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Stocks and copper play the ultimate game of chicken

Talking Numbers

Stocks and copper play the ultimate game of chicken

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Stocks and copper play the ultimate game of chicken

Stocks and copper play the ultimate game of chicken
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The red metal is, well, in the red.

Since the start of 2014, copper is down 14%. As data in China suggests a relative slowdown in that country's economy, copper has taken the hit. After all, China imports 40% of the world's copper.

Copper is traditionally considered a bellwether for US stocks, though in the past year, the benchmark S&P 500 index is up 19% while copper is down 17%. Does this mean that copper is sending a huge prescient warning to US markets?

"I think it's more important than the market is giving it credit for right here," says Talking Numbers contributor Enis Taner, Global Macro editor at RiskReversal.com. "It's historically been known as Dr. Copper. The reason is that copper is used in so many different industries that it's a good barometer of industrial demand."

However, Taner sees the recent dive in copper prices as related to the economic situation in China. Besides being used for industrial purposes, copper is also used as collateral by businesses seeking financing from China's "shadow banking" system. As the Chinese economy slows, demand for copper as collateral slows and copper gets added to the market as financing deals fall through and borrowers sell their copper collateral to pay back debts.

(Read: Secretive Chinese funds: a potent force in copper rout)

"[Copper] is generally viewed as more of a barometer of Chinese shadow financing," says Taner, "rather than a barometer of global industrial demand and, specifically, US industrial demand."

But, there is one way depleted demand for copper could signal a problem for US stocks.

"Chinese growth is 30% of global GDP growth," says Taner. "It's such a huge portion of where global growth is going to come from in the future…. US multinationals that get 50% or more revenues from outside the US should be concerned, both as companies and as stockholders."

CNBC contributor Andrew Busch, editor and publisher of The Busch Update, says copper has in the past served well as an indicator of where US stocks were headed, but not as of late. 

"Dr. Copper is kind of a quack right now," says Busch. "It has really lost its mojo as far as telling us where the S&P is going."

Looking at a chart of copper against the S&P 500 over the past five years, Busch says, "For the first four of them, [copper] actually led the way up, it's led the way down, and it's led the way back up."

That is, until last year. "The two have gone their separate way significantly," says Busch, who agrees with Taner that the copper's decline is due to problems in China.

(Watch: The scary factors behind copper's price plunge)

"We're probably seeing some selling pressure because of the shadow banking area in China is putting pressure on those companies to dump copper," says Busch.

Yet Taner doesn't believe US investors should ignore copper. In fact, it may yet serve as a warning.

"I wouldn't write off Dr. Copper so quickly," says Taner, who notes that copper and US stocks were more closely correlated several years ago. "The past year is the anomaly, not the norm. So, maybe the re-correlation of these two might mean US stocks going lower."

To see the full discussion on what copper means for US stocks with Taner on the fundamentals and Busch on the technicals, watch the video above.

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