From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

Last week, we pointed out that commodity-centric currencies were beginning to slide. 

Our petrocurrency index was making new 52-week lows, and the Australian dollar was on the verge of breaking down. By Friday’s close, the AUD/USD cross looked to have completed a topping pattern and was trading at its lowest level since the summer of 2020.

Seeing one of the world’s leading commodity currencies break down from a major distribution pattern would not bode well for commodities and other risk assets.

But the bulls aren't ready to roll over yet. Investors are back on offense this week, as buyers have already repaired all or most of the damage that was done to stocks and commodities last week.

They needed to come out swinging after the latest flurry of selling pressure… And that’s exactly what they did! 

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.

But when we zoom out--as we like to to at the end of each month--and focus on commodities as a whole, two key takeaways come to the forefront: 

1. The underlying uptrend is still intact.
2.  A period of digestion within the ongoing trend is well deserved. 

Let’s take a look at a couple commodity indexes and try to put the recent action into perspective.

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

Treasury yield spreads are contracting.

Inflation has been the talk of the town in recent weeks. But, now that the Federal Reserve has finally joined the chorus, the market seems to be headed in a different direction. At least over the near term.

Short rates are holding up just fine, but the longer end of the curve has been under serious pressure.

We’ve been closely monitoring long-duration rates for signs of further weakness. As we write, the 30-year is violating its summer lows, and the 10-year is testing a critical level of interest around 1.40%.

The bulls really need these levels to hold. If they don't, we’d better get used to the recent volatility--because it’s likely to get worse.

Let’s take a deeper look!

This is a weekly chart of the US 10-year yield:

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

As we near the close of another month, crude oil is once again front and center.

At the end of October, black gold was ripping to new seven-year highs while interest rates rose and cyclical stocks kicked back into gear. 

Today, this picture has dramatically changed. 

Crude oil is currently about 20% off its highs, as prices have collapsed back below our risk level.

Crude dropped $10 during last Friday’s volatile session and continues to slide lower this week. Just look at this bearish candlestick on the monthly chart:

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

Earlier this month, we discussed our outlook for a post-harvest rally, highlighting corn and soybean oil contracts. 

Here’s what we had to say: 

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

You already know how we feel about the US Bond Market. 

We like the short side when it comes to treasuries.

Lately, we’ve been keeping a close eye on the long end of the curve since it hasn’t kept pace with shorter-term yields. Though this is still the case, the 30-year yield has found support in recent weeks as rates continue to rise across the curve. 

This should keep the bulls happy for now as an environment where long rates are making new lows is not supportive of higher prices for risk assets. 

But that’s not what’s happening. We remain in a rising-rate environment and don’t see signs of that changing anytime soon. As long as this remains the case, we want to be selling bonds and betting on higher prices for risk assets.

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

At the beginning of the month, we pointed out the disconnect between risk assets and the currency market. 

Stocks up and down the cap scale were breaking out to new highs and energy futures were resolving higher from multi-year bases -- all while emerging-market and commodity-centric currencies approached year-to-date lows.

Something wasn’t right. 

We’d expect these risk-on currencies to catch higher given their strong correlation with other risk assets. But this hasn’t been the case. In fact, seeing as currency markets had been out of sync with other asset classes for months, we really didn’t want to overthink this development.

But what appeared to be another mixed intermarket signal proved a valuable warning.

Fast-forward to today and the weakness that was evident among emerging-market currencies is spreading to stocks and commodities. Small-caps and crude oil are retesting critical breakout levels, and cyclical stocks are failing to sustain their recent moves.

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.

Breadth fell off a cliff and was not supporting the new highs for energy stocks.

The relative trends have gotten clobbered, as energy has been among the worst-performing sectors over the near term.

And, just today, we’re seeing failed breakouts in energy sector ETFs across the board.

Since we’ve already written about these themes, let’s dive in and see what energy futures themselves have to say about the situation.

Are futures resilient despite these bearish developments? 

Or are there cautionary signs in the commodities market that are confirming the weakness in the stock market?

Let’s find out.

First up is crude oil:

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

On Tuesday night we held our November Monthly Conference Call, which Premium Members can access and re-watch here.

In this post, we’ll summarize it by highlighting five of the most important charts and/or themes we covered, along with commentary on each.

Let’s get right into it!

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

TIPS versus Treasuries is one of the most important charts we’re watching right now, as it's hitting its highest level since early 2013. Relative strength from TIPS hints that investors are positioning themselves for a sustained surge in inflation.

This makes sense given both the five- and 10-year breakeven inflation rates have reached their highest levels in more than a decade. 

As investors react to signs of impending inflation, many cyclical stocks that benefit from higher rates are catching a bid. A great example of this is the Metals and Mining ETF $XME.

Let's take a look!

Below is a chart of XME overlaid with the TIPS versus Treasuries ratio and correlation study in the lower pane:

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

The US Dollar Index $DXY is pressing to new highs, disregarding what many think it should be doing based on historic intermarket relationships.

Considering the bullish developments and new highs from risk assets, the strength from the US dollar continues to be a head-scratcher.

But will the breakout in the DXY hold, or will it roll over and confirm the signals coming from bonds, stocks, and commodities?

When we broke down the US Dollar Index last month, we pointed out that its strength was rather narrow in terms of how it was performing relative to most individual currencies. Long story short, the recent rally in DXY has been fueled primarily by its two largest components -- the euro and the yen. These two currencies make up more than 70% of the DXY weighting, and the fact that they are at new 52-week lows explains why the index is at new highs.

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

Commodities are streaking higher, providing plenty of alpha across the entire space to anyone who can pry their eyes away from their altcoin charts.

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.

But what about the grain market? Last week, we pointed out that our Minneapolis Wheat position had hit our target and that it was time to feed the ducks.

Today, we’re going to highlight a couple of grain contracts we want to keep on our radar for buying opportunities in the coming weeks and months.

Let’s dive in!

First up is the March 2022 corn contract: