Small-cap stocks, which as I noted in my last writing on Monday reached pre-melt-up extremes, have started to meaningfully outperform, precisely as they did in the early stages of the October rally last year. And yes — inflation expectations are returning as central bank paranoia over a 2008 repeat causes a re-pricing within the bond marketas I noted on Bloomberg last week .
I believe we are in the very early stages of the Summer Surprise, given that many intermarket trends are only now just starting to show true signs of a return to risk-taking. One of the areas of the market which I think clearly show why this move may just be getting started is the stock side of Dr. Copper.
Take a look below at the price ratio of the Global X Copper Miners relative to the S&P 500. As a reminder, a rising price ratio means the numerator/COPX is outperforming (up more/down less) the denominator/IVV.
Copper holds the title of being a leading economic indicator given its use in industrial production and its role in global demand for infrastructure building.
Many bears have argued that the tremendous weakness in copper prices means a significant slowdown is underway. The problem is that this may be an old story. Copper miners (on the stock side) appear to be in the very early stages of outperforming the broader stock market. Given how severely these stocks behaved, reflation in global markets means leadership is likely in mining companies and a continuation of a "melt-up" in risk assets, copper included. It stands to reason that leadership in miners means higher prices in copper to come.
What might be behind this move? I suspect China is likely to begin to act on both the fiscal and monetary side more aggressively, which likely also explains why the Australian Dollar has performed so well as a "risk currency" since early June. A ramp up in stimulus in China, combined with continued central bank paranoia by Super Ben and the League of Extraordinary Bankers means that a meaningful recovery could soon begin, as Dr. Copper itself gets over its temperature and gets back to work.
GTE Price at posting:
23.2¢ Sentiment: Buy Disclosure: Held
