Friday, June 4, 2010

Amazing Correlation Between Copper and S&P 500 Past 10 Months

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A few years ago I mentioned how correlations among asset classes were at a level I have never seen before. Bloomberg confirmed this in a piece we posted a year ago [Jun 30, 2009: Bloomberg - Correlation Among Asset Classes Highest Ever] I like to call this 'student body trading' and I believe it is due to the dominance of HFT trading schemes (almost all doing the same trades off the same mountains of data) overlaid with the prominence of ETFs (rather than a focus on individual stocks). Currencies, commodities and the like are all in the same boat. This has been my theory for a few years and it's now becoming mainstream.

In a world where almost every asset class now trades together (ex US Treasuries) it is not surprising to see some very high correlations amongst risk assets. But this chart courtesy of a piece by Doug Kass @ Realmoney.com showing the relationship between (Doctor) copper and the S&P 500 is quite eye opening. With copper breaking down yet again today, it does not bode well if the trend of the past year continues to play out.
  • Copper hit a four-month low on Friday after weaker-than-forecast U.S. jobs data fractured confidence already dented this week by worries over Chinese monetary tightening and euro zone debt.
It was something I highlighted in 2007 when Kool Aid was near its highest level - S&P 500 hit its highest levels in October 2007! [Nov 23, 2007: Is Copper Signaling a Slowing Global Economy?]




Of course China now dominates every commodity market in terms of user demand [May 13, 2009: Commodities - It's China's World: We Just Live in It] [Mar 23, 2009: FT.com - Chinese Stockpiling Spurs Copper Price Rally] (financial instrument demand is another story all together) [Jan 11, 2009: 60 Minutes - Speculators and Oil] [Feb 12, 2008: Wheat is Being Ruined by ... what else... Hedge Funds and Speculators] ... so perhaps the red metal's struggles are another sign that the engineered slow down they are trying to manage is taking hold. [Mar 5, 2010: Copper Demand is Now Weak in China] [Feb 9, 2010: China Copper Imports to Halve]




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