From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
So far, 2022 has been a historic year. That theme intensified during the second quarter, which is now in the books.
The bond market is working on one of its worst years on record. The S&P 500 just posted its worst quarterly return since 1970 with the index down more than 16% from January through March.
Bitcoin finished the quarter with its second-worst return in its short history. And now the energy sector – the market’s leader this year – just posted its third-worst monthly return since the 1990s.
The operative words here are “worst” and “return.”
That’s 2022 in a nutshell. The bears are in complete control.
However, one area that has held up through all this is commodities. It was the best-performing asset class in 2021, and it’s the only one to close the first half of 2022 in the green.
Let’s note that the first quarter of 2022 was far different from the second. And before we go running to commodities for safety, let’s put the group’s recent performance in perspective.
First, we have a bubble chart of the CRB Commodity Index and our equal-weight commodity indexes, with their year-to-date performance on the y-axis and their Q2 performance on the x-axis:
The first thing that stands out is that Q2 wasn’t too good for most commodities. The CRB booked a small loss, while all subgroups but energy were negative.
It’s also clear from this bubble chart that the commodities space is bifurcated.
The two main procyclical groups, base metals and energy, are in opposing corners. This means energy is leading over both time frames, while metals are lagging.
Grains, livestock, and energy are all in the green year to date. But base metals, precious metals, and softs are all lower.
The truth is it’s been a mixed bag, with a lot of messy and corrective action. And this has been the reality across commodity contracts for months now.
When talking heads tout commodities, they’re really talking about the CRB and its tilt toward energy.
In fact, when we adjust for energy’s heavy exposure, the 25% year-to-date gain in the CRB turns into 0%. That jibes with our equal-weight commodity index, which is just about unchanged on the year.
When we look at Q2 performance, even the energy-heavy CRB Commodity Index finished in the red. Not only has selling pressure accelerated in recent weeks, it’s also spreading.
This weakness is illustrated well by our trend summary table, as bearish readings dominate shorter time frames:
With only feeder cattle showing a bullish reading across all time frames, the deterioration in market internals suggests further corrective action is likely.
While most contracts have moved sideways this year, a lot of ranges have resolved lower in recent weeks, as bears take control of more and more areas.
With a whopping 87% of our universe in a short-term downtrend and almost 83% trending lower over the intermediate term, it makes sense that we're seeing pattern breakdowns.
Though the longer-term trend summary has a more balanced outlook, there is damage to the primary trends in many areas now also.
This chart shows our Equal-Weight 33 Commodity Index, along with the percentage of contracts above their 50- and 200-day moving averages in the lower panes:
It tells the same story as the table above.
The intermediate- and long-term trends for most contracts are no longer pointing up. While one-third remain above their 200-day, only 2 of 33 contracts are above their 50-day.
When you look back to the first quarter, both these readings were pinned around 90%.
Back then, we had broad participation from commodities. Everything seemed to be working, and we were finding fresh long opportunities all over the place.
That was then.
This is now.
With energy finally catching lower to its peers, the entire asset class is now vulnerable.
There’s nowhere to hide – not in commodities, not in energy. This is what we mean when we say Q2 was different than Q1. Unlike the first three months of the year, commodities weren’t a great place to be in Q2.
And, if we continue on in this direction, Q3 will look even worse.
Until we start to see breadth improve, we anticipate further corrective action and deeper drawdowns for commodities.
COT Heatmap Highlights
Commercial hedgers in crude oil and gasoline are holding long exposure near multi-year extremes.
Commercials' net long exposure in gold, silver, platinum, and palladium are either at or near three-year records.
While commercials were net buyers this week, they still hold a net short position in orange juice futures near the three-year extreme.
