From the desk of Steve Strazza @Sstrazza and Ian Culley @IanCulley
In this week’s Commodity Report, we saw a continuance of many of the same themes that we've been pounding the table on for months now.
Mainly, strength in the procyclical areas of the market like Energy and Base Metals. This fits with what we’re seeing in Equity Markets as the rotation out of Mega-cap growth and into more cyclical sectors takes hold.
However, Crude Oil and Copper aren’t the only Commodities catching a bid right now. We’re also seeing strength in the grain markets.
One of the charts that caught our attention this week was Palm Oil Futures.
Palm Oil is one of the most important Commodities in Asia and combined with Soybean Oil it accounts for roughly 63% of the global production of vegetable oils. Its uses vary from cooking and producing processed foods to personal care products like soaps and fragrances. It also plays a key role as feedstock for biofuel production.
Bond Yields and US Dollar have been in the spotlight over the last few days. But in the meantime, let's not forget to check on our shiny friends, that are not in their most shiny phases.
What are the levels to watch out for on Silver and Gold? Let's have a look.
Silver has been the stronger one out of the two names and we've seen more resilience from Silver over the past few months. While both the metals haven't been at their shiny best off late, an outperformance in Silver bodes well for precious metals in the weeks and months ahead. It is this outperformance that prevents us from shorting Gold and being selective about the levels we observe.
At the beginning of each week, we publish performance tables for a variety of different asset classes and categories along with commentary on each.
Looking at the past helps put the future into context. In this post, we review the absolute and relative trends at play and preview some of the things we’re watching to profit in the weeks and months ahead.
Rotation into value is dominating the narrative right now as money continues to pour out of the former leaders and into long-term secular laggards like Financials and Energy.
In line with this trend, we continue to focus less on US Large-Caps and Growth, and instead look for opportunities in SMIDs, Cyclicals, and International stocks.
We are in the midst of a bull-run and the events over the last ten days or so have sprung up some doubts over the current move with regards to the repercussions of the rise in bond yield and the US dollar.
We included the US Dollar(DXY) chart in the Three Charts for the Week ahead post since DXY moved past its resistance in the week gone by. Let's take a look at how this had panned out in the past and what are the signals that we can identify in the present.
The chart below tracks DXY and Nifty 50 over the past 20 years. Note that we are looking at the subsequent move in Nifty 50, following the bottoming out of DXY. The dashed lines mark the reversals in DXY, which is what we're tracking here. Of the seven instances where we've seen the bottoming out of DXY, Nifty 50 has continued to rally on four such occasions.
On three occasions the negative correlation plays out as can be seen in the years 2000, 2008 & 2015.
From the desk of Steve Strazza @Sstrazza and Ian Culley @IanCulley
When reviewing our chartbook this week, one major theme that stood out is the relentless bid we continue to see in Crude Oil.
Most risk-on commodities have consolidated or pulled back recently as the dollar has rebounded back to its highest level in over three months.
But, not oil...
Crude has completely ignored this action from the US Dollar and tacked on an additional 12% gain since DXY bottomed about two weeks ago.
Ever since trading at negative prices last spring, Crude has been on an absolute tear.
Price just broke above its key prior highs and closed the week at its highest level since 2018. As long as Crude is above this key former resistance around 65 the bias is higher and we're targeting the 2018 highs just above 75 over the near-term.
From the desk of Steve Strazza @Sstrazza and Ian Culley @IanCulley
We think it's time to buy Gold Miners again, specifically the VanEck Vectors Gold Miners ETF $GDX.
The yellow metal has not been a great place to deploy capital over the last 6 months as the environment has significantly favored stocks over rocks... and risk-assets over defensive ones in general.
Owning Gold or Gold Miners has been nothing more but opportunity cost. However, there is mounting evidence that suggests now might be the time to jump back into this trade.
First, Commodities have really been working as an asset class. We've been pointing this out for months now, from Industrial Metals and Ags to even petroleum-based commodities.
Although through the early innings of this Commodities resurgence, Gold and Gold Miners have taken a back seat as prices peaked all the way back in the summer of last year and have been trending lower since.
Whenever I want to talk about bonds, I always know just who to call. Larry McDonald is a former bond trader at Lehman Brothers and author of the book, Colossal Failure of Common Sense. I highly encourage you to give it a read, especially if you're looking for some perspective on what really happened back in 2007-2008.
It's no coincidence that I reached out to him to come on the podcast. Larry and I had a very timely conversation in February of last year. So with the bond market recently losing 5-6 Trillion dollars in such a short period of time, who better to talk to than by favorite bond trader.
We've been talking about Commodities and a possible upcoming supercycle in this asset class.
The reason we're inclined to this view is that we're seeing signs of this on several different charts across the globe. Now when that happens, we've got to sit up and notice.
Remember when the unthinkable happened and Crude Oil traded below zero? Entertaining as it may be (to some) such extreme readings on the chart tend to act as signals for the future.
Take a look at the chart below. It is the S&P500 relative to the inverted ratio of the CRB Index (Cap-Weighted Commodity Index). The long-term chart below suggests that the extreme negative readings that we saw in Crude Oil seem to have probably sealed the top in this ratio. Can Commodities begin their outperformance going forward? It's quite likely. The individual constituents certainly look like they're ready for a good move!
At the beginning of each week, we publish performance tables for a variety of different asset classes and categories, along with commentary on each.
Looking at the past helps put the future into context. In this post, we review the absolute and relative trends at play and preview some of the things we’re watching to profit in the weeks and months ahead.
Every major asset class on Earth continues to illustrate risk-taking behavior on the part of market participants.
Yields, Oil, Equities, Base Metals, the Australian Dollar -- there's an overwhelming amount of new highs in offensive areas of the market right now. The weight of the evidence continues to suggest that we want to bebuyers, not sellers, of stocks.
From the desk of Steve Strazza @sstrazza and Ian Culley @ianculley
We just revised and updated our Commodities chartbook and there probably couldn't have been a better time as we believe we've just entered the early innings of a new Commodities Supercycle.
As we reviewed each passing chart our bullish thesis on commodities was reinforced as the same overarching theme became clearer and clearer... Everything seems to be trending higher!
With a slew of massive bases, bullish breakouts, and major trend reversals, this once left-for-dead asset class is now demanding investors' attention.
Last Summer when Gold ran into those former highs from 2011, it only made sense for price to recognize that overhead supply that had been in place for close to a decade prior. Even if only temporarily, that was big time resistance way back when, sending precious metals tumbling. So to ignore that seemed irresponsible (see Sept 3rd Conference Call).
Now, at the time we did not know how long this process would take, or if it was even necessary. No one knew. My suspicion, at the time, was that it could take months, maybe even quarters. But maybe longer, or perhaps would never even break out at all. I didn't know. No one did.
So we sat back and waited while basically every other asset class on earth ripped higher, except bonds. So you could have owned pretty much anything but gold and treasury bonds and done great since Labor Day.
