Earlier in spring, I wrote a note highlighting wheat’s tendency to lead crude oil at key inflection points.
While this statement is mostly true, it needs clarification.
Chicago wheat does have a tendency to lead crude oil at significant market tops. But crude leads at critical troughs.
Check out the crude oil overlaid with Chicago wheat futures:
Notice crude bottomed in Q1 of 2009, 2016, and earlier this year. Chicago wheat followed roughly six to nine months later, marking critical turning points in late Q3 of 2009 and 2016.
While I stand by my line of reasoning, I did manage to leave out one overarching theme. And it’s an important one!
It’s a market theme that’s played out for almost three years, extending beyond energy to encompass commodities as an asset class.
I’m talking about the commodity-bond ratio…
Commodities relative to bonds was the most impactful high-level chart headed into 2021.
A major trend reversal favoring raw materials over US treasuries signaled a new, wild world on the horizon – a world characterized by inflation and rising interest rates.
This shift in relative strength caught many investors off guard as commodities also outpaced stocks for the first time in over a decade.
Shockingly, commodities were back in the conversation as analysts struggled to deem the energy space a viable investment. (As if the price charts didn’t provide ample evidence.)
Seasonality is not the most heavily-weighted data point in my analysis.
It doesn’t even make the top three: price, price, and price.
Nevertheless, tracking seasonal patterns has proven quite valuable in past experiences, especially regarding commodities. (We discussed it today on What the FICC, outlining three strong seasonal tailwinds heading into the fall. Check it out below.)
Raw materials are clearly affected by the earth’s rotation around the sun.
And while these trends fail to produce explicit entry or exit signals, they do provide insight into potential market conditions (not unlike sentiment or COT positioning).
I use seasonality to help guide my focus to those areas of the market that deserve additional attention. Areas such as…
Crude oil and gasoline futures are completing major reversal patterns.
Heating oil is ripping higher.
Natty gas has traders on the edge of their seats (what’s new?) as it heads into a seasonally favorable stretch.
But what about the rest of the commodity space?
Check out the overlay chart of our equal-weight energy index and our equal-weight broad commodity index:
Both averages have followed the same path since the 2020 lows despite a mere 15% weighting toward energy in our broad commodity index.
But energy is pulling away. Oil and gas names are taking on a leadership role among US equities as their underlying commodities confirm by digging in and resolving higher.
Energy commodities are reclaiming critical levels. They’re outperforming their alternatives. And buyers continue to support a healthy demand for crude oil distillates.
What’s not to like?
Today, I’m drilling down to individual stocks, highlighting five trade setups I didn’t cover in last Wednesday’s What the FICC episode…
And these stocks look ready to rip!
First up is oil services. I like this group of stocks because the oil services ETFs $OIH and $XES are the strongest among industry groups.
Most energy stocks and commodities have failed to provide the best opportunities for the average market participant.
In fact, they’ve been an absolute dumpster fire compared to high-flying tech names for almost a decade.
But everything changed following the 2020 sell-off.
Commodities flipped the script, outperforming bonds and stocks. Long-forgotten energy names worked their way back in the conversation as the energy sector taught a masterclass in relative strength.
This story isn’t finished – not yet!
One glance at the market’s year-to-date performance reveals an explosive tech rally that’s managed to erase the past two years from our collective memory.
