Don't Miss This Rare Commodities Signal

Short-term post-signal SPX returns have historically been bullish

Senior Quantitative Analyst
May 30, 2018 at 7:00 AM
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Copper is used to build almost anything, and oil is used to power almost anything. So, these commodities are often looked at as economic indicators. The chart below shows the typical yearly path of these commodities along with the S&P 500 Index (SPX). I also show this year's return. Despite oil's woes over the last few days, it's still up over 10% on the year, while copper is down a decent amount. This week, I'm looking at historical divergences in these assets to see if it's any kind of tell for stocks going forward.

copper_oil 2018 returns on may 29

History Points to Short-Term SPX Upside

Going back to 1980, I looked at copper and oil returns through a similar time each year. Then, based on whether these commodities were up or down, I looked at how the S&P 500 did for the rest of the year and over the next three months. If investors think bullish returns for these commodities are a positive sign for markets, then -- at least using this method -- they are wrong.

When both commodities were up at this point in the year, the S&P 500 has gained more than double digits, on average, for the rest of the year, with all five of the returns positive. When both oil and copper are down at this point, the index averages a gain of just 1.22%, the worst average return in the table. In the current situation, with copper down and oil up, the S&P 500 averages a respectable 6.22% return, with 71% of the returns positive. (Editor's note: A previous version of this sentence erroneously said "with copper up and oil down." We apologize for any confusion.)

The second table below does the same thing, but looks at a shorter three-month time frame. This table does not resemble the first table. The worst returns are when both commodities are negative. The good news is that the best returns have occurred in the current situation, with copper down and oil up on the year.

spx returns may 29

Oil's Big 2018 Lead Could Hamper SPX Returns, Though

This year, it's not just that copper is negative, and oil is positive. It's the extent to which they are different. Oil is outperforming copper by a lot. I broke down those 14 times that oil was up and copper was down by whether the difference in the return was more than 15%, or less than 15%.

In both tables below, it's worse for the market when the discrepancy is so wide. For the rest of the year, the S&P 500 averages a 3.63% return when there's a substantial difference, compared to an 8.81% return when the difference is smaller. Over the next three months -- which you see in the second table -- when there's a stark difference, the index averages a loss, with 57% of the returns positive. Otherwise, it averages a 5.32% gain, with 86% of the returns positive.

stock returns oil outperformance may 29


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