They say a picture is worth a thousand words. While I am by no means a chartist I do track many assets and indicators by simply reviewing their charts (see here for more on technical analysis and chartists). A chart is nothing more than the fundamentals of a market in picture format. In this market three particular charts have been extremely helpful in guiding one through a difficult environment.
Copper is famously known as the commodity with a PhD in economics. It is notoriously sensitive to economic trends. Thus far copper prices have remained relatively strong. As a global commodity it’s important to view copper prices as a macro indicator. The story here is simple. Copper prices have held up despite some noticeable macro headwinds. The global economy is not collapsing, however, the sideways action is telling us a story of relatively stagnant growth. The extreme volatility is a symbol of great global uncertainty.
China’s stock market is telling a different story. The Shanghai Composite has proven to be an important leading indicator of global equities. After rallying over 10% since July Chinese stocks have run into a wall and have declined a swift 3% since reaching highs just days ago. Chinese stocks are off 1.8% overnight (as I type) on fears of further tightening of lending regulations. A sustained decline in the index would be a major warning flag for US equities. China has become the lone strong leg in the economic equation and any signs of weakness as expressed by equities would be disconcerting. U.S. equities have lagged Chinese stocks for several years now. As we see Chinese stocks moving sideways it’s interesting to see U.S. equities surging….
The VIX has come well off its highs, but isn’t telling a story of great complacency. Back in April the VIX was a sign of the market’s vulnerability. At 22 investors are still positioned in relatively defensive posture. After a 8% rally in just 9 days it is interesting to see the VIX find some support. The longer term trends in copper and recent strength in China say the market rally could continue, however, traders are clearly buying some downside protection after the big move.
There’s clearly much more to the big picture than just three charts, but developing a macro outlook is an in-depth process and these are three important pieces of the puzzle. The sum of the parts appears to be telling a story that can be summarized as follows:
- Uncertainty is extremely high
- A medium term bullish trend appears to be in place in equities
- Traders are cautiously positioned following a huge two week rally
- The global economy isn’t collapsing just yet
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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