Copper and Commodities Crumbling

Yet again, Equity markets led by the US shrugged off bad news that included the start of a global trade war, the dismantling of NATO, and frayed relations with Britain.  I guess we should add a domestic tidbit such as the Mueller investigation that is gaining traction as well.

The Dow industrials and the NASDQ 100 were both up +2.5% for the week. US is the only country that had positive returns over the past six months assuming you remove some Gulf States and Israeli equities from the equation. Higher oil prices have certainly helped oil producers.

By almost any measure US Equites are overvalued. According to Robert Shiller (Nobel prize winning economist) CAPE (Cyclically Adjusted Price-Earning) is an excellent longer-term indicator (lousy at short to intermediate term) if averaged out over 10 years. Currently CAPE is at levels not seen since 1928 or 2000 with its current level sitting at 31. Anything above 25 is considered frothy. Copper, a lead indicator  has been very weak and one of the first casualties of the budding trade war.

The highlights of this week’s market action are the following:

  • Price action was positive with the Dow confirming a new bull phase
  • The Yield Curve continues to flatten
  • Copper, an excellent lead indicator of economic activity, has been hit hard over past several weeks
  • Soft Commodities hit hard
  • Pressure on High Yield debt and Junk bonds remain, a risk off indicator flashing red
  • Utilities are still outperforming Equities indicating risk off but eased off
  • Sentiment is improving as Volatility has dropped to levels not seen since February
  • Volume has a mixed read with a divergence between the Dow (Improving) and the NASDQ 100.
  • FANG stocks are going parabolic, driving multiple indexes higher

From our vantage point staying flexible is tantamount, especially as leading growth stocks are a in a parabolic stage, which makes them most volatile and therefore subject to an unknown upside move and then a massive correction. The parallel to the late 1960’s and the Nifty Fifty regarding the dangers of concentrated performance is obvious.  A most recent example of a parabolic move is Bitcoin’s recent run. Stay tuned.