Copper Confirms New High in Equities - But Watch Interest Rates
One of the best confirmatory indicators in equities over the years has been the price of copper. Both equities and copper need the prospect of good economic health to move higher. Equities need the prospect of growing earnings due to economic expansion, and copper needs the prospect of solid demand for electronics and home construction to increase the bid for its price.
Notice the high correlation between copper (the black line) and the S&P 500 (red line). Copper actually rallied into the summer of 2008, but once copper broke down in the fall, equities crumbled also. Also notice how copper bottomed in December 2008 and made a higher low in March 2009 - a divergence that forecast higher equity prices. Now that copper has confirmed the latest high in the S&P 500, higher prices can be expected which puts the S&P on target for its 1240 target which was projected by last years inverse head & shoulders pattern.
There has been much debate over the source and sustainability of this economic recovery, and as most of my readers already know, I have been skeptical of this whole scenario while participating in this rally as equities continue to grind higher. For now, however, the markets are saying that there is more upside to come. As the Fed keeps the printing press humming and foreign governments continue to also have an accommodative stance on money supply, the riskier asset classes should benefit as the surplus capital looks for a home. Equities are more appealing than government paper due to low yields which is a by product of easy money.
Watch interest rates here. If the ten year note yield reaches 4%, that could provide competition for funds flowing into equities. Thirty year bond rates are breaking up through resistance at 4.75%, and now have an upside target of 5.25%. The Fed has been doing its best to hold rates low with their open market purchases of U.S. debt, yet there has been upward pressure on rates since last fall. If the ascent can not be contained, the investing landscape could change in a hurry. There is enough momentum in this market to get the Dow to at least 11,000 and the S&P to at least 1200, but after that, we need to watch interest rates very closely.
The bottom line here is that the trend in equities is up. Fighting the Fed and the printing press is a fool's game, but if the mighty Fed can not contain interest rates, what then? What is the tipping point with regard to equities and interest rates? Only the market knows for sure.
Notice the high correlation between copper (the black line) and the S&P 500 (red line). Copper actually rallied into the summer of 2008, but once copper broke down in the fall, equities crumbled also. Also notice how copper bottomed in December 2008 and made a higher low in March 2009 - a divergence that forecast higher equity prices. Now that copper has confirmed the latest high in the S&P 500, higher prices can be expected which puts the S&P on target for its 1240 target which was projected by last years inverse head & shoulders pattern.
There has been much debate over the source and sustainability of this economic recovery, and as most of my readers already know, I have been skeptical of this whole scenario while participating in this rally as equities continue to grind higher. For now, however, the markets are saying that there is more upside to come. As the Fed keeps the printing press humming and foreign governments continue to also have an accommodative stance on money supply, the riskier asset classes should benefit as the surplus capital looks for a home. Equities are more appealing than government paper due to low yields which is a by product of easy money.
Watch interest rates here. If the ten year note yield reaches 4%, that could provide competition for funds flowing into equities. Thirty year bond rates are breaking up through resistance at 4.75%, and now have an upside target of 5.25%. The Fed has been doing its best to hold rates low with their open market purchases of U.S. debt, yet there has been upward pressure on rates since last fall. If the ascent can not be contained, the investing landscape could change in a hurry. There is enough momentum in this market to get the Dow to at least 11,000 and the S&P to at least 1200, but after that, we need to watch interest rates very closely.
The bottom line here is that the trend in equities is up. Fighting the Fed and the printing press is a fool's game, but if the mighty Fed can not contain interest rates, what then? What is the tipping point with regard to equities and interest rates? Only the market knows for sure.
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