When I called peak inflation back on Dec. 10, it was an easier decision than you might think… And so was putting together this week’s Fortune Research weekly watchlist.
For starters, I track commodity prices every day. So when they stop going up, it’s easy to take notice.
In fact, anyone with a working pair of eyes could see it!
Source: Bloomberg
This trend is going to play a huge role in market outcomes over the course of next year.
Companies whose margins were squeezed over that time — those unable to pass all input cost inflation on to customers — are going to benefit greatly as prices relax.
Even though we said Tuesday that overall retail sales are likely to slow as we head into 2022, margin growth has the potential to offset any declines in top-line earnings.
So the question remains… Exactly how much are commodities going to pull back?
The answer, unfortunately, can’t be determined from tracking U.S. activity.
Instead, we have to watch China.
China’s Impact on Our Fortune Research Weekly Watchlist
Now, I talked a week ago about China’s “Credit Impulse” beginning to tick up, and how that’s a great leading indicator for a turnaround in China’s stock market.
Source: Bloomberg
Last week’s free trade on KBA, in fact, is already up around 2% this past week.
But credit impulse is also a great leading indicator for commodity prices on a six- to 12-month-lag basis — like iron ore, shown below…
Source: Bloomberg
Crude oil…
Source: Bloomberg
And gold prices also track it closely…
Source: Bloomberg
The reason is that China is the biggest buyer of commodities in the world. So when Beijing enters the market, it moves it.
In general, after about six to 12 months following an inflection point in Credit Impulse, commodities will flip directionality.
In this case, the China Credit cycle peaked in March. Meanwhile the commodity price cycle peaked about eight months later and turned over.
As such, we want to look for opportunities to short the commodity space now while we wait to see inflationary trends begin to reemerge around the end of Q2 next year.
So for the watchlist this week, we’re keeping Consol Energy Inc. (NYSE: CEIX), the Materials Select SPDR Fund (NYSEArca: XLB), the Real Estate Select SPDR Fund (NYSEArca: XLRE) and the KraneShares Bosera MSCI China A Share ETF (NYSEArca: KBA) as each has fundamental reasons to rise.
Then, to capitalize on commodity disinflation, I want to bring in the ProShares UltraShort Bloomberg Crude Oil ETF (NYSEArca: SCO).
And as a hedge on equity markets, I want to bring in both a volatility instrument, iPath Series B S&P 500 VIX Short-Term Futures (NYSEArca: VXX), and SPDR Gold Shares (NYSEArca: GLD).
Updated Fortune Research weekly watchlist below…
Source: Fortune Research
Markets aren’t turning yet, but we want to be prepared if the cycle rolls over.
All the best,
Matt Warder
Fortune Research
P.S. I don’t want to scare anyone, but traders who don’t have a financial plan of action for 2022 might be in some hot water…
Luckily, WealthPress Senior Strategist Roger Scott is hosting his “Turning Point 2022” event, where he will share three huge predictions and his favorite play for the new year.
The timing of this is absolutely crucial because we’re cutting it close with only a few days to spare in 2021.
And with world health getting more complex, it should come as no surprise that we might be in for another bumpy year ahead…
But the good news is we’ll be in this together!
