Some Good News for Commodities

August 19, 2022  |  Michael Reilly

In case you hadn’t noticed, Commodities have come under a lot of pressure since June.

However, there is some good news for Commodities.

The recent sell-off in these inflationary assets is beginning to subside – and not surprisingly, it is happening at very logical prices.

These are positive developments for the Bulls, as the appetite for risk-on assets has spread beyond just growth stocks to the more economically sensitive assets.

The CRB Index and numerous bellwether commodity stocks are digging in and finding support at key levels…

Investors will want to pay attention.

We know that Commodities have taken it on the proverbial chin lately. And we know that in order for them to go up, they must first stop going down.

So far, it looks like Commodities got the memo. 

Let me show you what I mean by starting our analysis at the index level using the CRB as our asset class proxy.

As a refresher, the CRB Index is a basket of Commodities that are sorted into four groups with different weightings: 

  • Energy and Agriculture make up the lion’s share of the index at 39% and 41%, respectively
  • Base/Industrial Metals account for 13%
  • Precious Metals round out the remaining 7%

Looking at the chart above, after a failed move higher in June above former resistance at the 2012 and 2014 highs, the CRB index rolled over. But importantly, it dug in and found support just above the 61.8% Fibonacci retracement level.

That’s very constructive for the entire Commodity complex in spite of the index’s obvious tilt toward Energy and Agriculture.

It doesn’t matter where you look, Commodities are digging in, finding support at key levels.

Ags, Base Metals, and Energy have all found support. Even Gold is bouncing off critical levels of former support.

Take a look for yourself… here are Gold futures bouncing off the 38.2% Fibonacci level – the same level Gold found support in Q1 2021.

And take a look at Lumber… yes, Lumber.

We all remember the memes on Facebook and Twitter as Lumber prices skyrocketed during the COVID crunch…

Followed by an epic collapse, followed by recovery, and so on…

But look at where Lumber futures sit right now. Finding support at what had been for decades price resistance around $490. 

And much like Dr. Copper, Lumber is an economically sensitive commodity. 

So seeing demand hold above key levels with decades of price memory bodes well for risk assets and the economy.

And speaking of Copper – here are Copper futures. 

And what is Copper doing? Finding support at former resistance (2017, 2020). 

The fact that Copper was able to defend that level is supportive of the recent risk-on trade.

I’ll say it – seeing Lumber and Copper just isn’t Bear Market Activity. 

If the economy is as bad as we keep hearing, would Lumber/Copper futures rise? I’d venture to say that’s a resounding NO.

I guess price comes down to the difference between what “might” happen vs. what “is” happening. And right now, prices of economically sensitive securities are finding their grove.

Much of this may be a bit of a head-scratcher for many. Afterall, the Fed has sent a consistent message – they will continue to raise rates to put down inflation regardless of outcome. And that means the real prospects of recession. 

So, why would raw materials and their related stocks move higher in the face of such potential headwinds?

Your guess is as good as mine. 

But the fact remains – we can illustrate that raw materials, like Lumber and Copper along with material-related stocks, are catching a bid.

Here are two ETFs that illustrate the same point as Lumber and Copper futures.

Metals & Mining: Digging in at previous support and holding above the 2018 highs.

Steel: Price has memory and steel found support where it needed to with Dulls defending ~$51.00 and the 2018 highs.

We have to admit, it’s pretty constructive for bulls that Commodities – a risk-on asset class – has been able to find stability at some pretty key levels across the board. 

Price doesn’t lie. Focus on price – not headlines and not what-ifs.

Look, we don’t know what’s going to happen next, we don’t know if the recovery in Commodities and related stocks will continue or not…

So follow price, use good risk management, and always ADAPT to what is in front of you…

Until next time…

P.S. To find out how Rowe Wealth can help you profit through whatever the market serves up next, schedule a free 1-hour consultation with us now

Get Our FREE Guide

How to Find the Best Advisor for You

Learn how to choose an advisor that has your best interests in mind. You'll also be subscribed to ADAPT, Avalon’s free newsletter with updates on our strongest performing investment models and market insights from a responsible money management perspective.

Avalon_NewGradient_24Feb22 copy