COPPER BREAKDOWN RATTLES GLOBAL MARKETS -- FREEPORT MCMORAN COPPER & GOLD ALSO TUMBLES -- FOREIGN STOCKS ARE PULLING U.S. STOCKS LOWER -- WEAKNESS IN TECHNOLOGY STOCKS HAS PULLED QQQ INTO DOWNSIDE CORRECTION -- SMALL CAPS HAVE TURNED DOWN
COPPER PLUNGES TO 18-MONTH LOW-- FCX TUMBLES WITH IT... Of all the commodity markets, copper is viewed as the most closely aligned with trends in the global economy. Copper and other commodities have been lagging behind global stocks over the past year (largely owing to a stronger dollar and weakness in Chinese stocks). This week's plunge in copper, however, finally caught the world's attention, and not in a good way. Chart 1 shows the price of spot copper plunging this week to the lowest level since October 2011. It had already fallen below the lower line of a long-term "symmetrical triangle" which signaled that its trend was weakening. One of the worst performing stocks is tied to copper. Chart 2 shows Freeport McMoran Copper & Gold (FCX) tumbling to a two-year low this week. Its relative strength line (gray area) had been falling for the past year. [FCX is primarily a copper stock]. The copper breakdown calls into question the strength of the global economy which, in turn, is causing nervous profit-taking in global stock markets.
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Chart 1
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Chart 2
FOREIGNS STOCKS WEAKEN... It's usually not a good sign when foreign stocks are falling, which is just what they're doing. China's economy was called into question on Monday. Yesterday it was Europe's turn. Chart 3 shows a divergence between foreign stocks and those in the U.S. The red line plots Emerging Market iShares (EEM) of which China is the biggest part. It's been falling all year. The falling blue line represents stocks tied to the Euro (EZU) which has been falling since the start of February. The black line shows the S&P 500 being the only one to reach a new high this earlier this month. That negative divergence between U.S. and foreign stocks doesn't usually last for long, and is usually resolved on the downside. The U.S. market finally rolled over this week.
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Chart 3
NASDAQ 100 FALLS BELOW CHART SUPPORT... Technology has been one of the week's worst performing sectors which largely accounts for the sharp drop in the Nasdaq market. Chart 4 shows the Power Shares QQQ Trust falling below its 50-day average and a support line drawn under its 2013 lows. It's also threatening to break its April low near 67. Downside volume has been particularly heavy this week, which has been true of the market in general. The QQQ has now entered a downside correction. Its next downside target is the February intra-day low at 65.81.
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Chart 4
SMALL CAPS LEAD S&P 500 LOWER... It's been pointed out before that small caps usually turn down first during a market correction. Chart 5 shows the S&P Small Cap Index (SML) already trading below its 50-day average and its April low. Chart 6 shows the S&P 500 Large Cap Index (SPX) on the verge of doing the same. The SPX is testing its 50-day average and April low around 1540. The large red volume bars show heavy downside volume on Monday and Wednesday, which shows institutional selling. Its 14-day RSI line (above chart) has fallen below the 50 line, while its MACD lines (below chart) are rolling over to the downside. As I've suggested in previous messages, a correction in the SPX would most likely drop to the February low at 1485 (a drop of 7%). Fortunately, investors have already moved into defensive groups like staples, healthcare, and utilities which usually hold up best during a correction. They're also moving back into bonds for the time being, and the U.S. dollar. Dollar strength is contributing to the plunge in commodity markets and stocks tied to them, which have been the market's weakest groups.
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Chart 5
