From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Gold is the hot topic this week, now that it’s finally showing signs of life.
It’s impossible to deny gold’s near-term strength. But we think the setup probably needs more time to develop and work through all the overhead supply from the past few years.
Long story short, gold is still pretty messy if it's below the 2011 highs.
If and when the shiny metal makes a decisive resolution, there should be plenty of time to join in and ride the trend higher.
As for other areas within commodities, we continue to see a growing list of contracts reclaim key levels and print fresh highs.
Procyclical commodities like crude oil and gasoline might come to mind since they’re constantly in the news cycle.
But other areas, such as grains and even livestock, are also breaking to new multi-year highs.
Today, we’re going to highlight an agricultural commodity that often gets overlooked.
Let’s talk about hogs!
Let’s start with an overlay chart of lean hog and live cattle futures:
The first thing that jumps out is that live cattle futures tend to lead hogs through major peaks and troughs.
We see this phenomenon in 2017, 2018, and 2019. And then the pandemic lows hit and they bottomed around the same time in 2020.
Focusing on the most recent price action, notice how live cattle peaked in mid-February of 2021, almost four months before lean hogs topped in early June.
The point we’re trying to make is simple. Sometimes cattle is a leading indicator for hogs and at other times it is more of a coincident indicator.
But rarely do we see hogs lead cattle.
This brings us today and raises an important question: Will lean hogs follow the path of live cattle yet again?
If they do, then it should only be a matter of time until we see new highs.
Here’s a weekly chart of lean hog futures:
Not only are lean hogs catching higher. They’re also reclaiming a key level of interest at the 2019 highs as they attempt to re-complete a multi-year base.
It was those same former highs around 98 that we wanted to get long above last year.
That trade triggered. But hog futures fell back into their prior range following a short-lived rally. They never reached our target.
Fast-forward to today, and lean hogs are back at the scene of the crime and showing signs of renewed strength.
One thing that’s different this time around is that live cattle futures are hitting fresh seven-year highs instead of the range-bound action that was present last year.
The strong relationship between hogs and cattle strengthens our conviction that the rally in hogs is the real deal this time.
From a tactical standpoint, hogs are well above our risk level around 98 -- too far to put on a risk/reward trade that’s skewed in our favor.
At this point, our best course of action is to wait for a short duration continuation pattern to develop and redefine our risk there.
More importantly, it’s impressive the market is giving us a reason to talk about hogs and livestock futures in the first place.
That alone is information.
It’s a clear sign of broadening participation within the commodity space, and it strengthens our bullish conviction on the asset class in general.
We expect more and more commodities to participate in the rally as the cycle unfolds. This is true for even some of the worst performers -- like precious metals.
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 increased their shorts, as they're less than 2% away from their three-year-record short position.
- Coffee: Commercials now hold their largest net short position in history for the second week in a row.
- US 10-Year T-Note: Commercial hedgers are less than 4% away from a three-year extremes net long position.
Click here to download the All Star Charts COT Heatmap.
Trade of the Week
Today we’re highlighting Warrior Met Coal $HCC, a $1.6B coal stock from our Natural Resources list:
HCC is carving out a multi-year base with a breakout level at the 2018 highs around 33.75. You’ll notice in the bottom pane that it has been steadily outperforming the broader market since last year.
With a trend reversal in the relative ratio already underway, we’re most likely getting long a leader if and when this stock breaks out on absolute terms.
We want to be buyers on strength above 33.75 with a target around 48.75 over the next 2-4 months. Our bias remains neutral until a decisive resolution above those former highs.
Thanks for reading! As always, please let us know what you think.
Be sure to download this week’s Commodity Report below!
