News Analysis date published New: 
Thursday, August 23, 2012 - 13:30
New Date created: 
Thursday, August 23, 2012 - 13:30
New Date last updated: 
Thursday, August 23, 2012 - 13:30

This Plummeting Commodity Spells Trouble for the Stock Market

Thursday, August 23, 2012 - 1:30pm

Something doesn't feel right about this market rally.

The S&P 500 is up 11% since the beginning of the June... but why? Europe's debt crisis is still in full force, the United States has made no progress with its deficit problems and China is on the brink of an economic slowdown.

All the fundamentals are signaling weakness in the world's financial system, and I'm not the only one who thinks so...

Just look at what one of the world's leading economic indicators -- copper -- is telling us about the strength of the global economy right now.

Copper is one of the most important industrial metals on the planet. The metal is used in everything from plumbing to air conditioning. As a result, demand for copper has historically been a good indicator for the health of the overall financial system.

Since copper prices normally shift in tandem with stocks, given the rally, you would expect prices to have moved higher over the past couple of months.

But as you can see from the chart above, the opposite has happened. Copper is down more than 10% since it touched its high for the year in February.

This could play-out in one of two ways. Copper could rally to catch up to the recent gains in stocks... or stocks could fall, moving back in line with what's been happening with copper.

Either way, lower copper prices are a signal of weak economic activity... and that's a problem for stocks in the long run.

Risks to Consider: Copper prices and stock prices have been good indicators of economic activity in the past. Nothing is for certain, but if copper prices continue to stay low, then it could be a sign that economic activity as weak... a bearish sign for equities.

Action to Take --> Every investor should keep an eye on what's going on with copper. With economic growth slowing, copper prices could be a good indication of what's to come in the equity markets.

If you're an aggressive investor, then you could short the S&P 500 and go long copper... expecting the two to converge like they have in the past. The easiest way to gain exposure to copper is with an exchange-traded note like iPath DJ-UBS Copper ETN (NYSE: JJC).

P.S. -- There is an energy crisis looming in the United States. In case you haven't heard, in six months a major event will take place that could cause 10% of America's electric energy supply to dry up. As the country scrambles to react, one company could shoot up by hundreds of percent. For more information on how to profit from the coming crisis, click here.

Austin Hatley does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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