Commodities Can Go A Lot Higher, But Not All

The Reuters/Jefferies CRB Index is a widely followed commodities index. Since its inception in 1957, the Index has been revised ten times. The last revision was in 2005 when a 4-tier grouping system replaced the system of equal weightings of its current 19 components.

The new system gives Group 1 – Crude Oil, Heating Oil, and Unleaded Gas – 33% weight. Group 2 – Natural Gas, Corn, Soybeans, Live Cattle, Gold, Aluminium, and Copper. – gets 42% of the Index’s share. Group 3 weighs 20% and includes Sugar, Cotton, Cocoa, and Coffee. Group 4 gets 5% weight and includes Nickel, Wheat, Lean Hogs, Orange Silver, and Silver.

Within the CRB Index, the Energy sector – 39% – gets the most weightings. Crude Oil is the most dominant, with a 23% share. Industrial Metals are at 13% but do not include Palladium and Platinum. Precious Metals are at 7%, though Silver – 1% – could be considered an industrial metal. Agricultural Commodities get 34% of the total weight, Live Cattle and Lean Hogs comprise 7% of the Index.

Commodities Are in a Bull Market

Fig. 1 – CRB Reuters/Jefferies Commodity Index (Monthly)

The CRB Index, $CRB, has been rising since April 2020 (see Fig. 1) after a long-term decline that started in July 2008 during the Global Financial Crisis. The decline was not straight down, but it was clear that the commodities were in a strong bear market.

There were bounce backs – from February 2009 to April 2011 – and consolidations – from September 2011 to June 2014 and from July 2015 to December 2019 – but the trend was demonstrably down. The pandemic induced a panic selling which helped commodities bottom out.

The Index has been moving up since April 2020. In summer 2021, it broke above a downtrend line from the 2008 high for the first time and broke a long-term sequence of lower-highs and lower-lows. Finally, it broke above the congestion area created between 2015 and 2019.

Bull-Bear Markets in Commodities Last A Long Time

When the commodities start a move in one direction, they continue to do so for a long time. The first bull market of this century in the CRB Index (see Fig. 1) lasted eight years, from the lows in late 2001 to the high in 2008. The bear market lasted eleven years from 2008 to 2019 though it contained a couple of consolidations that did not break above but down.

The first consolidation, depicted by the Symmetrical Triangle in Fig. 1, lasted roughly six years. The second consolidation, illustrated by the Horizontal Channel in Fig. 1, lasted four years from 2015 to 2019

The chances are high that the current bull market in commodities, which started in April 2020, will last few years, although the rise will not be uninterrupted. There may be some consolidations with a reasonable possibility of a throwback to the congestion created between 2015 and 2019.

Commodities Continue To Outperform Equities

Fig 2: Relative Strength Commodities and Equities

For the past few months, commodities have been the strongest asset class. Commodities started to outperform equities in April 2020 (see Fig. 2). Amongst the equity indices, Dow Jones Industrial Average (DJIA), $INDU, is underperforming the most (see Second Pane of Fig. 2). S&P 500, $SPX, is faring a little better than DJIA.

Tech-heavy NASDAQ Composite, $COMPQ, kept pace with commodities for most of 2020 and early 2021. Since February 2021, it too has been underperforming the CRB Index.

Small-Caps – S&P 600 Small Cap Index, $SML – did much better than the large caps. They mostly kept pace with commodities from April 2020 to September 2020 before outperforming for six months. Since late March 2021, small-caps have been underperforming the CRB Index.

Not Everything Is Oaky With All Components

Fig. 3 – Crude Oil, Industrial Metals, Agricultural Commodities, and Precious Metals

Not all of these components are performing similarly. Some are contributing more than others to the CRB Index’s rise. Most started to rise in April 2020, give or take few weeks, but then their performance diverged afterward.

Industrial Metals – DJ US Industrial Metals Index, $DJUSIM (see the First Pane in Fig, 3), turned around in late March 2020 and advanced until May 2021 before moving sideways. Currently, it shows a sign of weakness, and a break below its July 2021 low of 327.43 could trigger a further decline of 20%-30%.

Crude Oil – WTIC Light Crude Oil, $WTIC – turned around in April 2020, and it briefly fell in Summer 2021 before regaining its up trajectory (see the Second Pace in Fig. 3).

Agricultural Commodities – S&P GSCI Agricultural Index, $GKX – was the last commodity group to turn around (see the Third Pane in Fig. 3). It started its rise in July 2020 but then faltered in May 2021. Since then, it has been losing strength and moving sideways to down, though it could be consolidating.

Precious Metals – Dow Jones Precious Metals Index, $DJGSP – was the first commodity group to start the uptrend and the first to falter (see the Fourth Pane of Fig. 3). It began to move up in March 2020 but stalled in August 2020, and since then, it is mostly moving down.

Natural Gas Is Leading Other Commodities

Fig. 4 – Commodities Relative Strength

Natural Gas is showing greater relative strength than others, and Crude Oil is the second-best commodity.

Crude Oil has been outperforming Industrial Metals since August 2021 (see the First Pane of Fig. 4). It was underperforming for many months before that. For the better part, it has beaten Agricultural commodities and Precious Metals since May 2020 (see the Second and the Third Pane of Fig. 4).

Until recently, Industrial Metals Index was the strongest commodity index. Since May 2021, its performance has worsened compared to Agricultural commodities and Precious metals (see the Fourth and the Fifth Pane of Fig. 4).

Precious Metals have been underperforming Agricultural commodities since August 2020 (see the Sixth Pane of Fig. 4), making it the worst-performing commodity group.

Fig. 5 – Relative Strength Crude Oil & Natural Gas

Natural Gas, $NATGAS, is showing the most strength. It has been outperforming Crude Oil, the second strongest commodity, since March 2021 (see Fig. 5). Natural Gas started its up move in June 2020, later than Crude Oil. From June 2020, it performed better than Crude Oil until October 2020 before underperforming until March 2021.

XLE Forming A Bullish Pattern

Fig. 6 – Energy Select Sector SPDR, XLE

An uneven Cup-and-Saucer pattern is emerging on the weekly chart of Energy Select Sector SPDR, $XLE (see Fig. 6). The move from February 2020 to June 2021 is the cup. The following retracement and bounce until early October 202 is the handle of the cup. If XLE breaks above 56.55, the high of the cup, then it could go much higher.

The top ten holdings of the XLE are Exxon Mobile ($XOM), Chevron ($CVX), ConocoPhillips ($COP), EOG Resources ($EOG), Schlumberger ($SLB), Marathon Petroleum ($MPC), Pioneer Natural Resources ($PXD), Kinder Morgan ($KMI), Williams Companies ($WMB), and Phillips 66 ($PSX).

XLB Forming A Descending Triangle

Fig. 7 – Materials Select Sector SPDR, XLB

A Descending Triangle is developing at the top of the weekly chart of Materials Select Sector SPDR, $XLB (see Fig. 7). If the price breaks below the lower limit of the pattern, a more common phenomenon, then it could fall more. If the price breaks above the upper limit of the pattern, a pattern failure, then it could go much higher.

The top ten holdings of XLB are Linde PLC ($LIN), Sherwin-Williams ($SHW), Air Products ($APD), Ecolab Inc. ($ECL), Freeport-McMoran ($FCX), Newmont Corp. ($NEM), Dow Inc. ($DOW), DuPont de Nemours ($DD), PPG Industries ($PPG), and International Flavors ($IFF).

XLI Forming An Upsloping Flag

Fig. 8 – Industrial Select Sector SPDR, XLI

An Upsloping Flag is evolving at the top of the weekly chart of Industrial Select Sector SPDR, $XLI (see Fig. 8). It is a bullish chart pattern, and if the price breaks above the flag, then it could move much further up. Typically this pattern occurs near the middle of an up-move. After the price breaks above the flag, a reasonable target would be near 133, the 61.8% Fibonacci extension, and the next target would be around 156.00, the 100% Fibonacci extension.

The top ten holdings of XLI are Honeywell Internationa ($HON), United Parcel Service ($UPS), Raytheon Technologies ($RTX), Union Pacific Corp. ($UNP), Boeing Co. ($BA), General Electric Co. ($GE), Caterpillar Inc. ($CAT), 3M Co. ($MMM), Deere CO. ($DE), and Lockheed Martin Co. ($LMT).

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