From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Cyclical stocks are all the craze.
If you're doing well this year, it's because you own these stocks. If you're not, it's because you don't own these stocks.
Whether we're talking about energy, agricultural inputs, or industrial metals, these are the kinds of industry groups that are showing relative strength.
And, to be clear, this is nothing new. This theme has been in place for over a year now.
The only new development is that we're seeing upside momentum in these names pick up. As a result, the gap between these winners and the rest of the market has widened to historic levels.
The reason why many of these groups are working is simple. They make their money by selling various commodities, and the prices of those commodities continue to rise at an extraordinary pace.
As such, these "value stocks" are now growing their earnings and revenue at levels that make SAAS companies wish they were in the commodity business.
For much of my career, I've listened to investors clamor over the incredible 30-40% growth rates that FANG names and other tech stocks have enjoyed for so long.
This kind of growth trajectory was enviable for much of the last decade because not many stocks could beat it. Today, we're in a very different environment.
With a new bull market in commodities, Materials and Energy stocks are putting their operating leverage to work and reporting triple-digit top and bottom-line growth rates.
In some cases, we're talking about earnings increasing by 5 or even 10x.
As long as commodities keep working, these figures are going to keep growing and these stocks are likely to remain in favor. We don't see this trend ending anytime soon, so we want to keep piling into these cyclical names.
Let's take a look at two of today's biggest "growth industries," copper and steel.
If you read our research, you already know the individual components of these subsectors are the hottest stocks in the market right now.
Our Trade Ideas page is littered with these names. Many of them have been basing since the first half of last year and are just now resolving higher.
Seeing a lot of similar patterns, and this makes sense because these are similar businesses. It's not at all unreasonable to look at the price action of one commodity stock and make the bet that another will follow a similar path.
As more and more continue to resolve higher, it only bolsters our view that this is indeed a new mark-up phase for the current bull cycle in commodities and commodity-related stocks.
Here's a look at the VanEck Steel ETF $SLX and Global X Copper ETF $COPX, which are both in the process of resolving higher this week:
This is the same pattern we just described. A primary uptrend. Continuation pattern (or base). In the case of steel, a fresh breakout.
And we have every reason to suspect copper will follow steel's lead in the coming days and weeks.
Based on our experience with these formations, some follow-through in the form of a strong leg higher is likely to follow these upside resolutions.
So, not only do we want to continue to bet on the strongest names from these ETFs, but now our risk is clearly defined to trade the indexes as well.
These are simply additional vehicles we can employ to bet on the industrial metals theme.
Here's steel:
We're buyers against those 2021 highs around 68 with a target of 85 over the coming 2-4 months.
And here's the Copper Miners ETF with an almost identical look:
We're buyers on strength above 47 with a 2-4 month timeframe and a target of 61.
Depending on your risk tolerance, you can use the May 2021 closing highs near 45 as your risk level. Regardless of how you craft the setup, the risk/reward is skewed heavily in our favor with this one.
While Industrial Metals stocks continue to dominate the new highs list and show strength, many individual names left the station weeks ago so the risk/reward isn't as favorable at current levels.
If you missed these opportunities, you have a chance to get in at the index level.
The bottom line is we want to be buying commodity stocks and positioning ourselves for further outperformance from the cyclical trade. SLX and COPX simply gives us another avenue to express this thesis through.
We'll be back next week with more!
Be sure to check out our COT Heatmap and Trade of the Week below.
COT Heatmap Highlights
- Soybean Meal: Commercial hedgers are less than 2% away from their three-year-record short position.
- Orange Juice: Commercial hedgers continue to position themselves near their three-year-record short position.
- Japanese Yen: Commercial hedgers increased their long position by 20,379 contracts.
- US 10-Year T-Note: Commercial hedgers are less than 6% away from a three-year extreme net long position
Click here to download the All Star Charts COT Heatmap.
