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Why China, Copper Bode Ill For Stocks, Global Economy

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Chinese stocks, copper and other industrial metals failed to join the global rally that sent the U.S. stock market a hair within its record 2007 high. The underlying weakness suggests the global economy is worsening, deflation is on the way and stocks are due for a correction, investing strategists say.

iShares FTSE China 25 Index ( FXI ) andSPDR S&P China ( GXC ) fell 2.2% and 1.6%, respectively, Tuesday. Both broke below their key 50-day moving average, indicating short-term weakness.

iPath DJ-UBS Copper ETN ( JJC ) fell 2.3%. It fell to a three-week low and broke below its 50-day moving average for the first time in two months, sending the red metal into short-term downtrend. However, it still trades above its 200-day moving average, indicative of a weak long-term uptrend.

TheSPDR S&P 500 ( SPY ) rose 0.73% to 153.23, just a smidge below its 2007 historic high of 157.52.

"This disconnect is incredibly important to focus on, as one class of investors is going to be wrong," Michael Gayed, chief investment strategist of Pension Partners and co-manager of the ATAC Inflation Rotation Investor with $29 million in assets, said in an email.

"If the bulls are wrong and the negativity in industrial commodities and China is right, it signifies that a correction is likely when no one sees it coming. If the bulls are right, there is immense catch-up potential in emerging markets."

FXI trades 46% below its 2007 high. GXC trades 35% below its 2007 peak.iShares MSCI Emerging Markets ( EEM ) trades 21% below its 2007 pre-bear market peak.

Dr. Copper Looks Ill

A meltdown in copper prices reflects slower demand and economic weakness in China, which consumes about 40% of global supply.

"Chinese exports to Europe are still under stress and Europe is now their biggest market," Jim Trippon, publisher of the "China Stock Digest" said in an email. He remains bullish on FXI and GXC but notes that they will fall further and faster than the S&P 500 should the U.S. markets weaken.

ETFs tracking industrial metals -- nickel (JJN), tin (JJT) and aluminum (JJU) -- fell below key support at the 50-day moving average Tuesday as well.

"The industrial metals are not telling a bullish story on global growth. Why then is the S&P 500 trading higher everyday?" Bill Strazzullo, partner and chief market strategist at Bell Curve Trading in New Jersey, asked.

The stock market is rising owing to the Federal Reserve's economic stimulus programs known as quantitative easing, near zero interest rates and a lack of investing alternatives rather than on the back of U.S. or global economic growth, Strazzullo believes. The S&P 500 will likely regain its 2007 record high but fail to break above it, he says.

Upshot Of Easing Money Policies

Money being printed by the Fed is finding its way into the market rather than building factories or hiring workers because businesses are very reluctant to take on debt in the wake of the 2008 bear market, said James Dines, editor of "The Dines Letter" in Belvedere, Calif. What's more, low commodities prices and interest rates are benefiting businesses and the stock market in the short term. But quantitative easing has created another housing bubble, Dines contends.

"Stocks have entered the third bubble this decade due to money printing, which sets up for another crash," Shawn Hackett, president of Hackett Financial Advisors in Boynton Beach, Fla. said in an email.

What To Buy Now

Perma-gold bull Jeff Sica, president and founder of SICA Wealth Management in Morristown, N.J., recommends successful investors buy gold (SPDR Gold Trust (GLD) in anticipation of a stock market correction.

"Since November of 2004, the S&P 500 has been up 29% over the same time period that gold is up 247%," Sica wrote in a note Tuesday. "The decline in gold this year will be temporary as the S&P 500 begins to decline off its interim high. It's imperative that investors realize that gold from December of 2007 to March of 2009, was up 17.5%, while the S&P 500 declined 53.4%.

"The relevance of this advance in gold during the S&P declines, is that most of the appreciation came before the onset of massive money printing by central banks around the world."

Follow Trang Ho on Twitter @TrangHoETFs

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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