From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
Commodities have been on an absolute tear, with our Equal-Weight Commodity Index up almost 40% over the trailing year.
But ever since Q2, the vast majority of the space has been chopping sideways along with most cyclical assets.
Sounds a lot like stocks, doesn’t it? And while we’re still yet to see any major resolutions from equities, we have seen some bullish developments in the commodities market of late.
Energy asserted itself as the new leadership group with a series of major breakouts. Both crude and heating oil broke to new six-year highs, while gasoline futures completed a seven-year base.
Then there’s natural gas, which gained more than 25% during the trailing month and tested its 2014 highs just above 6.
The emerging leadership from energy comes as no surprise, as we noticed signs of relative strength last month.
Now that it’s here, what are the implications for the rest of the commodity space and global risk assets?
Let’s take a look at a couple of charts to see what information we can glean.
First up is a chart of our Equal-Weight 33 Commodity Index:
After an explosive move off the 2020 lows, the index has formed a tight consolidation as commodities digest their monster gains. A similar pattern can be seen throughout the commodity space -- think copper, tin, aluminum, corn, soybean oil.
All of these contracts exhibit the same pattern to varying degrees. They peaked in Q2 and have been correcting through time or price, quite similar to cyclical stocks like the industrials and materials sectors.
Our index is able to pick up on this mainly due to its equal weighting. It’s not skewed heavily toward energy, like the CRB Index. Instead, it reflects what the majority of the commodity market has been doing.
With price knocking on the upper bounds of its range, we ultimately believe this consolidation resolves higher -- in the direction of the underlying trend. With the recent run-up in interest rates and burgeoning strength from cyclical areas of the market, we believe the weight of the evidence favors higher commodity prices.
And if commodities are breaking out across the board, we think that’s bullish for global equities.
Here’s a chart of our Equal-Weight 33 Commodity Index overlaid with the All-Country World Index Ex-US $ACWX:
They look practically identical, which speaks to how important cyclical assets are to international equities.
If commodities are about to make another leg higher, we’d imagine international equities will eventually follow suit.
And if participation among commodities continues to expand, both of the charts above are very likely resolving higher sooner rather than later.
COT Heatmap Highlights
Cotton: Commercial hedgers are the most net short they’ve been in three years and are only 1,500 contracts away from an all-time record short position.
Minneapolis Wheat: Commercials are still extremely short after hitting a record short position last month.
Heating Oil: Commercials continue to add to their shorts as they near three-year extremes but are still well off their all-time net short position.
Palladium: Commercial hedgers are still at an extreme long position after making a new record just last month.
