ECONOMICALLY-SENSITIVE STOCKS CONTINUE TO SHOW MARKET LEADERSHIP -- WHILE DEFENSIVE STOCKS FALL BEHIND -- MATERIALS ARE BEING LED HIGHER BY COPPER SHARES -- WHILE GOLD MINERS ARE LOSING GROUND -- DOW JONES NONFERROUS METALS INDEX TURNS UP

WEEKLY SECTOR RANKINGS...Chart 1 lists the eleven stock market sectors in order of relative strength for the past week.  There aren't any surprises there; but there is more confirmation of recent rotations within the stock market showing more confidence in the market and the global economy.  Financials remain at the top of the list, as they've been for the last month.  Rising bond yields (which hit a three-month high this week) have helped pushed the XLF to a new record.  Energy and Materials also had a strong week as economically-sensitive commodity prices have been rising.  The XLB also hit a new record (more on that shortly).  As did Industrials (XLI) and Technology (XLK).   The XLI was helped by transportation stocks which gained 3% during the week (nearly three times as much as the Dow Industrials), and closed just shy of a new 52-week high.  While Utilities (XLU) fell -3.6%.  Real estate and consumer staples were also among the three weakest sectors as investors fled safe haven stocks in favor of more cyclical groups.   The recent rotation out of defensive stocks into more cyclical ones can also be seen within the Materials sector.

ROTATION OUT OF GOLD AND INTO COPPER... My Friday message did an analysis of the relationship between copper and gold, and showed the industrial metal starting to do better than the precious metal over the last two months.   Those changes in their trends coincided with the recent upturn in global bond yields.   That's another sign of investors rotating out of safe havens into more economically-sensitive markets.   We see the same rotation taking place in shares tied to those two commodities.

COPPER MINERS LEAD XLB HIGHER... Chart 1 above shows the Materials SPDR (XLB) being the week's third strongest sector.  It also hit a new record.  Chart 2 below shows Nonferrous Metals (copper shares) being the strongest part of the XLB this past week (+9.5%).  Also strong were stocks tied to Paper, Commodity Chemicals, Aluminum, and Steel.  The weakest part of the XLB were Gold Miners which lost -6.2%.   Copper and gold mining shares followed the diverging paths of the two metals.

NONFERROUS METALS INDEX TURNS UP... The daily bars in the lower box in Chart 3 show the Dow Jones US Nonferrous Metals Index rising to the highest level since the end of July (as did the price of copper).   It also closed above its (red) 200-day moving average for the first time since July.  The upper box shows its relative strength ratio also rising versus the S&P 500 to the highest level in three months.  The index is made up of copper mining shares.   One of the biggest is Freeport McMoran (FCX) which gained +9.5% this week making it the week's second best performer in the XLB.  [While gold miner Newmont Goldcorp (NEM) was the XLB's weakest stock (-7.5%)].   The chart of FCX (not shown here) matches the chart shown below very closely.  It's also worth noting that the upturn in copper stocks started in early September when bond yields bottomed (more on that shortly).   It's also worth noting that both hit the highest level since July this past week.   That also explains why gold miners have been losing ground.

RISING BOND YIELDS HURT GOLD MINERS..Chart 4 shows the Dow Jones US Gold Mining Index peaking at the start of September and falling to the lowest level in three months.  Gold miners starting dropping with the yellow metal just as copper stocks (and the metal) started rising.   The gold mining/ SPX ratio in the upper box peaked at the same time.  Something else happened at the same time.  The green vertical line marks the spot when the 10-year Treasury yield bottomed at the start of September and started rising.  And hit a three-month high this past week.   Rising bond yields more than anything else probably account for the recent rotation out of defensive gold miners (and the precious metal) and into economically-sensitive copper and shares tied to the industrial metal.  As well as a broader rotation out of bonds and other safe havens into markets more closely tied to the global economy.

COPPER MINERS/GOLD MINERS RATIO MAY BE BOTTOMING... The next chart is similar to one I showed in Friday's message which was a ratio of copper divided by gold.  But the message is essentially the same.   And that's the possibility that both ratios are bottoming.  The weekly bars in Chart 5 plot a relative strength ratio of copper miners divided by gold miners over the last five years.  The chart shows the ratio bottoming at the start of 2016 before rising for a couple of years; and then declining over the last two years.  That has led to a recent retest of its early 2016 low (see circles).  In chart work, that leads to the possibility that a bottom is being formed.  The second circle formed since the end of August also shows the ratio gapping higher this past week which is another sign of strength.  If the ratio is truly bottoming, and copper assets continue to outperform those tied to gold, that would be another sign that investors are turning more optimistic on the global economy; and are positioning themselves accordingly.