From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
The rally in some commodities has been near-vertical this year.
And we’re seeing this strength across the entire complex -- from energy contracts like crude oil to base metals such as tin and even grain markets like wheat.
While these kinds of moves are bullish over longer time frames, when things get too hot (like they have), it’s often not sustainable on a tactical basis.
This is the situation right now for a lot of commodities. We think a period of well-deserved digestion is underway for the broader asset class.
But this doesn’t mean there won’t be fresh up-legs taking place in some individual contracts.
As this new secular bull market matures, pockets of strength will rotate across the space. Our only job is to find the emerging leadership.
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.
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Commodities are off to another record year -- and it’s only April!
Crude oil and friends are leading the charge as the energy-heavy CRB Index is up 34% year to date.
Oil ripped above 100 in February and has been in a corrective phase since. The energy complex remains red-hot though, with natural gas futures breaking to fresh 13-year highs this week.
While crude oil finds its footing, its derivatives -- heating oil and gasoline, are coiling just beneath all-time highs and gearing up for some massive base breakouts.
We’re also seeing some bullish data points for the broader oil and gas industry as crack spreads are expanding and signaling a healthy demand for black gold. This bodes particularly well for oil refiners.
All of this price behavior is what we like to call rotation.
It's an essential characteristic of any real bull market, and it’s exactly what we’re seeing from commodities these days.
The CRB Index is up 27.03% year to date while the S&P 500 and the 30-year Treasury bond aren’t even in the ballpark, posting lackluster performances of negative 4.95% and negative 6.25%, respectively.
Commodities are really the only game in town these days.
With that as our backdrop, we want to continue focusing on this asset class for buying opportunities.
As many of these contracts consolidate or correct following explosive upside moves, we’re paying extra attention to those that have been basing in recent months – such as natural gas.
Let’s take a look.
Here’s a zoomed-out weekly chart of natural gas futures:
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.
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Gold looks like it’s ready to run.
The largest gold miner in the world, Newmont Mining Corp. $NEM, has broken out of a multi-year base.
Silver and platinum have dug in at critical support levels and are catching higher.
And, most importantly, gold is in the process of reclaiming its former all-time highs from summer 2020.
These are all bullish developments, suggesting gold -- and precious metals more broadly -- are ready to join in on the party that most commodities have been enjoying for more than a year.
Last month, gold broke above its former 2011 highs near 1,924. Here’s a zoomed-out view of the chart:
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Commodities have been on a tear, with the Bloomberg Commodity Index recently posting its best week since 1970 and the CRB Index rallying more than 25% year to date.
Despite the broad strength from commodities, Dr. Copper – a key economic barometer – has yet to break out like so many of its peers.
After making a new all-time high last Friday, buyers were unable to sustain the move, and price retreated into its former range.
While it’s great to see so many other contracts trending higher, bulls really need to see copper join the mix. If this is truly a new commodity supercycle, it better break out from this consolidation.
It is that important to the overall asset class.
Let’s break down the various technical scenarios for copper’s recent move and discuss what they mean for the entire space.
First, the move could have been a premature breakout:
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Commodities are having their best week since 1970. And if you don't know what happened after that, let's just say it was a good decade for them as a group.
The CRB Index is up more than 13%. Crude oil is trading above 100. Wheat futures opened limit up last night, “dotting the chart.” Base metals such as aluminum and tin continue to print all-time highs.
And even precious metals have joined the party!
Could it get any more bullish?
As it turns out, it can…
After almost a year of sideways action, Dr. Copper looks ready for a fresh leg higher, as it just closed the week at new all-time highs!
Here's a close-up look at the continuation pattern copper has been consolidating in since May of last year:
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Gold is the hot topic this week, now that it’s finally showing signs of life.
It’s impossible to deny gold’s near-term strength. But we think the setup probably needs more time to develop and work through all the overhead supply from the past few years.
Long story short, gold is still pretty messy if it's below the 2011 highs.
If and when the shiny metal makes a decisive resolution, there should be plenty of time to join in and ride the trend higher.
As for other areas within commodities, we continue to see a growing list of contracts reclaim key levels and print fresh highs.
Procyclical commodities like crude oil and gasoline might come to mind since they’re constantly in the news cycle.
But other areas, such as grains and even livestock, are also breaking to new multi-year highs.
Today, we’re going to highlight an agricultural commodity that often gets overlooked.
