Tuesday, February 14, 2012

Commodities still manifesting weakness

I've written much in the past two weeks regarding the weakness in commodities in nthe face odf a rising American stock market.  I thought I'd give my readers a different perspective on the divergence.

Here's a daily chart of the Toronto Stock Exchange Composite Index (TSX).  Canada is a resource rich country and its equity market tends to move in close correlation to the price of commodities, especially oil and industrial metals.  As you can see from the chart below the divergence between American and Canadian stocks is pronounced (click on the chart for a larger view):

I've circled the weakness on the two momentum indicators in the panels above the chart.  On the price chart itself I've transposed the S&P 500 on top of the Canadian market to show the glaring divergence.  The bottom panel is especially noteworthy as it is the correlation between Canadian stocks and American stocks.  As you can see, for the past year, there has always been a strong positive correlation with a few dips toward the zero line.  But now the correlation is falling precipitously. 

If the correlation turns negative it will further reinforce the thesis that our present stock rally is "long in the tooth" and that the global economy is a lot weaker than the "bulls" would like to believe.

Tomorrow night we'll look at the other divergence that should concern us: Treasuries and stocks.