“Jeff, how can the U.S. dollar rally and crude oil rally as well. That’s not supposed to happen!”
. . . a Raymond James financial advisor
We have received numerous emails since reposting my friend Leon Tuey’s comments about a bottom in the U.S. dollar. Recall that Leon, now retired but still publishing to his friends, was one of the best technical analysts ever to grace our nearby neighbor Canada. Most of the emails read something like this, “Hey Jeff, you have been making a bullish call on commodities, but how can commodities do well if the dollar has bottomed?” Using crude oil as the proxy for commodities in general, our pals at Bespoke Investment Group write:
“WTI crude oil prices crossed a major milestone when they traded above $70 per barrel for the first time since late 2014. With the recent gains, crude oil prices are up over 16% YTD now and 52% over the last 12 months. The most surprising aspect of the rally in crude oil prices is that the most recent leg higher has come as the dollar has rallied along with it (see chart). Historically, crude oil prices have had an inverse correlation to the dollar and looking at the chart above, it’s pretty easy to see that the rally in crude oil prices over the last year has mostly coincided with a decline in the dollar. Over the last four weeks, though, the US Dollar Index has seen a pretty sizable bounce of over 3%, but rather than stop the rally in its tracks, crude oil has been unfazed, gaining an additional 10%+. Just to put into context how uncommon the simultaneous rallies in the US Dollar Index and WTI are, the current period represents only the 11th time since 1983 that crude oil rallied more than 10% during the same four-week stretch that the US Dollar Index gained more than 3%.”
So while it seems counterintuitive for both asset classes to rally together, it is not unprecedented. Accordingly, our bullish view of commodities remains in place.
And speaking to crude oil specifically, one of our institutional sales folks (David Schaffer) wrote this excellent piece the other day:
“Oil pushing above $70, supply disruption risk the most recent catalyst, and US/China trade issues lead the headlines as we enter the heart of May and the end of the first corporate confession season of the year. And what a season it’s been as it will be the highest percent beat quarter since FactSet started keeping track. We note that while oil prices have risen, most investors remain underweight the energy space. Consensus certainly believes that current oil price levels are unsustainably high, contra to our team’s view. That being said, as oily company earnings contribution to the indices increases over the next two years, investors will likely have to scramble simply to maintain weightings if not improve them. The bottom line, it’s not too late to expand energy weightings. Top energy picks from our fundamental analysts remain those closest to the drill bit with fracking companies leading the way: ProPetro Holding (PUMP/$18.59/Strong Buy), Superior Energy Services (SPN/$11.15/Strong Buy), Patterson-UTI Energy (PTEN/$22.45/Strong Buy), and Halliburton (HAL/$51.87/Strong Buy).”
As for the stock market, the SPX tagged the downtrend line of its three-month symmetrical triangle consolidation pattern yesterday (Chart 2). Therefore time is running out on the downside. The overwhelmingly evidence is an upside chart breakout is coming. This morning the S&P 500 futures are up 12 points, and at their quadruple top of 2683, as we write at 5:17 a.m., which also is roughly around the high for the month of May. There were three trading sessions during late April in which the S&P 500 peaked near 2683. Obviously, a breakout above 2683 should be viewed as constructive.