One of last year's biggest financial stories is still playing out... but the world stopped watching.
It began with Russia's invasion of Ukraine. Europe plunged into a wartime economy as Russia imposed an embargo on natural gas... And prices skyrocketed.
The commodity shot up 108% from the start of the conflict in February to last August, when prices peaked. But today, the trend has more than turned over. Natural gas now costs 48% less than it did the day the invasion began.
What's more, investors hate the idea of owning natural gas today.
But folks who are bailing on natural gas may be getting ahead of themselves... because the next big reversal could be just around the corner.
Let me explain...
The world runs on natural gas... And climate control is a huge source of the demand.
Buildings often use natural gas furnaces for heat. That's why a Russian embargo on natural gas was so frightening. No natural gas meant no heat in Europe – so a bad winter could easily turn deadly.
Thankfully, the worst-case scenario didn't come to pass. The seasonal forecast was mild. Natural gas prices found a top in 2022... and then collapsed.
Today, the price of natural gas is down nearly 75% since its August peak. And it recently completed one of the steepest six-week drawdowns in history. Take a look...
Investors are fleeing natural gas. And now, the move to the downside may be overdone.
One tool we can use to see this is the relative strength index ("RSI"). You can see this indicator on the bottom half of the chart above.
Simply put, this indicator flags when an asset makes a tough-to-sustain move in either direction. When an asset's price jumps up too fast, the RSI will rise above 70. This tells us the asset is "overbought" and likely to fall.
If the price declines too fast, the RSI will drop below 30. This means an asset is "oversold"... And a rally often follows.
As you can see, natural gas futures recently hit at an RSI of a little more than 27 – well into oversold territory. That means investors should be paying attention...
History shows that when an oversold RSI reading rises back above 30, natural gas tends to go on a yearlong tear. Take a look...
Over time, natural gas returns are pretty flat – up just 2% in a typical year. But after coming out of oversold territory, the commodity takes off...
It returns an average of 4% in three months, 6% in six months, and 10% in a year after a turnaround starts.
We're not there yet. This commodity isn't quite out of oversold territory. But the bait is set for a double-digit rally.
No one is watching natural gas today... And that's the perfect setup for big outperformance.
Good investing,
Sean Michael Cummings
Further Reading
"When an asset is hated and the price is going up, it usually leads to big gains," Dr. David Eifrig writes. That's what has happened with gold recently. And the rally is likely to continue... Learn more here.
"A multiyear high like this means that futures traders are all betting that the euro will rally," Brett Eversole explains. The problem is, these traders are terrible market timers. That means this booming currency could be setting up for a fall... Read more here.
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