Friday, September 30, 2011

"Dr. Copper" Needs License Revoked

Is "Dr. Copper" giving lab results informing us that equity markets are headed into bear market territory, a decline of more than 20%? Market observers often rely on the price of copper (down almost 30% in last 2 months) as a predictor for the future direction of stock prices. If this is the case, the big down move in copper must be telling us that the stock market is going to be falling much further. Or is it? 


In looking at the historical data, there is no real evidence that extreme copper prices are a good predictor of future lower stock prices. Jason Goepfert of Sundial Capital Research sheds some light.

Jason Goepfert: Let's go over the past 25 years for which futures prices are available and look at how the S&P 500 fared after other times copper fell rapidly into a bear market. 








Out of the six instances, only one led to an imminent and dramatic fall in stock prices. The other occurrences were not so bearish. In fact, they were outright bullish for the S&P. By six months later, the index was up by more than +12% each time (in four out of the six occurences). 
 A doctor whose diagnosis is correct 2 out of 6 times is not one in which I would put much trust. In fact with such a record, Dr. Copper should have his license revoked. As Goepfert concludes, "perhaps this latest bear market in copper will be more predictive of a future failure in stocks . . . but its history has not been consistent." 

3 comments:

  1. My concern with these stats is that they are mainly from more normal type investing environments (89,97,06), not full blown worldwide crisis type environment. 2007-2008 was not a normal type environment. Do you think we are currently in a normal investing environment?

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  2. these stats are meant to disprove the common perception that copper is good predictor of future stock prices - the data shows that clearly it is not a reliable tool to use when copper is in a "normal" bear market - nothing more.

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