Thanks to its heavy industrial use, particularly in international real estate sectors, a direct historical correlation has existed between the prices of the exchange traded fund for copper (JJC, quote) and the exchange traded fund for home builder stocks (XHB, quote).
The amount of copper used in the construction process is the key. The red metal is needed for manufacturing pipes, wires, cables, and many more components of a house or office building. It is also an integral part of such real estate–related industries as plumbing.
At the macro level, a strong economy consumes increasing amounts of copper and other industrial metals. That drives up the price of JJC, as a simple matter of supply and demand. A growing economy needs copper for its factories and farms, as well as other features of its output.
As the chart below shows, until March 1, JJC and XHB were moving in sync, as to be expected. However, reports of declining economic growth in China, Europe and the United States have taken JJC lower, while XHB has soared.
Of course, international real estate markets need strong economic growth to be healthy — the demand for the homes, office buildings, and shopping centers that constitute that market requires robust local economies. The rising price of copper is a manifestation of that dynamic, but JJC is falling because of decreasing demand for the red metal.
Moreover, there is a seasonal pattern to home building prices. As the great bulk of sales take place in the April-to-August period, bullish figures are reported. From that, the share prices of home builder stocks and other securities related to international real estate will rise.
But the boom sales period is ending. Looming is the slowest part of the year for the international real estate sector, particularly homebuilding companies. JJC plunging is a bearish indicator for XHB and other securities in the international real estate industry.