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In the midst of all the optimism we see towards key stock indices these days, there are two leading indicators
that are flashing warning signals. They say, “Be careful, and don’t get caught up in the euphoria.”
So says Michael Lombardi (profitconfidential.com) in edited excerpts from his original article* entitled Significant Divergence Between Copper Prices And Stock Market Not To Be Ignored.
The following article is presented by Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (sample here) and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
Lombardi goes on to say in further edited excerpts:
Record High Margin Debt
Margin debt, the amount of money borrowed to purchase stocks, is one of the leading indicators of where key stock market indices will go. Historically, the higher margin debt gets, the more risk for key stock indices. This indicator predicted the top of the stock market in 2007 and the Tech Boom top of 2000.
- No Problems Foreseen – Yet – from Sky Rocketing Margin Debt BUT
- Correlation of Margin Debt to GDP Suggests Stock Market Has More Room to Run
- Level of Investor Margin Suggest Its Time to Lower Stock Exposure
As it stands, margin debt on the New York Stock Exchange (NYSE) is at its highest point ever recorded..(Yes, investors have borrowed almost half a trillion dollars to buy NYSE-listed stocks!) and, sadly, this fact continues to be ignored by financial advisors.
Declining Copper Prices
Since the beginning of the year, copper prices have plunged lower. What’s interesting about this is that copper prices usually top before the key stock market indices do; they usually bottom before stocks as well. In the chart below, I have plotted copper prices (black line) over the S&P 500 and circled areas where copper has acted as a leading indicator of key stock indices.
(click to enlarge)
Chart courtesy of www.StockCharts.com
Copper prices topped in 2007 before key stock indices did. Then in 2009, they bottomed out well before the S&P 500, about three months earlier. Then in 2011, copper prices led key stock indices higher. Since the beginning of 2013, however, copper prices and key stock indices have been significantly diverging—this is something that shouldn’t go unnoticed.
My skepticism towards the key stock indices continues to grow as I look at the indicators that suggest their direction should be down, not up. Increasing stock market optimism is dangerous. In 2009, key stock market indices were presenting the buying opportunity of a lifetime for investors. At present, the opposite is true. The fall from Dow Jones 16,000 will be a steep one.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.profitconfidential.com/stock-market/significant-divergence-copper-prices-stock-market-ignored/
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