Global economic momentum improving, but don’t ignore disconnect between stocks and Doctor Copper

07 January 2014

Global economic momentum is improving and looks set to surprise on the upside in 2014. However, Doctor Copper should not be ignored. Copper has frequently been dubbed the metal “with a Ph.D. in economics” for its uncanny ability at forecasting the global economic cycle. When the global economy expands, industrial output increases and demand for copper pushes its price up. The converse happens when the global economy contracts.

The two charts below show the 5-year weekly copper price and the MSCI World (Stock) Index for the same period respectively.

copper

msciworld

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U.S. stock market: due for a correction

05 January 2014

Regardless of how the economy performs this year, I suspect the U.S. stock market is due for a correction, perhaps as soon as the first quarter of 2014. Sentiment is very bullish and fund managers have piled into the market en masse to avoid under-performing their peers or their benchmarks. People generally believe the Federal Reserve has managed to rescue the economy. The market has moved straight up for one year with at most very shallow pullbacks. I believe the time is ripe for the market to rattle some nerves.

The first chart below shows the 10 and 30-day moving averages for the NYSE Advance/Decline line. The 10-day (blue) is a short term indicator, while the 30-day (red) is an intermediate term indicator. The second chart is the weekly S&P 500 chart for the same period.

nyad3yr05jan2014

spx3yr05jan2014

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