Last week, we identified a bullish momentum divergence in the commodities versus stocks ratio at a shelf of former lows.
The evidence suggests we're on the verge of a new era of commodity outperformance.
If we're right, it's time to prepare a list of our favorite setups to seize this opportunity.
We've already covered promising setups in uranium and solar.
Now, let's focus on oil and gas, and here's why:
First, crude oil, heating oil, and gasoline have been consolidating above a shelf of former highs for more than two years, and the risk is skewed in favor of the bulls.
Until the bears can resolve these consolidations to the downside, we want to continue betting these levels hold as support.
Meanwhile, energy stocks have been much stronger than the underlying commodities:
The NYSE Oil & Gas Index $XOI made new all-time highs in 2022 and has been consolidating above a shelf of former highs since then.
On the flip side, the NYSE Natural Gas Index $XNG never broke out to new highs... until the US presidential election earlier this month.
Since then, $XNG has rallied in seven of the last 10 trading sessions and kickstarted a rally in the broader sector.
On a relative basis, energy stocks are testing a key level of interest versus the S&P 500:
This ratio completed a textbook trend reversal in early 2022 and has carved out a multi-year consolidation.
In the lower pane, we've highlighted the 14-week RSI never reaching oversold levels during this corrective wave, which adds to our conviction in an eventual upside resolution.
If and when energy makes new relative highs, we expect a new period of outperformance versus the broader market.
