Capital Flows: Copper & Stocks

The so call "risk trade" is the manifestation of capital flows that seeks to balance risk with reward. Money will continue to seek refuge as the international debt crisis intensifies and evolves over time. An area of refuge will be movable assets like stocks and copper.

Copper is far more sensitive to changes in capital flows than stocks. Trend line violations and divergences of the copper to stocks ratio often foreshadows a short-term change (better described as subtle shift) in capital flows. For example, the trend line breakout of the copper to S&P 500 ratio in February 2009 illustrated a change in capital flows that lead the turn in stocks in March 2009. Conversely, the break in the up trend in January 2010 and negative divergence (under performance of copper) in April 2010 foreshadowed a subtle shift that warned of weakness in stocks heading into May.

What is the ratio saying right now? Despite all the pessimism in equities, copper is showing impressive but largely quiet strength. While the copper to S&P 500 ratio has yet to violate the down trend line, it is very close. A violation of the power down trend line in the copper to S&P 500 will provide yet another signal of the ebb and flow of capital within the secular trends.

Copper to S&P 500 Ratio: