Reflecting on Oil, Copper, and the Fed’s Inflation Target: What Will Spark the Rally?

Of course, I put out a killer backtest and then...

Showing high win rates on stocks, gold, silver. Everything’s lining up perfectly. And then naturally, everything hits the fan while I’m in Colorado. Because life as a trader is cosmic irony in motion.

So here’s the big question: is this a bull market? Or a bear market pretending to hibernate? And if it’s a bull, what just happened?

Positioning got lopsided. Too many bulls caught offsides when the Fed whispered about fewer rate cuts.

Makes sense, I’ve been saying this for weeks.

I wrote about how this is the biggest headwind for the market. I still think we’ll grind higher into year end, but 2025? Tricky waters ahead.

Here…

That was written on November 22nd 2024.

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But I am thankful for cocoa, natural gas, orange juice, and coffee this week. While most positions tanked, cocoa raged.

This is why you diversify across asset classes.

Also, this caught my eye:

• Gold, natural gas, lumber, platinum, coffee, cocoa, and corn are positive for the week.

• With a major dollar bounce, most commodities held up. Even oil and gold didn’t get crushed.

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XLE:

• Energy just broke short- and intermediate-term trends. Primary trend is intact—for now.

• I’m out of the futures energy stock sector (IXE_F)position in the AAO swing portfolio. Still holding in the long term portfolio, but the GTFO line is close.

And what the hell is up with bonds and oil? Bond yields soar, oil did not budge.

The dislocation is wild. I’ve seen plenty of these “jaws will close” setups, but this one’s been open forever.

Oil: up or down? Still leaning up, but it’s comfortable at this level. No buy signal yet.

Inflation’s next leg?

I explained current inflation picture here.

Bonds:

AAO remains short long bonds. Up, 10% since our first entry.

Bonds are yelling about service inflation, and our models agree. The Fed’s rate cut probabilities dropped for a reason.

To really ignite commodities like oil and copper, we’d need expanding money supply. Or the Fed admitting inflation’s dead and raising its target.

Until then, cautious optimism.

However our model has moved in to stagflation.

Our model, which aligns closely with the data the Fed uses and inflation moving higher is the key reason behind the Fed reducing the likelihood of rate cuts next year.

Inflation is trending higher, but for oil and copper to truly break out, I want to see a catalyst like an expansion in the money supply.

To go aggressively long on energy commodities across the board, I’d need to see the Fed revert to its “inflation is dead” stance, or take the bold step of raising its inflation target.

One thing stands out: since the Fed began cutting rates, commodities have consistently outperformed bonds.

Now, with the stock market showing signs of cooling, commodities are outperforming both bonds and stocks.

As the market cools off, the percentage of stocks below their 50 day moving average briefly dipped below the red line, but I’d bet it’s back above after today’s close. Meanwhile, stocks above the 200 day moving average remain in the safe zone.

Here’s the key: if this is truly a bottom and the market is set to move higher, we need to see strength in stocks by Monday or at the latest, Tuesday.

Bonus:

Finally, the futures portfolio is up 70%, ETFs up 35%. Core commodity holding DBA keeps delivering. Agriculture and softs look like prime plays moving forward. Own it.

Hold it.

And if stocks don’t show strength Monday or Tuesday? All bets are off.

Against All Odds Research

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