From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
Whether we’re talking about stocks, commodities, currencies, or even the bond market, things have been a total mess. It’s no secret, and you’re probably tired of hearing it by now.
Trust me, we’re just as tired of seeing it.
So, as these choppy conditions test our patience and discipline, why not use this opportunity to take a step back and examine where we’ve come from, where we are now, and where we’re likely headed.
In today’s post, we’re going to do just that by revisiting and analyzing some of our favorite breadth indicators and discussing what some of them are suggesting for commodities over the long run.
Let’s dig into it!
First, we need to understand that a breadth thrust isn’t a singular event. It’s a process that builds upon itself as a new bull cycle unfolds.
These thrusts in participation don’t all just happen overnight. Instead, they develop over shorter time frames at first and eventually culminate with a broad expansion in new longer-term highs.
Using the stock market as an example, we saw our first breadth thrusts back in June, but it wasn’t until May of this year that we saw new 52-week highs peak.
So, let’s apply this same analysis to the initiation thrusts that we saw take place in commodities markets this year.
We first started seeing an expansion in new 21-day highs after the Covid crash.
Then, we got our highest reading since the early 2000s in January of this year.
And, as the rally picked up steam heading into last summer, more and more new highs began to show up across the 63-day timeframe.
Interestingly, we noticed a similar spike in participation from stocks around that same time. This helped inform our bullish thesis heading into last fall.
Notice how new 63-day highs started to pick up slightly later in the year than the 21-day highs.
This is exactly what should happen during the initiation phase of a new bull market.
We’re obviously going to see new 21-day highs before 63-day highs--and then six-month highs, and so forth. It’s just math.
It stands to reason that the percentage of new six-month highs should begin to rise ahead of new 52-week highs. And that’s exactly what we see in the chart below:
It wasn’t until January 5 that we saw a final thrust in six-month highs. This was also accompanied by peaks in our short-term new highs indicators as well as the first of a series of major thrusts from new 52-week highs.
And it just so happens that the US dollar hit its year-to-date lows that same week.
Notice how it took another five months before the percentage of new 52-week highs made its final thrust on May 6.
At this same time, the percentage of commodities with overbought RSI readings peaked as well. But we’d already experienced a series of thrusts in the months and quarters leading up to May from this indicator.
Here's a look:
At this point, we had more than enough data to suggest that we had very likely just experienced the initiation phase of a new bull market for commodities.
But breadth had already begun to deteriorate on shorter timeframes, and divergences were forming all over the place. Oh, no!
The fire had already been started: A new commodities supercycle was clearly underway, in our view.
A few divergences in our new highs indicators are actually something we should expect following the thrust phase of a breadth cycle.
And, when we fast-forward about four months to today, we want to continue to ignore these divergences.
It’s simply not practical to expect those extreme readings to be topped at this point in the cycle.
Instead, we need to be aware of and on the lookout for an expansion in new lows, which we have yet to see. Once that happens--and we experience what we like to call a “fall day”--then and only then will it come time to pay attention to some of these divergences.
Until that's the case, breadth divergences and corrective price action should be viewed as typical year-two behavior within the context of a new bull market cycle. This is no different than the year-two messy market theme we’ve been pounding the table on about stocks all year.
In fact, commodities are in the exact same boat as stocks, just on a couple months’ lag.
Most stocks have been going sideways since February or March following the onslaught of breadth thrusts we experienced leading into the beginning of 2021.
Since that last breadth thrust for commodities, our equal-weight commodity index has been correcting in a sideways range as well.
But is there anything unusual about some healthy digestion of these recent gains?
We don’t think so. Actually, we think it would be odd if they didn’t take a breather.
I mean, just look how far commodities have come off last year’s lows. Moving in a straight line higher forever just isn’t sustainable.
Long story short, we’re not looking at the current corrective action as anything other than normal. Like stocks, some commodities are going up, but most of them are going sideways or lower.
That’s why it’s as important as ever for us to identify pockets of strength and lean on those areas to generate alpha during this corrective period. As always, they’re out there; you just need to look a bit harder to find them these days.
In line with our view that this truly is a new commodities supercycle, when this sideways period is over, we’re anticipating prices to resolve higher, in the direction of the underlying trend.
If the action in the stock market this year hasn’t made this point clear enough, keep in mind that this range-bound action can last a lot longer than most investors are likely prepared for.
