From the Desk of Ian Culley @IanCulley
Commodities are losing ground as money flows back into stocks and bonds in hopes of a Santa Claus rally.
Yet fresh strength in equities isn’t completely leaving commodities in the dust. In fact, numerous bullish developments are underway for raw materials.
Dr. Copper is working its way higher. Crude oil is refusing to throw in the towel despite increased selling pressure. And softs such as orange juice, cocoa, and sugar are flying toward fresh decade highs.
That doesn’t sound bearish to me, especially when considering new buying opportunities in the grain markets…
First, check out the stock-to-commodity ratio:
The S&P 500 $SPY is violating a multi-year downtrend line relative to the CRB Index, signaling a potential trend reversal underway.
It’s undoubtedly constructive for stocks. But I want to see the ratio take out its year-to-date highs and the key retracement level at approximately 17.25.
An upside reversal could have legs once the stocks-to-commodities ratio reclaims that crucial level.
Of course, stocks could also outperform commodities while individual commodity contracts catch higher.
Soybean meal proves my point. (When’s the last time you heard that happening, if ever?)
Here are soybean meal futures completing a six-month base and finding resistance at a critical retracement level:
If you’re not already long meal, there are two ways to approach an entry:
- Buy strength above 457 based on the Nov. 14 close of 456.6.
- Buy weakness toward 420 if it occurs.
Both approaches work. It all depends on your trading style. Regardless of entry, our upside objective stands at approximately 508.
In an episode of "What the FICC?" earlier this year, special guest Angie Setzer mentioned the phrase “meal is real” regarding soybean's relationship with its derivative markets (soybean meal and soybean oil).
Generally, a strong rally in meal supports a similar rally in beans.
Lo and behold…
Soybeans are carving out a tradeable low:
I like buying strength in soybean futures above 1406 with an initial target of roughly 1545. It’s not there yet. But I've set my alerts.
How bad can it be for the commodity space when parabolic advances among softs are still intact, and grains begin to show signs of life? Not bad.
Considering the above and the resilience among procyclical contracts such as crude and Dr. Copper, commodities remain an attractive asset class.
And it’s a theme that will likely persist for years to come.
Stay tuned!
COT Heatmap Highlights
- Commercial hedgers are less than two percent from another record-long position in palladium.
- Commercials reached their largest long position for the Canadian dollar in three years.
- And commercials move within three percent of a three-year record-long position in the Japanese yen.
Click here to download the All Star Charts COT Heatmap.
You need to have a subscription to access this content in full.
Log in or
subscribe
