From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
Risk assets have been getting hit for the past two weeks. Stocks have been under pressure, and commodities have been struggling.
Meanwhile, we never saw any real follow-through lower in the Dollar, as DXY has bounced right back to the upper bounds of its year-to-date range.
But, as usual, we continue to see pockets of strength in the commodities complex.
Last week, we wrote about the resilience from base metals, such as Steel, Nickel, and Aluminum.
More recently, we're seeing relative strength from the Energy complex. That's what we're going to talk about today...
Energy is actually the only sector that's positive over the trailing two weeks. And Energy futures haven't been looking too shabby, either.
Here's a bubble chart of all of our commodity subgroup indexes with their one-month return along the x-axis:
Our Energy Ex-Ethanol Index is up over 10% despite everything else being lower over the last month. And it's been dragging the CRB Index higher with it due to the hefty weighting from Crude Oil and its peers.
Here's a look at that custom index:
It's breaking out of a multi-year base to its highest level since 2014.
Crude Oil is up another 3% this week, marking four consecutive up weeks:
It's still got some overhead supply at 76 to work through, though.
Thermal Coal has been on absolute fire and continues to rally after resolving upward from a textbook continuation pattern. Here's the chart:
And how about Natural Gas? Natty has quietly rallied to its highest level since 2014, recently registering an intra-week high above 5.50.
In June 2020, prices were below 1.50, so we're looking at almost a quadruple in just over a year. Not too shabby.
Here's a look:
Despite such a nice rally, no one seems to be paying Natural Gas much attention, and those who are don't seem to trust the move and are fading it.
And they may very well be right. There's a lot of dead bodies buried up here at the 5-6 area, and we've seen price fail here a handful of times over the past decade or so. But that kind of sentiment always catches my attention.
And even Natural Gas stocks have clawed back above a key level of interest. Here's the Natural Gas ETF $FCG.
Our line in the sand is 14.50. If we're above there, the bias is higher. But that level probably only holds if this move in the underlying commodity sticks.
So, what's it going to be for Natty now that we're revisiting this critical resistance zone once again?
Will sellers come out, in which case the recent rally could end up looking something like what we saw from Lumber earlier in the year? Or will it look more like Steel?
Only time will tell, but as long as prices aren't collapsing and FCG remains above our level, things are probably OK.
Here are two strong Natural Gas stocks we like and can use to express a bullish thesis under this scenario:
If we're above those 2018 highs in Magnolia Oil & Gas $MGY, we can be long and buying weakness back toward 15.20 with a 1-3 month target of 22.60.
And we have a very similar multi-year base breakout in Range Resources $RRC, which we're buying above 18.50 with a 2-4 month target of 28.90.
That's all we got for this week!
The bottom line is, while we've definitely seen weakness from most commodities of late, we're still seeing pockets of strength from various groups. And it's hard to find a subgroup more important than Energy.
Long story short, it's definitely not bearish for our global growth and reflation narrative to see Energy futures breaking to their highest level in about seven years. We'll continue to watch this development closely.
In the meantime, let us know what you think. We love hearing from you!
Thanks for reading, and be sure to download this week’s Commodity Report below!
