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

Last week, we touched on the weakness that’s been developing further out on the yield curve.

The long end simply hasn’t kept pace with shorter-term yields. This is understandable given the magnitude of the move in the 30-year since summer 2020. At some point, the shorter end of the curve needs to play catch up. And it’s done just that these past couple months.

Now it’s time to focus on longer-term rates, as further downside pressure will eventually put the current economic recovery into question.

Let’s put the recent action in rates into perspective as we head into year’s end.

Below is a chart of the US 30-year yield:

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

Correlations often work... until they don’t. It’s just the nature of intermarket relationships.

We can see a prime example in the recent action between the US dollar and risk assets.

The dollar has been marching to the beat of its own drum, as it's shown an unusually strong positive correlation with commodities since this summer.

Although the inverse correlation is not as strong with equities, it still exists. But the USD’s resilience during the second half of this year hasn’t stopped stocks from screaming higher. 

While we definitely aren’t in an environment where USD weakness is a tailwind, the evidence continues to stack up in favor of the bulls and risk assets. 

The dollar is just one data point. But it’s a rather important one, as the direction of King Dollar has proven to have a profound impact on other asset classes.

Today, we’re going to highlight the decoupling of USD relationships and what it could mean for the rally in risk assets.

Let’s dive in!

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

The best opportunities are the ones with the most clearly defined risk characteristics and most favorable risk/rewards.  

This summer, Minneapolis Spring Wheat was offering us a trade set-up with both these qualities. Price had just resolved higher from a near decade-long base and was trading at its highest level in 8 years. We were buying the breakout.

Fast forward to today and our initial profit target has been met and we’re locking in gains.

In today’s post, we’ll take a step back, review our trade, pinpoint current levels of interest, and discuss how we’re managing the position moving forward.

First, let’s look at the weekly chart of Minneapolis Wheat futures:

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

The outperformance from commodities this year has been hard to ignore.

Over the trailing 52 weeks, the CRB index is up over 56% and our equal-weight commodity index is up over 37%. The entire space has been participating -- energy, base metals, grains, and softs. 

And even though precious metals have been trending lower since last summer, we can’t forget that gold kicked off the commodities rally by hitting new all-time highs last year.

If we’re only looking at stocks and bonds we’re cutting ourselves off from what is currently the top-performing asset class. It doesn’t matter whether we trade the markets on a more tactical timeframe or if we have a long-term investing approach. There is alpha in commodities right now and we want to have exposure. 

But how do we take advantage of this space if we don’t have the ability to buy December futures contracts of Crude Oil or the March ‘22 futures contracts of Corn?

That's where our commodity ETF/ETN list comes into play. 

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

We’ve been pounding the table about rising rates for over a month now.

It’s hard not to when they're rising across the curve in both the US and abroad. Cyclical and value-oriented assets have increased in tandem, as energy and financials have become leadership groups.

We continue to see countries with heavy exposure to financials emerging from multi-decade bases. Just last month, the Euro Stoxx 600 made new all-time closing highs, while Italian equities reached their highest levels in 13 years.

But when we look further out on the curve, the long end hasn’t been keeping pace with shorter duration yields in recent weeks. 

Taking a look at the 30-year beside the 10- and 5-year yields tells this story best.

From the desk of Steve Strazza @Sstrazza 

We held our November Monthly Strategy Session last night. Premium Members can access and rewatch it here.

Non-members can get a quick recap of the call simply by reading this post each month. 

By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends. This is easily one of our most valuable exercises as it forces us to put aside the day-to-day noise and simply examine markets from a “big-picture” point of view.

Let’s dive in and discuss three of the most important charts and/or themes from this month’s call.

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

Risk assets are on the rise.

Energy futures are resolving higher from multi-year bases. Stocks are pressing to new highs all along the cap scale. And the more cyclical, value-oriented markets are catching a bid and becoming leadership groups again -- think financials and energy.

It appears everything is falling into place. But a few pieces are still missing… 

For instance, you might assume the US dollar is under pressure as commodities and stocks outperform.

But it’s not. 

In fact, the dollar made new 52-week highs not long ago and has since consolidated at the top of its range while riskier areas of the currency market have struggled to catch a bid.

We’ve highlighted the US Dollar Index and the mixed signals coming from developed currencies in recent posts.

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

Procyclical commodities have attracted all the attention this year as inflation and rising rates have driven prices considerably higher.

But, as we pointed out last week, many of these contracts -- Brent crude, natural gas, copper -- are running into areas of overhead supply or are already in the process of correcting.

With that as our backdrop, let’s switch gears and focus on an area of the commodity space we haven’t talked about in months.

That’s right... precious metals!

While we’re seeing many leading commodities pause at logical levels of resistance, gold and silver have finally stopped going down and are rebounding off support. Despite trending lower since last summer, they're still holding above the lower bounds of their trading ranges. We think this basket of shiny rocks is ripe for review.

Let’s take a look around the precious metals complex and see what’s new.

First, we have a chart of gold futures:

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

Long-term interest rates have taken a hit this week, while the short end of the curve has continued higher. When we zoom out a bit, yields have been rising across the curve since this summer.

During the past few months, the 2-year yield has ticked higher by more than 30 basis points (bps), the 5-year has increased by almost 60 bps, and the 10-year has gained 40 bps. But when we look all the way out to the 30-year, it's only risen by roughly 20 basis points.

Rates are rallying across the board, Treasuries are trending lower, and bond market investors are favoring TIPS and higher-yielding securities.

How do we want to position ourselves in this kind of environment?

Well, we definitely don’t want to be buying Treasury bonds.

In today’s post, we’re going to take a trip around the fixed-income market and discuss some US Treasury funds we can use as vehicles to express our thesis.

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

Crude oil has stolen the show, as it’s up more than 28% from its August lows.

What started as a questionable breakout has turned into a full-fledged rally -- and the broader market seems to agree.

Copper retested its all-time highs last week, interest rates are on the rise across the curve, and cyclical stocks have become leaders.

All of these events fit neatly in an environment where crude oil prices continue higher.

But what does the currency market have to say about the recent strength from black gold?

Let’s look at our Petrocurrency Index for clues, along with one forex pair that's showing strength against the US dollar.

First, we have our Petrocurrency Index overlaid with crude oil futures:

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

It’s been impossible to ignore the strength in commodities this year.

The CRB Index is up more than 50% over the trailing 52 weeks. During this same period, the S&P 500 is up 32%, and bonds ($TLT) are down more than 8%.

Commodities are the clear leaders.

With breakouts from some of the most commonly observed contracts -- crude oil, copper, and natural gas -- more investors are coming around to the idea that commodities are a viable asset class.

Now that the buzz surrounding this once-forgotten corner of the market is growing, we’re seeing many commodities run into overhead supply zones. We think it would make sense for these contracts to consolidate here. Following such explosive moves off last year’s lows, some sideways action at resistance would be normal behavior.

Let’s look at a few charts that are at logical levels to digest gains.

First up is natural gas futures:

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

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

Let’s get right into it!