Back in 2008 when I started to get long equities a few months before the lows in 2009, there was one thing that that really got me long equities at that point: The AUD/USD decisively hit a low.
Back in 2008, there were reports that the RBA was buying Australian dollars somewhere near the .6100 or .6200 levels. I was convinced at that point that the lows were in. Obviously, I was a few months off and then stocks finally started the (current) miraculous bounce off the famed “666” level in the SPX. But at that point, in the words of one of my colleagues, I kept hearing “commodities (and commodity currencies) tend to lead the market.” I kept the faith, and even though I bought about 10% before we hit the lows, I still ended up doing really well with some long term investments back then. Also, the good news was that many of our Wizetrade traders and customers also did very well in the process.
(AUD/USD bottomed nearly 5 months before the SPX did in 2008-9)
Fast forward to today….I was noticing a few things that got me thinking about this blog post. Copper is very close to breaking some major levels ($3). And, as many of you well know, the AUD/USD is also close to breaking below the .9000 level for the first time since mid 2010. Then, I was noticing the “lack of follow through” the markets have had since the recent new highs.
(Copper near term looking to test $3)
(JJC-Copper ETF triangle and possible H&S pattern)
Then, I started to look at the timeline. Back in 2008, the AUD/USD bottomed about 5 months (give or take) ahead of he equity markets. Sure, it was RBA driven, but it “did” happen. Today, the most recent “trend” highs in the AUD/USD was made about 5 month ago as well.
If you know copper, and you know how the AUD/USD responds to moves in copper, you know a break below $3 could be devastating to the single currency.
(Current Divergence of JJC, AUD and SPY. Notice the AUD peaked recent trend highs about 5 months ago)
So, I guess what I am trying to say is if copper breaks down, the AUD/USD should break down, and frankly…equities may follow after challenging monthly channel resistance.
(recent weekly channel resistance test of the SPY)
I am very worried about equities at this point. Stocks continuously move higher with complete disregard to any and all fundamental data. The entire market is in the belief that “stocks do not fall and only go up” (which in itself is one of the scariest markets to be in) and that the Fed will always be there to backstop any move lower.
I am not going to be like the guy who was on CNBC yesterday saying the DOW will hit 5000. Unfortunately, that type of fortune telling is way beyond my pay grade to figure out. However, I will tell you I see signs of a possibly pullback, and one that could be fairly uncomfortable.
For that reason, we should all keep an eye on the "Good Doctor Copper."
Chief Currency Strategist Wizetrade
Disclaimer: I am short the AUD on many crosses
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