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.
Crude oil is breaking to multi-month highs. Copper is approaching the 4-dollar level. And Silver is ripping!
I’ll have more on the precious metals front Monday with your weekly Gold Rush.
Today, I’m focusing on the grain and livestock markets. The dropping dollar has helped line up a long list of fresh trade ideas: potential failed breakouts, possible failed breakdowns, and critical levels to trade against…
The most important crop report of the year has hit.
Yes, it’s generated quite the buzz over the past few weeks, as grain markets ripped higher in anticipation.
Some observers even speculated that Friday’s report was the most important in the history of the agrarian economy.
So let’s round down, be conservative, and call it the most important crop report in 5,000 years.
Seriously, though, it was a big deal, as acreage estimates for soybeans represent the largest miss since the report's inception – or, like, ever, in history.
More importantly for traders and investors, the report brought increased volatility.
If you’re like me and prefer to sit out these kinds of days, you’re patiently waiting for the dust to settle.
Meanwhile, if you’re at all put off by the volatility of these futures contracts, I have a vehicle that promises a much smoother ride…
Let’s talk about Archer Daniels Midland $ADM, “supermarket to the world.”
The $41B commodity behemoth has more than 100 years of experience in the grain markets.
A healthy rotation is underway across equity markets.
Leadership has swung toward cyclical value-oriented names over the trailing two weeks. Small-cap Energy, Materials, and Financials are outpacing the year-to-date top performers (Large-cap Tech). It’s a clear expansion in participation and a hallmark characteristic of any bull market.
But if cyclical stocks have a chance at participating over the long haul, we want to witness similar strength from corresponding commodity markets.
And we are…
Check out rebar futures posting a potential failed breakdown: