How Copper Prices Suggest Stocks Are Priced Too High

Submitted by Abby Joseph as part of our contributors program.

By George Leong, B.Comm. for Profit Confidential

The S&P 500 traded at another record high last Thursday, and there appears to be no stopping the bullish investor sentiment that has encapsulated the stock market.

Yet, while the stock market gains are great for the bulls, I still have an issue with the rate of the stock market rally. Simply stated, it’s just a bit too fast, too quick.

I also wonder why the stock market is ignoring the continued fragile state of the global economy in spite of a deep recession in the eurozone and stalling in China.

The reality is that we need to be concerned about how the global economy is faring. The idea of focusing too much on only America doesn’t make sense due to the increased correlation between the global economies. Slowing in Asia and Europe will impact U.S. companies. (Read “Why America Will Struggle if the Eurozone Languishes.”)

Looking at China, while the Chinese economy continues to expand at rates we can only dream of, the country is stalling, as reflected in its demand for commodities.

Copper is a key commodity used in wiring, pipes, electronics, and other areas. When the economy expands, so does the demand for copper.

China imported less copper in February with imports declining to a 20-month low, according to the country’s General Administration of Customs (Source: “China Copper Imports Slump to 20-Month Low on Holidays,” Bloomberg, March 7, 2013, last accessed May 6, 2013.) China is the world’s top importer of copper, so the decline in the import number is important. (Source: “International Trade Centre,” NationMaster.com, last accessed May 6, 2013.)

The lower demand from China is a telltale sign that there could be more slowing on the horizon. If this is the case, then you have to wonder about the current level of the stock market.

Take a look at the chart below comparing the movement of spot copper on the Chicago Mercantile Exchange (CME), as shown by the red candlesticks, against the S&P 500, reflected by the green line.

Chart courtesy of www.StockCharts.com

You will notice the direct correlation in the first part of the chart up to around March, when copper prices begin to trend lower on global growth concerns, while the S&P 500 continues to ratchet higher, based on my technical analysis.

Looking at this comparative move, I’m somewhat baffled by the stock market. The reason for the decline in copper prices is the rise in copper stockpiles due to the global slowing.

So why is the S&P 500 continuing to move higher?

It’s true, the U.S. economy is improving across the board, but you have to also consider or discount in what’s happening with the global economy; there are signs of fragility.

My view is that the S&P 500 and the stock market are running ahead of the fundamentals.