The Fed Bazooka and Commodities

Off 67% from its 2011 high and 75% from its 2008 peak, the CRY commodity index is struggling in the abyss of a decade long bear market. A deflation spiral is the commodity complex worst nightmare - everyone knows this. The widely held assumption is commodities will under-perform as the demand shock from the COVID19 "sudden stop" kicks in.

The lessons from 2008 are important. After the crisis hit, the global fiscal response kicked into high gear in mid-2009 and commodities were off to the races with the CRY up 83% over the following 18 months.

Fast-forward to March 2020, Central Banks around the world are terrified of deflation and just fired the largest fiscal bazooka in history. The response-time, size and breadth of their latest bag of tricks is a never-seen-before game-changer that will benefit commodities as a whole.

We love natural gas here: with capex going down big time and unprofitable wells being turned-off at this level of price, production is going down, while demand keeps growing around the world (think “reflexivity”, like Soros). On top of that, the Fed is literally flooding the markets with liquidity… This could trigger sooner than later a huge short squeeze on the natural gas sector.

From a chartist point of view, two nice divergences have been quietly building over the past months between prices, RSI and MACD, which points to a probable breakout to the upside. Keep natural gas on your watchlist!

Bullish MACD and RSI divergences on the NatGas sector