Stock Market: Two Charts That Spell Disaster Ahead
For years, the correlation between copper prices and the stock market has been a reliable leading indicator of where stock prices are headed.
The chart below plots daily copper prices (brown line), the S&P 500 (green line), and the correlation between the two (black line at the bottom of the chart) going all the way back to 2002. Please pay attention to the red arrows.
Chart courtesy of www.StockCharts.com
What’s obvious from the chart is that whenever the correlation between copper prices and the stock market becomes negative (see black line at bottom of chart), stocks always subsequently sell off. This happened back in 2006 and 2007. This is when the top was formed on the key stock indices. Later, in 2008 and 2009, we saw a massive sell-off in stock prices.
From 2013 to 2015, the correlation has been negative (again, see the black line at the bottom of the chart above). If we use history as a gauge, this indicator spells big problems for the stock market.
Stock Prices Breaking Long-Term Trend
Another indicator that suggests that the stock market is headed towards a continued sell-off is the number of companies trading above their 200-day moving average.
When the stock price of a company trades above its 200-day moving average, it is considered to be in a long-term uptrend. If the stock price drops below this average, technical analysts consider it to be a bearish indicator; it essentially says the long-term uptrend has been broken.
With that said, please look at the chart below. It plots the number of S&P 500 companies trading above their 200-day moving averages.
Chart courtesy of www.StockCharts.com
You will note that since May of 2015, the number of S&P 500 companies trading above their 200-day moving stock price average has plummeted. More than half the S&P 500 companies are trading below their 200-day moving average. Remember the old adage “the trend is your friend, until it’s broken?” Well, it’s been broken.
What’s Really Next for the Market?
Dear reader, all the stars have lined up for a continued broad market sell-off.
Since 2009, the stock market was an easy place to be. Investors didn’t really have to do much. The trade was simply “buy on the dips,” and it worked. That doesn’t work anymore. What I’m seeing today is far too many investors and stock analysts bullish despite the quasi–stock market crash we had last week. In my experience, this type of complacency usually does not end well.
Also Read: Shocking: Copper Prices Show Markets of the Verge of Global Economic Collapse
