It’s hard to recall a more anticipated top in stock markets. It seems bulls and bears alike both expect the market to stall up here, one simply expecting a pullback for which to increase exposure, the other looking for a crash. One of the more widely cited divergences has been the recent under-performance of the R2K and TRAN. One leading sector we watch is SOX and we’d add it to the list of non-confirming indices. In fact with the SPX exceeding the 2011 highs the cyclically sensitive SOX is still 11% below its 2011 peak. And we thought tech was leading the rally? The other cyclically sensitive relationship that also peaked back in Feb 2011 along with the SOX and US bond yields is the Copper/Gold ratio.
Thus far the Copper/Gold ratio has not responded to the rally in other risk assets and remains below the 2010 low that coincided with the Greece/GOM initial correction off the 2009 lows. It’s quite possible this ratio doesn’t matter anymore but it would also be irresponsible to ignore. With the massacre in gold last week helping elevate this ratio higher than it may have otherwise been we will want to see further follow-through. If it rolls over along with the cyclical equity indices then defense is warranted.