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

In recent weeks, we’ve been diving into individual commodity groups to size up the structural trend and to get a better idea of where we’re likely headed in the new year.

Last week, we highlighted energy contracts and the fact that many are still grappling with overhead supply. And earlier in the month we covered the worst-performing area of the commodity markets - precious metals.

Today, we’re going to turn our attention back to metals and review the base metals group.

Even with the S&P 500 printing record highs, trading ranges and overhead supply stole the show in 2021 and those dominant themes are evident when we look at base metals.

Notice the strong relationship between our equal-weight base metals index and blue-chip international equities in the Global Dow Index $DGT.

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

With the exception of US large-caps, the market remains range-bound for most risk assets. At the same time, most defensive assets are failing to catch any meaningful bid.

Gold is still chopping around in the middle of its year-to-date range. Bonds continue to trend sideways or lower. The Japanese yen recently hit its lowest level since 2017. 

And while the defensive sectors recently made multi-month highs versus the broader market, they're still trading near 20-year lows on a relative basis.

These are the kinds of assets we expect to catch a bid in an environment where investors are fleeing for safety and positioning defensively. But we’re just not seeing that.

At the same time, we haven’t seen many definitive signals supporting a more risk-on tone… until now!

While our risk-appetite ratios remain a mixed bag and most are simply range-bound, we just got a meaningful upside resolution in the High Yield versus Treasuries ratio.

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

As 2022 approaches, the latest evidence from currency markets suggest the US Dollar Index $DXY could be stalling out.

Whether it resolves higher from the current continuation pattern is a key question with broad market implications. While dollar strength has been a headwind during the second half of 2021, we think it cools off coming into 2022.

In our view, there's a good chance a weaker dollar will actually help put a bid in risk assets in the near future. This hasn’t been the case in a while, so let’s discuss what’s changed to make us feel this way.

Notice the short-term weakness in our US dollar trend summary table:

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

As we approach year-end, we're diving into the individual commodity groups to gauge the status of the primary trends and to get a better idea of where we’re likely headed in 2022. 

Last week, we highlighted precious metals -- by far the worst performers of 2021 with a -10.59% return thus far. We think there's a good chance they'll turn things around next year and start participating.

Today, we’re going to review the other end of the spectrum in terms of performance -- energy! 

While base metals and ags have posted strong gains over the trailing 12-months -- 25.96% and 28.22% respectively -- energy has been the real leader, quietly printing a 46.33% gain despite recent selling pressure.

After crude oil collapsed below zero last year, the entire group had its work cut out. But they’ve covered an amazing amount of ground in a short period of time, and we think they have further to go.

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

Our focus has been on US Treasury yields in recent months – and for good reason. 

The 30-year yield recently undercut its summer lows, and the 10-year yield briefly lost the critical 1.40 level. Both have since recovered. But these crucial rates remain stuck in the same messy ranges that have defined most of 2021. 

Given the lack of decisive action in domestic yields, we think it's a good time to check in on the overseas bond markets in hopes of gleaning some insight into the potential direction of yields outside the US.

In today’s post, we’re going to switch things up and take a look at the 10-year yields from other major developed countries.

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

Major world currencies continue to struggle against the US dollar.

Both the euro and British pound have been coiling near 52-week lows against the dollar. We’re also seeing weakness spread among commodity-centric currencies, as the Canadian dollar hit new 52-week lows this week, and the Australian dollar accomplished the same earlier in the month. As for the safe-haven Japanese yen, USD/JPY hit its highest level since 2017 at the end of November. 

The bottom line is that we continue to see broad strength from the greenback.

Meanwhile, the US Dollar Index $DXY continues to consolidate within a tight continuation pattern.

As we wait for a resolution either higher or lower, we can look to these individual forex pairs for an indication of which direction we’re likely headed.

Let’s revisit the potential failed breakdown from the Australian dollar earlier in the month and the recent action in the Canadian dollar for clues.

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

We study a wide variety of sentiment data as we incorporate many different indicators into our day-to-day analysis.

In its simplest form, sentiment tells us how certain market participants or investors feel about the market.

Are investors feeling bullish and increasing their exposure to risk?

Or, are investors feeling fearful and positioning defensively?

More often than not, these are contrarian indicators that work best when at extremes.

One of our favorite sets of sentiment data comes from a weekly report published by the Commodity Futures Trading Commission. It is called the Commitment Of Traders, or COT report, and it simply outlines how various participants are positioned in futures markets.

We get lots of questions regarding how we analyze the COT report, so let’s talk about two of the main ways we find value in this information.

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

Not unlike the major US equity indexes, the commodity space is still range-bound as we head into year-end.

When we compare the trailing 12-month returns of individual groups, we get a sense of how bifurcated the commodity market has been. Another thing that stands out is just how weak precious metals have been relative to their peers.

While the rest of the asset class has posted solid gains on the year, gold and silver continue to trend lower. If this is truly a commodities supercycle, we’d expect to see some participation from this group. And, considering they’ve been in a downtrend for almost 18-months now as the rest of the space has been working, we’d expect it to happen soon. 

Let’s take a closer look at what’s going on with these shiny rocks.

First, here’s a chart with the trailing 12-month returns of our four major commodity indexes - energy, precious metals, base metals, and ags:

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

It was only a month ago that we discussed the TIPS versus Treasuries ratio hitting its highest level since 2013 as investors prepared for rising inflation.

Fast-forward to today, and the inflationary backdrop looks very different.

Inflation breakeven and forward expectation rates have rolled over aggressively since the middle of November. This is illustrated by the TIP/IEF ratio, which recently undercut its May highs. Combine this action with the lack of follow-through on last week’s kick save from the 30-year yield, and the prospects of rates rising across the curve aren’t looking too hot.

But what does that mean for risk assets?

For starters, commodities will miss out on all the usual tailwinds that come with inflationary pressure. Let’s take a look at a chart that highlights that relationship.

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

All eyes have been on the US dollar and interest rates in recent weeks.

Last week, we saw a timely kick save from the bond market as the 30-year reclaimed its summer lows. Whether the latest rebound in rates will hold is yet to be seen as the 10 and 30 are currently chopping sideways just above our risk levels. We’re watching the long end of the curve closely to see how yields react at these critical levels.

But what about the US dollar?

When we analyze the US Dollar Index $DXY, it’s hard to be bearish, as price is consolidating in a tight continuation pattern following a base breakout and swift leg higher last month. As usual, the direction in which the DXY resolves will have broad market implications and will affect risk assets around the globe.

We know you’re probably tired of hearing it, but this is another big week for markets -- especially the dollar!

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

Despite taking a hit in recent weeks, commodities have remained resilient.

Buyers are working to absorb overhead supply at some key levels. We’re seeing this kind of action in commodities across the board -- from industrial and precious metals to energy and even agriculture. We’re seeing prolonged consolidations in some of the most important contracts, such as crude oil, copper, gold, and soybean oil. 

The point is simply that most commodities are correcting through either price or time. Some are digesting gains around former areas of resistance, and others have failed to sustain their breakouts. 

Regardless of where they came from, most commodities are stuck in a range right now. That’s critical information supporting our messy outlook for risk assets.

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

The recent risk-off action came to a head last week, with commodities, stocks, and interest rates all violating key support levels. 

We saw a brief flight to safety, as long-term treasury bonds $TLT broke out to their highest level since early January.

Yes, money was flowing into bonds, which is not a good look for stocks and commodities.

Bottom line, there was a lot of damage done to the primary uptrend in a very short time. Market participants needed to come out and repair the damage ASAP.

In the handful of trading sessions since the selling stopped, bulls have managed to claw back much of the losses from last week.

Buyers needed to quickly step up to the plate. And that’s exactly what we’re seeing right now, as stocks and other risk assets are rebounding aggressively off the recent lows.

As for bonds, the breakout in TLT failed, and the 10-year and 30-year both snapped back above critical levels.