From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
It’s only six weeks into the new year and we’re already getting a sense that commodities could very well outperform just as they did in 2021.
Evidence supporting our commodity supercycle thesis continues to mount each day, as participation across the commodity space expands.
Crude oil is breaking above 90. Base metals like aluminum and tin are hitting new all-time highs. And the rally in grains is getting back on track.
All these things suggest that last year's bull run wasn’t a simple “one and done” event.
One key difference between last year and today is strength among commodities is starting to spill over into commodity-related equities.
This is a critical development that supports our bullish thesis.
Today, we’re going to run through some stocks, highlighting the renewed strength from some of these underappreciated cyclical areas of the market.
First up is the Metals and Mining ETF $XME:
Like many cyclicals – particularly materials and industrials – XME ran into resistance last May and has been digesting gains at this level since.
A resolution higher not only completes an eight-month consolidation and a decade-long base but also supports higher prices for industrial metals in general.
We want to be buyers on strength above the breakout level around 48.50. If and when we get it, we’ll be targeting 71.25 in the next 3-6 months.
Next we have the Global Carbon Allowances ETF $KRBN:
Just to be clear, the uptrend in carbon allowances is not a new development. The strength from KRBN has been going on for over a year now.
And it doesn’t look to be slowing down anytime soon as price seems to be resolving to the upside from its latest consolidation.
This is evidence of strong demand to burn fossil fuels and it sends a poignant message regarding “dirty energy,” which is that it’s not going anywhere anytime soon.
The green revolution and transition to renewable resources is an inevitable reality. But it could be a while until it actually happens.
Whether we like it or not, fossil fuels are still a necessity – at least for now.
Let’s switch gears to the agricultural space…
Here’s the Agribusiness ETF $MOO:
Ags are getting back in gear – so it makes sense to see those businesses associated with agriculture catch higher, too. After bouncing off its pandemic lows, MOO has been on an absolute tear.
But, like other commodity-related stocks, it’s been consolidating since May 2021. With MOO posting new all-time highs earlier this week, we think it’s just a matter of time before we see the next sustained leg higher.
The message here is straightforward: Equity markets are confirming the strength we’ve been seeing from commodities.
And it's no longer just energy stocks making new highs.
In recent weeks, we’ve seen industrial metals and agricultural stocks join in on the party too. Now it’s up to us – as investors – to position ourselves in the right way to benefit from these trends.
We’ve already been leaning on cyclical stocks for months. But, with participation expanding, now we have even more options to gain exposure to these commodity-related groups.
Stay tuned!
Be sure to check out our weekly trade idea from our natural resources and commodity-related scans below.
COT Heatmap Highlights
- Australian Dollar: Commercial long positioning went relatively unchanged, approaching record levels.
- Soybean Meal: Commercial hedgers are less than 3% away from their three-year-record short position.
- Coffee: Commercials now hold their largest net short position in history.
- US Dollar Index: Commercial hedgers lightened their net short position for the second week in a row but remain near three-year extremes.
Click here to download the All Star Charts COT Heatmap.
Trade of the Week
Today we’re highlighting Corteva $CTVA, a $37B agricultural stock from our Natural Resources list:
Sean put out an options trade on CTVA earlier this week, which you can read here. But we like this chart so much that we can also buy the common stock at these levels…
We want to buy the breakout above those former 2021 highs around 50.75 with a target around 69.50 over the next 2-4 months. But if the breakout fails and we fall back below those former highs, we don’t want anything to do with it.
Thanks for reading! As always, please let us know what you think.
Be sure to download this week’s Commodity Report below!
