From the Desk of Ian Culley @IanCulley
Not only are commodities losing their leaders, but the leaders are losing their former 2018 highs.
Heating oil futures just posted their lowest level since February. Meanwhile, gasoline and crude have printed fresh year-to-date lows, taking out their prior cycle highs.
Should we expect broad selling pressure to hit the commodity space?
Not so fast…
If you believe impending weakness awaits commodities in the coming weeks and months, this chart is for you: our energy index overlaid with our broad commodity index (both equal-weight):
Energy contracts have led the way higher while relinquishing far less than the broader index – until now.
It’s a logical assumption that commodities as a whole will fall without the participation of the leadership group. But the EW33 index has yet to break down.
Instead, it’s holding above a shelf of former lows going back to the spring of 2021. I believe our index continues to hold the line under one condition…
While energy contracts carved out yearlong topping patterns, metal contracts stopped falling. Check out the overlay chart of our energy and base & industrial metals indexes:
Despite the weakness earlier in the year, metals are carving out a tradeable low while crude and its distillates print fresh lows. This is what rotation looks like. Whether it turns out to be healthy is anyone’s guess.
But you can’t ignore Dr. Copper showing signs of strength, trading above its former 2018 highs. For the structural uptrend to remain intact for commodities, metals need to resolve higher.
And, ideally, crude and gasoline correct through time, not price.
Based on the resilience of energy stocks, my money is on the former. Bottom line: I’m not crazy about shorting energy here.
On the other hand, I do like buying metals. Copper is trading above its August highs, and silver and gold are giving gold bugs something to talk about – me included!
I’ll save precious metals for another day(stay tuned).
Rotation out of energy and into metals is indicative of healthy bull market conditions. My bias remains higher as long as that’s the case.
To quote the legend Ralph Acampora, “Rotation is the lifeblood of any bull market.”
Even for commodities!
COT Heatmap Highlights
- Commercial hedgers hold one of their smallest net-short exposure for crude oil in almost three years.
- Commercials carry their largest long position in coffee over the trailing three years.
- And commercials favor lumber, as their net-long position registers within 3% of three-year extremes.
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