foxex: Looking for Confirmation to Be More Bullish

Chart Advisor | Focus on the Price

Tuesday, March 19, 2019

1. Palladium vs. copper…what it's telling us

2. S&P 500 consolidates ahead of FOMC

3. Small-cap stocks lagging behind latest breakout

Major Moves

Palladium and copper have been moving in the same direction – higher – during 2019 as the global economy has been able to shake off concerns it was headed for a recession, but the difference in the moves between the two metals could be quite instructive for stock investors.

Palladium (PA) futures started 2019 at $1,200 per ounce and have since soared 30% to ~$1,555 per ounce. Copper (HG) futures, on the other hand, started 2019 at $2.60 per pound and have since only climbed 12% to $2.92 per pound.

So what accounts for the difference?

Both metals are considered industrial metals, and demand for these metals is on the rise. Palladium is primarily used in auto manufacturing for catalytic converters in gasoline-powered automobiles, and manufacturers need more of it as emissions standards are increasing.

Copper is used in far too many industrial applications to list here, but as the global economy continues to grow, manufacturers are demanding more of the metal.

However, even though demand for both metals is high, the supply of palladium is becoming a growing concern. Copper is produced in many areas around the world, the majority of palladium comes from either Russia or South Africa.

Currently, Russia appears to be mulling over the idea of prohibiting the export of nickel mining tailings – the source of most of Russia's palladium – in the hope that the country can build up its own palladium refining capacity.

Russia won't be able to build up its refining capacity overnight so if it takes this step, palladium may be much harder to come by in the short term.

Knowing that potential supply-side disruptions are likely driving palladium's out-performance, I'm still cautiously optimistic that both metals are signaling strength in the global economy, but I'm watching to see if copper can break out of its consolidation range (see the red box in the chart) and move higher before getting too excited about what I see in the commodity market.

S&P 500

After gapping higher this morning, the S&P 500 gave up not only its overnight gains but also a tiny slice of yesterday's gains.

The index closed yesterday at 2,832.94 but fell 0.01% to close at 2,832.57 today.

This isn't a large decline by any stretch of the imagination, but it looks like the S&P 500 may need to re-test 2,816.64 to see if the former resistance level is able to hold up as a new support level before the index can move higher.

Today's move isn't surprising. We often see investors hunker down the day, or two, before the Fed's Federal Open Market Committee (FOMC) releases its monetary policy announcement.

If the monetary policy statement is as dovish and the accompanying economic projections are as stable as Wall Street is hoping, the S&P 500 has a great opportunity to continue moving higher.

However, if there is a surprise in either the statement or projections, the re-test of 2,816.64 may not hold.

A quick heads up…the market's initial knee-jerk reaction in the aftermath of the FOMC announcement often moves in the opposite direction of where the S&P 500 will ultimately end up at the closing bell.

Expect some volatility tomorrow at 2 pm Eastern daylight time when the FOMC releases its monetary policy statement.

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Risk Indicators - Russell 2000

It's been an exciting week on Wall Street for everyone who is invested in large-cap stocks as the S&P 500 has jumped up to new highs for 2019.

Sadly, it hasn't been quite as exciting for all of the investors who put their money into the small-cap stocks that make up the Russell 2000. It has failed to keep up with its large-cap big brother.

Small-cap stocks are generally considered to be riskier investment opportunities than large-cap stocks because the companies behind them are less established and more vulnerable to the shifting sands of the U.S. and global economy. This makes them great investments when the economy is strong but less so when the economy slows down.

Based on the Federal Reserve Bank of Atlanta's GDPNow indicator, analysts and economists at that branch of the Fed believe Q1 2019 gross domestic product (GDP) is going to come in at a paltry annualized growth rate of 0.4%.

This is an early estimate, but Federal Reserve Bank of New York's GDP Nowcast isn't much more encouraging at an estimated Q1 2019 GDP growth rate of 1.4%.

Seeing a general consensus of slower economic growth in the United States may explain why the Russell 2000 is under-performing the S&P 500.

The index is still in an uptrend after forming a higher low in early-March, but it has struggled to climb back up to its February 25 high of 1,602.1. Instead, it has remained below 1,575 – the level that served as support for two weeks in late-February as the index was forming its previous high.

I'm watching the Russell 2000 closely. If it can break to new 2019 highs, it will confirm Wall Street has fully bought in to this rally. If it can't, we may see a shift toward more conservative equity investing.

Something Gross in GDP

How does the stock market affect gross domestic product (GDP)?

Bottom line: It's good, but it could be better

2019 has been a great year for the stock market so far, but it could be better. We're still waiting on confirmation from the FOMC that it's not going to raise rates in 2019, we're still waiting to see if the global economy can continue to grow at a steady clip, and we're still waiting to see if the United States can seal a trade deal with China.

Until we get answers to these looming questions, I wouldn't be surprised to see mixed messages from various asset classes.

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