Commodities Weekly: The What, The When, And The Primary Trend

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

As May just came to a close, many spent the weekend celebrating the kick-off to the Summer season at Memorial day barbeques. We did that too. BUT... being the nerds we are, we also spent much of the weekend pouring over some fresh monthly candles now that yet another one is in the books.

In the spirit of our sacred monthly candlestick process here at Allstar Charts, in this week's column, we're going to take a step back and discuss some of the primary trends at play in Commodities Markets.

We only get this incredibly valuable information ONCE a month. That's right. Just TWELVE times a year. As such, we really cherish weeks like these. 

So, let's dive right in and talk about one of the charts that really stuck out this month: None other than the good old Thomson Reuters $CRB Index, arguably the broadest barometer for the asset class as a whole.

First and foremost, our position remains unchanged regarding basically all of the themes we’ve highlighted of late.

Many of the economically sensitive commodities such as Aluminum, Steel, Crude Oil, and Gasoline remain at or near their objectives, prior highs, or other logical levels of supply.

We've been obnoxiously vocal about this theme lately as we continue to see the list of risk assets running into resistance grow. And it's happening in every single asset class in both the US and abroad.

How these charts resolve and/or react at these major levels is going to determine where markets head into the back half of the year.

The CRB Index ranks right among the top in terms of importance for this laundry list of risk assets hitting our objectives. Here's the monthly chart:

It’s no secret Commodities have been ripping. Lumber is up 259%, Tin is up 111%, and Steel is up 224% over the last year. We’ve seen similar returns in the Ags. Soybean Oil and Lean Hogs have posted annual returns of 139% and 109%, respectively. So, seeing this v-shaped bottom off of last year's lows is no surprise. 

Although, when we compare this chart with some of the individual commodities themselves - many of which are trading at or near record highs following some of the historic moves mentioned above, the CRB Index looks like it's just getting going.

Now, this may seem counterintuitive as so many of its components are hitting resistance at their all-time highs while the index itself is still miles from its record highs from over a decade ago. This is due mainly to the overwhelming weight the index has in Energy and relatively small exposure to all other commodity subgroups... And we all know what's gone on with Crude Oil and its peers since the last Commodity bull cycle.

So back to the chart... Unlike Copper and Tin, which are currently pressing on fresh all-time highs and appear poised to break out (or put in some nasty failed breakouts), the CRB Index just pierced through resistance at a 12-year downtrend line last month and is now trading at its highest level since 2015.

Furthermore, we’re seeing several bases within the Wheat Complex, Softs, Energy, and Precious Metals that have yet to resolve higher. If and when they do, these will be additional catalysts for higher prices at the index level.

In many ways, it appears the next major bull market in Commodities is just getting started. I mean, we're looking at roughly 130% of upside just to get back to those former all-time highs around 470. 

This structural view goes hand in hand with what we’re seeing in International Equity Markets right now. Those countries and regions with heavy weightings toward value and cyclicals are just beginning to break out of multi-decade bases. The Euro Stoxx 600 $SXXP is a great example as it just recently broke above its former all-time highs from 2000.

From a tactical viewpoint though, many areas of the Commodity space have reached logical levels of resistance, so a period of corrective action or digestion here would be healthy. This was a major theme from our most recent Conference Call.

So the question we're asking ourselves right now is simple...

How long will it take to absorb the supply at current levels before prices resume higher in the direction of the underlying trend?

That's all just a matter of timeframe though. It's all about the when... But what we really care about is concerned with the what.

In other words, WHAT is the long-term trend?

Well, not only is it undoubtedly higher above 200 but when we take a step back and examine the bigger picture, a damn good argument could be made that we're still in the early innings of this new Commodities Supercycle. 

Thanks for reading. As always, let us know what you think, and be sure to download this week’s Commodity Report below!