From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
If you’re searching for strength, look no further than commodities!
With risk assets coming under increasing pressure, the strength from commodities and commodity-related stocks stands out that much more. Except for rates, it’s the only thing the bulls have left.
When we look beneath the surface, so far, the story centers around energy – whether we’re talking about crude oil printing fresh seven-year highs or Chevron Corp. $CVX breaking out of a multi-year base to new all-time highs.
Energy is -- and has been -- re-asserting itself as the next dominant leadership group.
But unlike the stock market -- where energy is the only group working -- we’re seeing broad participation within the commodities market.
In fact, there are still plenty of pockets of strength we want to be buying.
Today, we’re going to highlight one of those areas by outlining a trade setup in soybean oil.
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
The bull market for commodities is alive and well. They were the top-performing asset class last year, and they’re kicking off the new year with a lead once again.
The energy-heavy CRB Index is printing new seven-year highs, and our ASC Equal-Weight Commodity Index just resolved from a nine-month base to its highest level since 2013.
To take advantage of this area of leadership, we’ve been highlighting strength and outlining long ideas in a variety of commodity markets.
We know not everyone has access to the futures markets, and that’s OK, because there are plenty of opportunities to express a bullish thesis on commodities through the equity market.
To make this easier, we’ve put together a universe of stocks that offer investors exposure to a wide array of different commodities.
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Crude oil bulls are back in town!
They kicked the year off by pushing price back above 76 and reclaiming the upper bounds of a multi-year base. Oil is the most important commodity in the world, so it’s hard to overstate just how bullish fresh seven-year highs would be.
But we’re not quite there yet. We still need to take out the fall highs.
The 76 level marks the former 2018 highs and the breakout from a massive reversal pattern. Buyers ran into an overwhelming amount of supply here during the back half of 2021. When they did manage to reclaim those former highs, it was short-lived, and the move quickly failed.
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
In recent weeks, we’ve been diving into individual commodity groups to size up the structural trend and to get a better idea of where we’re likely headed in the new year.
Last week, we highlighted energy contracts and the fact that many are still grappling with overhead supply. And earlier in the month we covered the worst-performing area of the commodity markets - precious metals.
Today, we’re going to turn our attention back to metals and review the base metals group.
Even with the S&P 500 printing record highs, trading ranges and overhead supply stole the show in 2021 and those dominant themes are evident when we look at base metals.
Notice the strong relationship between our equal-weight base metals index and blue-chip international equities in the Global Dow Index $DGT.
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
As we approach year-end, we're diving into the individual commodity groups to gauge the status of the primary trends and to get a better idea of where we’re likely headed in 2022.
Last week, we highlighted precious metals -- by far the worst performers of 2021 with a -10.59% return thus far. We think there's a good chance they'll turn things around next year and start participating.
Today, we’re going to review the other end of the spectrum in terms of performance -- energy!
While base metals and ags have posted strong gains over the trailing 12-months -- 25.96% and 28.22% respectively -- energy has been the real leader, quietly printing a 46.33% gain despite recent selling pressure.
After crude oil collapsed below zero last year, the entire group had its work cut out. But they’ve covered an amazing amount of ground in a short period of time, and we think they have further to go.
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Not unlike the major US equity indexes, the commodity space is still range-bound as we head into year-end.
When we compare the trailing 12-month returns of individual groups, we get a sense of how bifurcated the commodity market has been. Another thing that stands out is just how weak precious metals have been relative to their peers.
While the rest of the asset class has posted solid gains on the year, gold and silver continue to trend lower. If this is truly a commodities supercycle, we’d expect to see some participation from this group. And, considering they’ve been in a downtrend for almost 18-months now as the rest of the space has been working, we’d expect it to happen soon.
Let’s take a closer look at what’s going on with these shiny rocks.
First, here’s a chart with the trailing 12-month returns of our four major commodity indexes - energy, precious metals, base metals, and ags:
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Despite taking a hit in recent weeks, commodities have remained resilient.
Buyers are working to absorb overhead supply at some key levels. We’re seeing this kind of action in commodities across the board -- from industrial and precious metals to energy and even agriculture. We’re seeing prolonged consolidations in some of the most important contracts, such as crude oil, copper, gold, and soybean oil.
The point is simply that most commodities are correcting through either price or time. Some are digesting gains around former areas of resistance, and others have failed to sustain their breakouts.
Regardless of where they came from, most commodities are stuck in a range right now. That’s critical information supporting our messy outlook for risk assets.
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Risk assets are under pressure.
Failed breakouts and significant retracements have materialized across cyclical areas of the market, including the Russell 2000, the energy and financial sectors, and, of course, commodities.
The energy complex has endured the most severe damage in the commodities realm, with crude oil leading the pack lower. Last Friday’s session was a bruiser, with crude dropping $10 to close out the week.
This kind of volatility can be alarming for any investor.
Cotton and coffee continue to rip. Crude oil and the energy space are grinding higher. Live cattle are breaking out. Even precious metals are starting to catch a bid.
Fast forward to today, and Ags have emerged as the clear leaders over the near term. They’ve been ripping higher while the majority of the commodity space retests critical levels of former resistance and continues to consolidate.
The fact that grains, softs, and livestock are marching higher while their peers are under pressure, tells us this is an area we should focus on for long opportunities. It’s where the relative strength is right now.
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
We’ve pounded the table on the weakness in energy these past few days, so why stop now? When we find ourselves hammering the same topic time and again, there’s usually a very good reason.
As far as energy goes, there’s been a lot of damage done to the space this week.
