Observing the action today, there are some interesting correlations happening. Here is the leaderboard:
- Mining Stocks
- Basic Materials
Coincidence? Or is this the correlation that commodities bulls have been waiting for? Here is a ratio chart between the China FXI ETF and the $SPX:
We can see that China has been in a massive downtrend vs. the $SPX over the last few years, but last October it broke above the downtrend line. Starting in 2013, US equities once again resumed their relative strength and the FXI:$SPX ratio remained in a downtrend for the entire 1st quarter. Last Friday, the ratio not only backtested the trendline but it also tested the level that it had bounced from last September. Today, it has formed a swing low.
Is this the beginning of a big move higher in China equities vs. US equities? If so, does that mean that the huge appetite for everything commodity will be returning? These are questions that remain to be answered, but if they prove to be true then we should see big moves happening in mining, basic materials, copper, silver, solar, and the China indexes themselves over the next few intermediate cycles.
Commodity bulls have been looking to Quantitative Easing as the source of price inflation, but skyrocketing bank reserves and a collapsing velocity of money (which I wrote about here) have been more of a monetary black hole than a stimulus. With US equities sitting at all-time highs and many commodities sitting at multiyear lows in price, positioning, and sentiment, the asset that has more upside potential is obvious.
At The Refined Investor, we are always looking for assets with positive fundamentals, contrarian sentiment, and constructive price action. Maybe this time it will just take the good old-fashioned demand of a massive economy to get things started again, instead of the magical creation of some digital zeros that never see the light of day…
Good trading all.
Steve Chapman, TRI
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