April Conference Call: 5 Key Takeaways

1. Commodities Take the Wheel

It’s no secret that commodities have been the best performing asset class for more than a year now. As word of this spreads we continue to get asked the question, "How long can it last?"

When the relative trend between stocks and commodities changes course, the directional moves tend to last years and decades, not months and quarters. So the simple answer is, "A lot longer."

The zoomed-out chart of the S&P 500 versus the CRB Index puts the recent outperformance in commodities into perspective.

These last couple of years are most likely just the beginning of a new secular trend that favors commodities over stocks.

That doesn’t mean we don’t want to own any stocks. It just means we want to own the right stocks for an environment where commodities are leadership. 

That means looking for opportunities in commodity-related and natural resource stocks. We’ve been seeing them pop up on our bottoms-up scans for months as the relative strength from these areas is undeniable.

This is all the same trade. Commodity futures and commodity stocks are where we want to be right now.

2. It's a Material World

Speaking of natural resource and commodity-related stocks… 

The vast majority of these names are found within the materials and energy sectors. It’s no wonder that an equal-weight index combining these two sectors is breaking out to fresh multi-year highs.

While energy was the top-performing sector of 2021, the strength in materials has really accelerated since late last year. This supports our thesis that we're in the early stages of a new bull market for commodities.

We continue to see strong rotation among commodity stocks and commodities themselves. This is incredibly constructive.

When we look at the above base and consider the fact that these stocks went absolutely nowhere for seven years from 2014 to 2021, it reinforces our view that they still have plenty of room to run.

3. Strong Dollar Weighs on World's Equities

While the strength of the US dollar hasn’t impacted commodities or commodity-related stocks much, it has definitely been putting pressure on international stocks.

Historically, the MSCI All Country World Index Ex-US $ACWX has had a strong negative correlation with the US Dollar Index $DXY. This makes sense given both indexes have heavy exposure to Japan and developed Europe.

As long as the US Dollar Index continues to trend higher, it will be a headwind for international equities. On the other hand, a reversal in the dollar would set the stage for higher prices for these stocks.

Since there's little evidence of the dollar cooling yet we want to be prepared for an environment where international stocks continue to experience volatility.

4. Supply Looms Overhead

Speaking of global equities being under pressure, just look at all this overhead supply around the world.

Whether we’re talking about Europe, Asia, or even the US, the majority of world markets are trapped beneath critical levels of resistance.

These charts are just a handful of examples:

While there are pockets of strength in commodity stocks and commodity countries, these areas are not represented well at the index level.

Due to this, the major indexes in the US and abroad are not the best vehicles for the current environment. The bias is lower as long as long as these topping patterns are intact.

The best way to express a bullish thesis at the index level is through individual sectors such as energy and materials and commodity-centric regions and countries such as Latin America. As always, we want to focus on the leaders.

5. Stocks Get Defensive

The most defensive areas of the stock market appear to be taking on leadership roles.

Utilities, staples, and real estate are all considered risk-off sectors. During market downturns, when investors are seeking safety, low volatility, and a nice yield, these are the stocks they hide out in.

For this reason, seeing them outperform and lead the overall market is not something we tend to see during healthy bull markets.

This kind of price action is evidence of risk aversion, not risk-seeking behavior.

Making matters worse, these groups are completing major trend reversals relative to the broader market. 

Bulls do not want to see sustained relative strength from these sectors as that would tell us investors are positioning for tough times ahead. But for now, it’s the direction these relative trends suggest we’re headed in.

That’s it for this month’s key takeaways!

As always, Premium Members can re-watch the conference call and view the slides here!

We hope you enjoyed our recap of this month’s call. Thanks for reading, and please reach out to us with any questions!

Allstarcharts Team