From the desk of Ian Culley @IanCulley

Commodities have been on the ropes for more than a month. As for commodity stocks, they’ve been under pressure since the start of Q2.

But the steep decline in these inflationary assets is beginning to slow – and it couldn’t happen at a more logical place.

The CRB Index and numerous bellwether commodity stocks are digging in and finding support at key levels. Whether these levels hold is anyone’s guess.

But the first step of the base building process is to stop going down. 

Let’s take a look.

First up is the CRB Index:

After a meteoric rise off the pandemic lows, commodities are experiencing their first significant correction in two years.

From the desk of Ian Culley @IanCulley

Sellers are in the driver's seat when it comes to commodities these days.

Besides natural gas and livestock contracts, few commodities present buying opportunities that we like. In reality, most have either broken down or are on the verge of breaking down. 

As the latest bout of selling pressure shows little signs of easing, we’re likely to experience more damage in the coming days and weeks.

Copper, one of the most economically sensitive and widely followed commodities in the world, is a great example of recent weakness. It can’t stop falling.

Given the downside volatility raw materials have experienced since the start of the summer, many trends are stretched. We don’t want to be too bearish here. We want to let the dust settle.

With that said, it’s hard not to imagine where the bears will strike next.

And when we scroll through our charts, it looks like they have crude oil in their sights.

Let’s take a look.

From the desk of Ian Culley @IanCulley  

Don’t let the numbers fool you.

Despite positive returns at the index level for Q2, commodities have been in full retreat for the past month or more. We broke the damage down in last week’s post.

However you want to slice it, commodities are under increased selling pressure. The strongest areas aren’t breaking out; they’re trying to hold support.

That’s simply how raw materials are performing in the current environment. Yet we’re still finding levels we want to trade against from the long side.

Believe it or not, one of these situations is popping up in one of our favorite energy contracts…

Natty gas!

Here’s a weekly continuation chart of natural gas futures:

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

So far, 2022 has been a historic year. That theme intensified during the second quarter, which is now in the books.

The bond market is working on one of its worst years on record. The S&P 500 just posted its worst quarterly return since 1970 with the index down more than 16% from January through March.

Bitcoin finished the quarter with its second-worst return in its short history. And now the energy sector – the market’s leader this year – just posted its third-worst monthly return since the 1990s.

The operative words here are “worst” and “return.”

That’s 2022 in a nutshell. The bears are in complete control.

However, one area that has held up through all this is commodities. It was the best-performing asset class in 2021, and it’s the only one to close the first half of 2022 in the green.

Let’s note that the first quarter of 2022 was far different from the second. And before we go running to commodities for safety, let’s put the group’s recent performance in perspective.

Dr. Copper is in the hot seat again this week!

I know we just covered copper and the copper/gold ratio. But this is a major development, so let’s dive in a little deeper.

When one of the most important procyclical assets breaks to fresh 52-week lows, it takes center stage. It also has major implications across a variety of markets.

But what about energy? What about grains and softs and the rest of the commodity space?

Well, most of those contracts have already been in correction mode.

And, based on the recent selloff in energy and other commodity-related stocks, a much deeper correction could be in store for these raw materials.

It’s definitely something we’re monitoring. And that’s where copper and today’s chart in focus come into play.  

Let’s take a look.

Here’s an overlay chart of copper futures and the five-year breakeven inflation rate:

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

One of the most important risk ratios and easily the biggest snooze fest from the past year is finally starting to move. 

That’s right – after going nowhere for more than a year, the Copper/Gold ratio is making a directional move! And believe it or not, it’s resolving in the opposite direction of interest rates.

Instead of following rates higher, Copper/Gold is rolling over to the downside and raising questions regarding risk appetite and overall market health.

And from the looks of today’s price action, Dr. Copper is breaking down on an absolute basis as well.

We can’t emphasize the importance of these developments enough. We’ve been awaiting resolutions of these ranges since early last year, and it’s finally happening.

Let’s talk about it.

Here’s an overlay chart of the Copper/Gold ratio and Copper futures:

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

Don’t fight trends. It never ends well.

Learning to go with the flow often comes with age and experience. Lucky for us, we have plenty of both at All Star Charts as the current cycle isn’t our first rodeo.

We’ve been pounding the table on the energy trade, gracefully accepting all of this inflation and the outrageous prices at the pump.

What can we do about it? 

We can own the strongest commodities that continue to benefit from this inflationary environment. It’s really that simple. 

Let’s take a look at one of them now.

Here’s a zoomed-out chart of live cattle futures:

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley  

Momentum thrusts abound.

The other day on Twitter Spaces, JC made the point that we hadn’t seen many bullish thrusts this year. He was right. There have been a handful of obscure ones, but nothing really stands out. Until now…

Last week, the High-Yield Bond ETF $HYG registered its largest single-day rate of change since spring 2020.

Not bearish, right?

Then, yesterday, copper futures followed this up by rallying over 5% and booking their largest daily gain in almost a decade.

Also, not bearish.

These types of strong momentum thrusts tend to kick off new uptrends.

We just covered the action in HYG and highlighted the major bottoms that formed under similar momentum conditions.

Today, we’re going to review yesterday’s thrust in Dr. Copper and discuss what a sustained rally from here could mean for risk assets.

Let’s dive in!

Here’s a chart of copper futures with a one-day rate of change in the lower pane: 

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley   

Nobody likes inflation.

The costs of day-to-day necessities rise. Long-forgotten and disliked sectors of the market start to outperform. And many of the cool tech names that were a must-own for every portfolio turn into a pile of hot garbage.

Now that everyone – even the Fed – agrees the current inflationary environment isn’t transitory, cries of a near-term top in inflation have emerged. 

Yes, breakevens and inflation expectations have peaked and are beginning to roll over. Whether this will turn into a substantial downturn in the coming weeks and months is anyone’s guess.

Instead of playing the guessing game, we’re focused on commodities – the assets that benefit most from inflationary pressures. 

Here’s what we’re seeing.

This is a chart of our equal weight commodity index overlaid with the 10-year breakeven inflation rate:

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

Markets trend. Trends persist. 

Those crucial Dow Theory tenets form the foundational premises of technical analysis.

As technicians, identifying trends is a central component of our work.

But, most of the time, markets remain range-bound, as we experienced during the choppy mess that dominated the stock market and so many risk assets last year.

However, during that time, commodities continued to rip higher.

Now that the rally in raw materials is reaching significant areas of overhead supply, it would make sense for this leadership space to follow stocks and enter a corrective period.

In other words, the uptrend in commodities that has persisted since 2020 is likely to take a breather and turn into a sideways trend.

Let's talk about it.

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

There’s always a bull market somewhere.

But the environment is tough right now.

Volatility is sweeping across markets. The dollar is catching a defensive bid. And the major averages continue their downward trajectory as investors desperately look for signs of a bottom. 

Yet, despite the bearish action gripping markets, we’re still finding bases we want to buy.

And, to no surprise, many of those smiley faces are in the commodities market.

That’s where we want to focus our attention.

Today, we'll highlight the wheat complex, outlining some tactical setups that complement our bullish structural outlook for commodities and grains.

Let’s dive in!

First up, we have Chicago wheat:

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

A few weeks ago, we pointed out widening crack spreads and what they meant for oil refining stocks. You can read more here, as we explain how wider crack spreads support higher prices for this particular area of the market.

Three weeks later, crack spreads have widened to their highest level in more than a decade.

This post is not about crack spreads, though. It’s about energy and how everything in the space is working these days. 

Bullish rotation continues to be the theme for energy.

This week, gasoline was the standout, booking a 10% gain and breaking out of a massive base to new all-time highs.

Let’s take a look at the breakout in gasoline futures and discuss what it means for crude oil.