What to Own as the Strait of Hormuz Slams Shut
This essay was originally published in DailyWealth Trader, a daily trading advisory, and has been adapted. To learn more about this service, click here.
Stocks aren't reacting well to America's foray into Iran...
On February 28, U.S. and Israeli forces staged a military strike on Iran's capital, Tehran. Supreme Leader Ayatollah Ali Khamenei was killed in the strike. And Iran has retaliated by attacking U.S. bases in other Middle Eastern countries.
America has had tensions with Iran for decades. But this is a massive escalation in the Persian Gulf.
Assets like stocks and gold are swinging as the market digests this new reality. But one asset class has been soaring as almost everything else falls...
I'm talking about commodities.
As tensions escalate in the Middle East, commodity markets are surging. They recently went on a rare hot streak. And history says the outperformance will only continue from here...
Iran made one of its biggest possible strategic plays following Saturday's attack: shutting down the Strait of Hormuz.
This narrow channel is the only way for ships to access the Middle Eastern Gulf States. Take a look...
The Strait of Hormuz acts as a choke point for 20% to 30% of the world's oil supply. And since Iran has vowed to attack boats in the strait, we can expect oil to become far more scarce.
It's not just oil... A wealth of other Middle Eastern resources has just been shut off to the world. The supply won't come back online until the conflict is over.
Put it all together, and you have a recipe for soaring commodity prices...
And the upward move is likely just getting started.
Commodities Are About to Climb Higher
We can see it with the United States Commodity Index Fund (USCI). This exchange-traded fund gives investors exposure to commodities futures contracts. It also reflects the performance of commodities as a whole...
As America geared up for the strike on Iran, USCI forged higher for six consecutive days. Take a look...
We always want to pay attention when assets go on hot streaks like this one. More outperformance tends to follow in the long term...
I wanted to see what this six-day winning streak implied for USCI going forward. So I tested the behavior of the commodity index underlying the fund after similar six-day rallies.
It turns out, six-day win streaks in commodities are rare. We saw this signal light up on just 3% of trading days going back to 1991.
However, these streaks tended to lead to more wins for USCI in the months that followed. Take a look...
Commodities have been strong performers since 1991. USCI's underlying index has returned 10.3% in the average year.
But you can beat that performance by buying after a six-day rally. Six-day streaks led to returns of 7.3% over six months... and 14.4% in a year.
In short, the conflict in the Middle East is disrupting various markets. But as it escalates, commodities are catching a bid.
USCI's recent six-day streak shows the commodities rally still has room to run.
This upheaval in a major trade corridor will squeeze commodities higher. If you don't own commodities yet, consider adding some exposure to your portfolio today.
Good investing,
Chris Igou
Further Reading
"For investors, inevitability is a compass," Rick Rule writes. The commodities market can be difficult to navigate – especially if you're chasing fashionable investments. Your best bet is to put your money behind what must happen in the years to come. And one simple checklist can help you get started.
The natural resource sector is full of traps that look like opportunities. Most of these companies don't make their investors a dime. To succeed in this space, you must learn how to find the companies that will actually make you money – instead of chasing blue-sky stories.
Market Notes
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
BP (BP)... oil and gas
Chevron (CVX)... oil and gas
CNX Resources (CNX)... oil and gas
Canadian Natural Resources (CNQ)... oil and gas
Cenovus Energy (CVE)... oil and gas
EOG Resources (EOG)... oil and gas
Suncor Energy (SU)... oil and gas
Enterprise Products Partners (EPD)... oil and gas
Sunoco (SUN)... oil and gas
Equinor (EQNR)... oil and gas
Cheniere Energy (LNG)... natural gas
Waste Management (WM)... trash and recycling
CF Industries (CF)... fertilizer products
Elbit Systems (ESLT)... "offense" contractor
NEW LOWS OF NOTE LAST WEEK
Campbell's (CPB)... soup
Builders FirstSource (BLDR)... homebuilder supplier
BXP (BXP)... office REIT
ADT (ADT)... security
Avantor (AVTR)... chemicals