Chinese Stocks, Dr. Copper, and Why Going Long Stocks is Pointless

Chinese Stocks, Dr. Copper, and Why Going Long Stocks is Pointless

Quietly, Chinese stocks continue to slide, now down 12% for the year to date.  Since China had announced its plans to target inflation, the Shanghai Index has taken it on the chin:

China Stock Market Price Chart 2011Chinese stocks quickly retraced a portion of their 2008 losses – and then slowly faded. (Source:

Regular readers know that we like to follow China from a leading indicator point of view.  Chinese stocks topped before US stocks last time around, and also turned up about 3 months ahead in 2009.  We’ll see that if the summer of 2009 top in Chinese stocks turns out to be a foreboding one too.

David Rosenberg writes today that the Shanghai index usually leads commodity prices by about 8 months (something I’ve wondered about recently):

In China, the Shanghai index was down a further 0.5% today and is now off 12% from the start of the year — and this index leads commodity prices by around eight months. Mizuho Research just published a report indicating that even with the government upping its inflation target, this is a sign of reality and not complacency. We are likely to see no fewer than six rate hikes next year out of the People’s Bank of China on top of the two increases this fall, no wonder the bank stocks there are peeling back.

Dr. Copper, though, disagrees with the bearish prognosis being inferred by Chinese shares – the metal with the PhD in economics continues its relentless ascent:

Copper Price Chart Outlook 2011Source:

I never thought we’d see copper approach it’s 2008 bubbly highs – but amazingly, here we are.  And it only took a few trillion newly minted dollars to do it!

Going forward, there are divergences all of the map – gold and silver are near new all-time highs, while most other commodities still lag their 2008 marks.  Bullish sentiment appears to be at or near a high water mark.  And to make things really exciting, interest rates are starting to pop across the globe.

A bet on higher stock prices is probably not an optimal one.  You likely have more upside and less downside by just buying gold straight up.  Since a bet on rising stock prices is really a bet on inflation, why not just go straight to the proven inflation hedge?

Gold Dow S&P Ratio Price ChartThe Gold/Stocks Ratio is still in an uptrend in the US.

Of course regular readers know that short-term, I don’t really like either – because the dollar is starting to look frisky again.  If the buck does rally, that’d probably be bad for stocks, and somewhat less bad for gold (which is breaking out against most other currencies).

So once again, the “short stocks, long gold” trade is probably the one to be in for at least a few more years.