Is the Gold/Copper Ratio Predicting A Drop In the S&P?

People are always talking about the silver/gold ratio—but the copper/gold ratio seems to be much more predictive of market trends.

My friend Michael Hampton has this very interesting chart—check it out:

The top chart is a ratio of copper-to-gold prices. The bottom chart is of the S&P index. If you notice the timeline, you’ll see the chart covers the last three years.

The red circle 1 is when the copper/gold ratio turned down—followed shortly by a turn down in the S&P index which [sarcasm alert] we all have such fond memories of. The subsequent green circle in the ratio—the bottom of the ratio—came shortly before the uptick in the S&P from its bottom of 666.37.

Similarly, red circle 2—the downturn in the copper/gold ratio—signaled the top of the market in the S&P. However, the subsequent green circle anticipated the bottom of the S&P by about six weeks.

Now, at red circle 3, there is a clear break down in the ratio.

Does this signal a break down in the S&P?

Michael seems to think so—and so do I. From the ratio, one could make the reasonable claim that equities are set to take a tumble in the near-term: Say within the next couple of weeks. How severe a tumble? Between 7% and 10% seems reasonable, within a three-week period. Furthermore, it would make sense for the equities markets to turn severely bearish, now that Quantitative Easing-2 (QE-2) is supposed to end. The lack of Federal Reserve-supplied liquidity will definitely squeeze allasset classes—not just commodities.

So expect the S&P to break down between now and the first of June at the latest—and from this break down, expect the Federal Reserve to become more aggressive in its talk about extending QE-2 into QE-∞. Individual FOMC board members are already making noises about extending QE-2, as are some prominent investment bank economists, especially at Goldman Sachs. A jolt down in the equities markets would put further pressure on the Fed to just keep on printin’.