The Doctor Is Calling

Copper is often referred to as “Dr. Copper” because of its unique ability to forecast economic trends. On Sept. 15, I sent the following chart of copper to a friend:

I proposed copper was about to break down. Technically, that near-perfect symmetrical triangle is a continuation pattern, which in this case would be a bullish formation.

OK, Mish, so why the “?” assuming down?

That’s a good question, and inquiring minds deserve answers. Here goes:

1. One of the biggest uses of copper is in housing, and housing has clearly fallen off a cliff.
2. Copper went into contango.

In a previous conversation with this friend a few months back, we discussed the idea that the bull in copper would end as soon as copper went into contango. Although I was very aware that much (but not all) of the backwardation had worn off, I did not have a graphical presentation of it.

It seems I am not the only person watching copper.

Greg Weldon at Weldon Financial posted the following charts on Minyanville on Sept. 21:

In reference to the above chart, Weldon wrote:

“I still believe that copper simply cannot ‘escape’ the horror show that has become the U.S. housing market, particularly as defined by an expected deepening contraction in new home building. Observe the teetering price as it relates to the underlying support offered by the most recent double low ($3.265-3.275) and the med-term 100-day EXP-MA.”

It was the following chart that really caught my attention:

Boom! 2 1/2 years of backwardation in copper is now officially over.

Greg Weldon went on to say:

“The chart above plots the 100-day exponential moving average of the cash-to-3-month spread for copper, traded on the London Metal Exchange. Copper’s spreads are in free fall, and this spread has completely wiped out all of its HUGE $200-plus per tonne backwardation and has collapsed into contango, indicating an amply supplied market for the first time since the 4Q of 2003.

“A breakdown in copper would be a confirming signal, and ‘should’ provide the proverbial ‘next shoe to drop,’ in terms of a broadening disinflation becoming increasingly dominant in the entire commodities sector.”

Flashback December 2005

Back in December 2005, Sterling’s World Report asked the question, “Will Dr. Bernanke Get Along With Dr. Copper?”:

“Many traders have affectionately referred to copper as ‘Dr. Copper,’ because it is considered to be ‘the only metal with a Ph.D. in economics.’ That is, copper historically has been considered to be an excellent barometer of the overall state of global economic activity because of its widespread use in industrial applications…

“What Dr. Copper is saying right now is that the world economy is booming. As can be seen in [Serling’s] Chart 1, the price of copper has nearly tripled since 2001 and is approaching $2.00 a pound. Much of that is attributable to the growth in China, which has created nearly insatiable demand for copper as it upgrades its electric power grid. But a booming housing market in the U.S. and strong growth throughout much of the developed and developing world are also part of the story.”

Although copper went on to soar way past $2.00/lb. all the way to well over $4.00/lb. in May 2006, the message from Dr. Copper seems quite different today.

A Technical Break

We now officially have a break in that symmetrical triangle. Let’s take a look at a chart of copper as of Sept. 22, 2006:

The interesting thing to me is that hardly anyone is taking these trendline breaks seriously, even though there are breaks practically everywhere you look: oil, natural gas, sugar, the CRB itself, and now a technical failure in copper. Yet posts of charts like these on Silicon Investor and other places just bring a big yawn. In fact, in a response to one of my blogs from just a day or so ago, someone used commodity charts to show “current inflation.”

Has everyone really forgotten about the lagging effect of 17 consecutive rate hikes? No, not everyone. Brian and I at The Survival Report, along with Greg Weldon and many of the professors on Minyanville, are taking these breaks very seriously. Are the technical breaks in various commodities we see now akin to the technical breaks in JDSU, LU, CSCO, and INTC in 2000 that most disregarded? Right now it is hard to say, but the complacency and buy-the-dip mentality sure seem similar.

Perhaps this is nothing more than a head fake lower on gold, silver, natural gas, crude, gasoline, sugar, and copper. Then again, perhaps the good doctor (along with confirming indicators such as M1 money supply, the inverted yield curve, and housing) is telling us that this patient (the U.S. economy) is very ill. I think you know which way I am betting: the weakness in housing is about ready to spill over into other areas. A consumer-led recession is on its way.

Regards,
Mike Shedlock ~ “Mish”
September 25, 2006