Chinese stocks, copper and other industrial metals failed to join the global rally that sent the U.S. stock market a hair within its record 2007 high. The underlying weakness suggests the global economy is worsening, deflation is on the way and stocks are due for a correction, investing strategists say.
iShares FTSE China 25 Index (FXI) and SPDR S&P China (GXC) fell 2.2% and 1.6%, respectively, Tuesday. Both broke below their key 50-day moving average, indicating short-term weakness.
iPath DJ-UBS Copper ETN (JJC) fell 2.3%. It fell to a three-week low and broke below its 50-day moving average for the first time in two months, sending the red metal into short-term downtrend. However, it still trades above its 200-day moving average, indicative of a weak long-term uptrend.
The SPDR S&P 500 (SPY) rose 0.73% to 153.23, just a smidge below its 2007 historic high of 157.52.
"This disconnect is incredibly important to focus on, as one class of investors is going to be wrong," Michael Gayed, chief investment strategist of Pension Partners and co-manager of the ATAC Inflation Rotation Investor with $29 million in assets, said in an email.
"If the bulls are wrong and the negativity in industrial commodities and China is right, it signifies that a correction is likely when no one sees it coming. If the bulls are right, there is immense catch-up potential in emerging markets."
FXI trades 46% below its 2007 high. GXC trades 35% below its 2007 peak. iShares MSCI Emerging Markets (EEM) trades 21% below its 2007 pre-bear market peak.
Dr. Copper Looks Ill
A meltdown in copper prices reflects slower demand and economic weakness in China, which consumes about 40% of global supply.
"Chinese exports to Europe are still under stress and Europe is now their biggest market," Jim Trippon, publisher of the "China Stock Digest" said in an email. He remains bullish on FXI and GXC but notes that they will fall further and faster than the S&P 500 should the U.S. markets weaken.
ETFs tracking industrial metals ? nickel (JJN), tin (JJT) and aluminum (JJU) ? fell below key support at the 50-day moving average Tuesday as well.
"The industrial metals are not telling a bullish story on global growth. Why then is the S&P 500 trading higher everyday?" Bill Strazzullo, partner and chief market strategist at Bell Curve Trading in New Jersey, asked.
The stock market is rising owing to the Federal Reserve's economic stimulus programs known as quantitative easing, near zero interest rates and a lack of investing alternatives rather than on the back of U.S. or global economic growth, Strazzullo believes. The S&P 500 will likely regain its 2007 record high but fail to break above it, he says.
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