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:
Monday night we held our June Monthly Conference Call, which Premium Members can access and rewatch here.
In this post, we’ll do our best to summarize it by highlighting five of the most important charts and/or themes we covered, along with commentary on each.
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.
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.
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
Not all indexes are created equal… But, some are equal-weighted.
We like to use the equal-weight versions as they level the playing field among components and give us a more accurate view of the participation within a given universe.
This balanced approach adds a crucial layer to our analysis.
Friday, we highlighted our custom commodity index which assigns the same weighting to thirty-three individual contracts. As we would expect, it’s moving in lockstep with the 10-yr breakeven inflation rate. Both are rolling over in the near term.
Interestingly, the energy-heavy CRB index is not following the same path. It's trading at new highs.
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:
