Which Way Is Up?

Wow, the selling continues. As the market absorbs the daily news of inflation, the market is a hard place to find ballast right now. I was on a presentation platform this week, and the person following my presentation was making 5 digits per month shorting stocks. The presentation went on to say that this will continue for a long time.

As the market tests the June lows, we’ll need to watch for the selling to expand creating a capitulation low.

I see critical shortages in energy and copper ahead, but that is further out than the front of our shoes so it is not soil we are walking on now.

For now, energy has a couple of big things going on:

1) A double top in Natural Gas:

2: A double top in oil occurred a while ago. With Friday’s price action we are getting close to unchanged on the year.

Oil and Natural Gas make up a significant part of the $CRB index and it is cracking. The two year uptrend is broken as other commodities are also getting wiped by the high USD and some government influenced buying/selling.

There is a lot of price action focused around the SPR supplying product into the market. As the drain of the Strategic Petroleum Reserve continues, we do not appear to be running on empty at any time soon. Chart below from the EIA. We appear to have used up about 1/3 of the maximum inventory back in 2010, and still have 2/3 in the system. However, the recent drop in inventories looks out of scale for the chart. Will that stop anytime soon or continue?

When will production catch up with demand, so that SPR withdrawals are not necessary? That still looks to be a distance away, and as oil prices come down, that stops capital being allocated. Oil is the hardest trade on the planet as it is a political football in every region. Trying to get the direction right is difficult. When will the Saudi’s cut production? Will the Russian barrels coming off the market be the force that changes the charts? Neither one of these has been a reason for the markets to rally yet.

The charts outline some serious pressure on the commodities. As for the question in the title, Which Way Is Up? Well, it’s not ‘up’ towards commodities right now.

Good trading,
Greg Schnell, CMT, MFTA