The Correlation Between Copper and the Shanghai Composite is Failing

• Posted by Greg Harmon
• on November 11th, 2014

There are many rules of thumb in trading. ‘Sell in May and go away’,’how the market goes in January sets the tone for the year’, ‘buy Treasuries and Gold in times of trouble’ are a few. Some arise from relationships between markets or assets. ‘The dollar and stocks can’t go up together’, ‘stocks and bonds can’t rise together’, ‘the ratio of gold/silver can foretell the direction of the S&P 500’. All of these are true. Sometimes. And false, sometimes. They have their roots from times when they did work. But that does not stop them from being consistently pulled out as spur of the moment advice.

One of my favorites is that the price of Copper is highly correlated with the Chinese market. This seems to have become popular from the long run up in both markets into the financial crisis. The last few years has done nothing to dispel this as fact either. But the chart below suggests those following this adage may be in for a butt kicking if they cannot change their ways.

This chart of the ratio of Copper to the Shanghai Composite shows a run higher through 2010 into a 4 year period where the relation ship was very stable. From the line charts at the bottom you can see this was because both the Shanghai Composite and Copper were drifting lower. Focusing back on the top chart though shows this as a classic topping pattern. Look close enough and you can find a Head and Shoulders top, or any other kind of top you might like. All of them point to a retracement of the ratio back to the pre-2010 levels. It seems to be driven by the strength in the Shanghai Composite as Copper continues to flail. Should strength in the Chinese market continue look for this ratio to feel pain. Seems 50% of the time Copper and the Shanghai Composite always move together.

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