(Commodities Weekly) Energy: The Next Big Rotation?
August 29, 2025
Everybody knows that energy has been one of the biggest laggards of this bull market.
While technology, industrials, and even some of the more defensive sectors have staged powerful uptrends, energy has gone sideways at best.
In fact, it remains the only S&P 500 sector SPDR still trading below its Great Financial Crisis highs. If this is truly a broad bull market - and we believe it is - then at some point, we should expect meaningful rotation into energy.
The charts suggest that the moment may be close.
We're seeing historic volatility compression in energy futures:
The ASC Energy Futures Composite holds an equal-weight basket of Crude Oil, Heating Oil, Gasoline, and Natural Gas. This provides us with valuable insight into the energy commodity complex as a whole.
After a 500% surge off the COVID lows, the price has done nothing, consolidating in a multi-year range.
To us, this looks less like a top and more like accumulation, in the context of a strong primary uptrend.
Beneath the surface, volatility has collapsed... Our Bollinger Bandwidth indicator shows one of the tightest compressions we’ve ever seen, coiling into the apex of a symmetrical triangle.
Historically, periods of such extreme volatility compression are followed by explosive moves.
The direction of that move often depends on positioning. Currently, the setup is leaning bullish.
Dumb money hates Crude Oil futures:
Crude Oil futures are sitting right at a key level of polarity.
The 60 level was resistance before the 2020 crash, and it has since served as support. As long as we’re above that shelf, the path of least resistance is sideways to higher.
Meanwhile, the COT report shows that money managers are carrying their largest net-short position in history.
Every time we’ve seen extreme short positioning like this, it’s proven to be a fantastic contrarian buy signal. If this squeeze plays out, it could be the catalyst that unleashes the next major energy rally.
They don't just hate the commodity...
The Energy Sector SPDR has the highest short interest in years:
As you can see, the short interest in the Energy Sector SPDR recently broke out to new multi-year highs.
Everyone already knows these stocks have been dead money for years...
Everyone hates it...
That kind of consensus negativity rarely pays off for the crowd.
We believe the risk is skewed to the upside due to mispositioning.
The combination of historical net-short futures positioning, elevated sector short interest, and ultra-tight volatility compression sets the stage for a powerful rotation.
As long as crude oil remains above 60, we're looking for buying opportunities in this space.
And speaking of opportunities - this week’s Commodities Trade of the Week is one of our favorite energy setups in the entire market.
It’s exactly the kind of name that could benefit most from a sector-wide squeeze.
