Copper turns golden along with stocks
Last week, the S&P 500's medium-term trend overtook its long-term trend for the first time in months. While the technical signal itself is suspect, the fact that the index erased such a wide spread between trends has been universally positive over the next 6-12 months in recent decades.
At about the same time, the dollar's trends were reversing to the downside. And now copper is joining the S&P with a Golden Cross after a wide negative spread between its 50- and 200-day moving averages. The last time it did this, the metal soared over the next year.
That trend change in 2016 was more the exception than the rule. The table below shows every time copper recovered from its 50-day average being at least 10% below its 200-day average. Only once, in 2009, did it equate with an immediate and sustained bull market. All of the other signals showed a loss either 2 or 3 months later.
Because copper has done well in recent weeks, sentiment has become very positive, and the 10-day Optimism Index just rose above 70. The Backtest Engine shows that the metal has struggled to hold onto further gains when optimism is this high.
This optimism is hitting just as copper enters what has been its most challenging seasonal window.
As noted by the Wall Street Journal, a positive trend in copper is assumed to be a good sign for other assets as well, due to its industrial uses. For the S&P 500, it was a mixed blessing. It showed gains across most time frames, but there was an odd dip at the 3-month time frame. We wouldn't read too much into that, perhaps other than the idea that these signals in copper typically didn't lead to large, sustained advances in stocks, either.
We try to limit the number of tables we show because after a little bit, readers' eyes just glaze over and numbers lose their meaning. But because some other markets showed such consistent returns after these signals in copper, we'll show them in full.
For 10-year Treasury note futures, these potential signs of a pickup in economic activity were not received well. Note futures consistently declined over the next 2-3 months.
Because interest rates move opposite to bond prices, this meant that rates tended to rise over the medium-term.
Because gold has to compete against rate-bearing instruments, it did not respond well to these upticks in interest rates. Up to two months later, gold was almost universally negative.
That was the case even though the dollar didn't rally consistently, either. Gold and the dollar usually have an inverse relationship.
Copper has had a heck of a run, showing the most relative strength in years, with enough near-term buying interest to invert its futures curve. There are all kinds of interesting and compelling fundamental theories for what these things mean for copper itself as well as other markets, but empirically those theories don't hold much water.
This Golden Cross has been another nice-sounding reason to become positive on the metal, but historically that didn't work out too often. More than anything, we'd suggest it's a positive sign for interest rates, with the associated negative implications for bonds and gold.