From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Equities continue to get hit. And yesterday, commodity-related stocks were not immune to the selling pressure.
Energy, metals, and natural resources, in general, all sold off into the close. The inflation, interest rate, and commodity trade had a really rough week.
It's never a good thing when the leaders get hit like this. At the same time, two days really doesn’t make a trend.
Before we get sucked into calling peak inflation, let’s zoom out and put all this near-term volatility into the right context.
When we do, it reconnects our eye with the underlying trend – which is unequivocally higher. It also becomes clear that many of these stocks are finding resistance at logical levels – areas where we would expect these stocks to digest gains.
And that’s exactly what they’re doing!
Let's take a look!
First up is a triple pane chart of the Metals & Mining ETF $XME, Copper Miners ETF $COPX, and the Steel ETF $SLX:
This chart gives a great read on how base and industrial metal stocks are doing.
XME recently broke to fresh highs, leading the way for COPX and SLX. The question has been – will copper miners and steel stocks follow XME with their own upside resolutions?
So far that has not been the case.
Actually, it’s starting to look like XME will catch lower.
XME is up 37% year-to-date and it’s only April! And it’s running into a logical level of overhead supply. Taking a breather here would make sense. In fact, it would be healthy.
Here’s a weekly chart zoomed out 10 years:
XME ran right into a key retracement level ~64. This is as logical a level as any for price to digest its recent gains.
It would actually be abnormal if price didn’t react at this level.
The copper miners and steel ETFs are grappling with overhead supply as well:
Instead of running into a key retracement level like XME, COPX and SLX are both contending with their 2021 highs. These bases never resolved higher, and now they appear to be failing at these former highs.
While SLX is showing more strength, it just undercut its former highs, resulting in a failed breakout. Meanwhile, COPX never even broke out and is now rolling over back into its range.
Both these ETFs need more time for demand to absorb all the overhead supply at these levels. That’s perfectly normal.
It’s near impossible to talk about copper miners without mentioning the bellwether – Freeport-McMoRan $FCX:
Unlike the copper miners ETF, FCX reclaimed its 2021 highs only to lose that level yesterday and slip back into its prior range.
Remember, it wasn’t that long ago we were talking about the prospect of FCX being a double when it was trading ~10.
It closed just shy of 45 yesterday – after one of its worst days in two years. This happened on the heels of a top and bottom-line earnings beat as well. It’s never a good thing when investors stop rewarding stocks for strong performance.
Today, it followed through to the downside.
We should expect backing and filling as these trends continue higher, especially at logical levels of resistance and support, like this one.
With that said, the way the stock is behaving is a bit of a concern. Momentum is waning and the stock dropped -15% in just two days as it registered this failed move.
Another great example is the Global Natural Resources ETF $GNR:
This ETF is carving out a decade-long base as it finds resistance at its 2011 highs. These are the same levels where many natural resource stocks peaked during the last commodity supercycle. So it makes sense for these stocks to respect those former highs.
This is a perfectly logical level for GNR to digest its recent gains and build up energy for the next leg higher.
Last but not least we have the MSCI Global Agriculture Producers ETF $VEGI:
We know we’re in a commodity bull market when we’re talking about agriculture producers ripping higher. But like most commodity-related stocks, investors took profits at logical levels this week.
In the case of the VEGI ETF, it was a key extension level ~51.
The main takeaway is that these cyclical stocks – whether we’re talking about metals and mining, steel, agriculture, or just natural resources – are in strong primary uptrends. The past couple of sessions hasn't changed that.
Is broad selling pressure gripping the stock market right now?
Yes.
Are cyclical and commodity-related stocks feeling the pressure?
Yes.
But many of these natural resource stocks are at logical levels of overhead supply – whether it’s former highs or key Fibonacci retracement or extension levels. And they’re pausing at these levels after explosive moves.
We don’t want to fret about two days of selling, particularly after the run these stocks have had. Some consolidation here would make sense and would be a sign of a healthy uptrend.
At the same time, the indiscriminate selling taking place across the market is something we must respect. The leaders coming under pressure the way they are now is never a bullish thing. If it continues for any significant period of time, this will be a real cause for concern.
The bottom line is this… The last two days of price action were about as ugly as it gets. But it was still only two days of price action. If this kind of volatility persists we’re going to need to reevaluate our thesis. But, let’s see if that happens before we jump the gun.
These are volatile stocks. They are high-beta. When they trend, they trend aggressively.
But the opposite side of the coin is the same story. When they sell-off, they get sold aggressively. And that’s what we’ve seen the past few sessions.
What we don't want to see is the market leaders start acting like the laggards.
We’re keeping a close eye on this development and will be back with more soon.
COT Heatmap Highlights
Soybean Meal: Commercials continue to pile on a record short position after a reprieve last week.
Orange Juice: Commercial hedgers lightened their short position after holding a 3-year record extreme last week.
Japanese Yen: Commercials reduced their long position this week but remain within 2% of their 3-year extremes.
Crude Oil: Commercial hedgers extended their long position to less than 10% away from a 3-year record.
