The S&P500 is trading at all-time highs relative to commodities. The commodities sector is therefore an attractive area to investigate for relative value and the potential for outperformance versus equities. In my research, the most compelling chart is the ratio of the S&P 500 to copper (a.k.a “Doctor Copper”). When this ratio is climbing, the S&P500 is outperforming copper; when falling, the S&P 500 is underperforming copper.
The chart above shows the ratio climbing now to multi-month highs, with a definitive break above the 50% Fibonacci retracement. The pattern also appears to have formed an inverse head and shoulders, with the neckline formed right at the 50% retracement. This pattern would imply a move to retest the August and September highs. (The distance from the top of the head to the neck should equal the length of the move in the opposite direction.)
Furthermore, in another look at the same chart, the trend line from the September highs has been recently broken and successfully retested. The move off of this retest is now gaining momentum. This is a reliably bullish pattern.
As one final indication, the 200 day moving average is strong and sloping positively. The momentum is clearly is the direction of a higher ratio.
In my opinion, I would remain long the S&P 500 over a long position in copper (or the commodities sector in general), as the charts above would seem to indicate the continued outperformance of equities.
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Paperback: 128 pages
Author: Shelley Allen, M.A.Ed.
Publisher: Fibonacci Inc.; 1st edition (2019)