Is Copper A Leading Indicator For Stocks? Exploring the Copper vs. Stocks

Is it correct that copper is a leading indicator for stocks? Can we make a copper vs. stocks strategy?

No, copper is most likely not a good leading indicator for stocks. Our copper vs. stocks trading strategy might be due to luck or randomness.

Traders are always looking for leading indicators that can predict the stock market’s return. Popular leading indicators include the Manufacturing PMI or weekly jobless claims, but commodities are also commonly used. Copper is frequently touted in the media as a leading indicator for stocks.

In this article, we are going to look at why copper is considered a leading indicator, develop a copper vs. stocks trading strategy, and backtest it. Because copper is used in almost every industrial sector, weak demand is usually a sign of economic slowdown. Hence, it might be a useful indicator for the stock market.

We backtest trading ideas frequently. If you are looking for a short term trading strategy, please click on the link (we have made hundreds of backtests).

Why is copper considered a leading indicator?

Copper is used practically in all sectors of the economy, from homes and factories to electronics and power generation.

Moreover, the demand for copper is growing consistently every year because it’s a critical component of electric vehicles and green energy equipment such as solar panels. We can expect this to continue due to the so-called green shift of the economy.

Because of this, when demand for copper increases, meaning the price increases, it typically indicates a growing economy. When copper prices fall, it may signal an economic slowdown ahead. Because the stock market is discounting future earnings, copper might be a useful indicator.

Other ways exist to measure this (apart from price rises or falls). For example, the price of copper has widened to the biggest discount against its futures equivalent in almost two decades.

In other words, it is much cheaper to buy copper right now than a futures contract to have it delivered in 3 months (a kind of contango). This might signal investors and traders about a possible sudden weakening in global demand (?). (By the time you read this the current situation might be different, though).

Is Copper a leading indicator for stocks? Trading rules

The reasoning for why copper might be a leading indicator sounds reasonable, but is it supported by facts and statistics?

We developed a simple strategy to test this hypothesis. Let’s call it the copper vs. stocks trading strategy:

Trading Rules

[am4show have=’p2;p3;p58;p59;p130;p138;’ user_error=’Premium Post Access’ guest_error=’Premium Posts’]

• If the last four-week return for copper is positive, buy SPY (S&P 500) for the following week, or
• If the last four-week return for copper is negative, hold cash for the following week.

[/am4show]

There might be other trading rules that are better, but we chose these rules. Let’s find out how this backtest performed: