The Dow and Copper's Negative Correlation vs. Market Corrections (Chart)

The Dow's negative correlation with copper over the last 30-50 days is at a level last seen before major market corrections. You can also see that the Dow priced in Copper ($INDU/$COPPER) just made a new high and has been trending up since 2011. But is it just related to China's economic slowdown? (Slowdown feared for China raw materials - FT) Remember back in October/November 2008 when China's government put together a $586 billion stimulus package, the U.S. passed the $700 billion TARP to bailout the U.S. banks, and the Fed announced QE1? This was the beginning of the ultimate reflation trade, and as a result, commodities, commodity currencies and the Baltic Dry Index all bottomed before the U.S. stock market (posts between 12/31/2008 and 2/6/2009 - 1, 2, 3). This was why there was a bullish negative correlation (divergence) between the Dow and Copper at the beginning of 2009.

So is it time for the market to follow copper to the downside because of sustained economic slowdowns in China and the U.S.? Or will printing press wars between central banks (monetary inflation) be bullish for copper either way and close the gap. Tom McClellan (see previous post) believes this divergence is not confirming the Dow's new high and sees a market correction any time now.


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