Not many people talk about commodities in the aggregate sense, i.e. as an overall asset class. Typically it’s gold this or oil that, which is a shame because it is a really interesting asset class; particularly now as the core index we track is basically at a make-or-break turning point.
Q4 hedge fund letters, conference, scoops etc
The chart of today’s post comes from a special report on the outlook for commodities as an asset class where we looked at a number of key drivers and indicators for commodities.
The chart shows the GSCI Light Energy Commodities Index against our composite speculative futures positioning indicator. Basically traders have lost faith in the outlook for commodities.
Specifically on the details, the GSCI Light Energy index is the index we tend to focus on because it provides more diversified commodities exposure than the classic GSCI commodities index, which has a much heavier weighting to energy. The futures positioning indicator provides a view across commodities of how traders are positioned in commodities – currently it is not quite overall net short, but it is at the lowest point since early 2016; which indicates investors are running lighter exposure than usual.
The reason it’s worth tracking positioning is because it typically serves as a contrarian indicator. That is, most of the time when positioning falls to very low levels, or indeed outright short, it marks a major market bottom and a turning point. With commodities teetering on the edge of a possible new bull market vs continuing with the old bear market, we think charts like this should warrant particular attention, especially as we move later in the cycle.
The other things we’re watching include valuations (look cheap according to our composite indicators), market breadth (improving), the US dollar outlook (overall bearish on our analysis), and after working through a substantial supply overhang, we expect a re-coupling or even overshoot vs expected global economic growth.
On that aspect, the disappointing run of data on the global economy and slump in global trade growth have certainly presented headwinds to commodities (helping create this mispricing), but we believe this theme has run its course. The key drivers of this slowdown (the trade wars and global monetary policy tightening) have already done the worst of their damage, and if anything we’re seeing a global policy pivot as central banks cease tightening, switch to dovish talk, and in some cases even turn to easing policy.
Already we’ve seen a rebound in the China PMIs, and this maps fairly well to the price action in copper. This is possibly the first of many signs that the demand picture is going to pickup to match the improved sentiment and technicals setup.
So as others ignore and sell down commodities, our view is we need to be paying more attention to this often neglected asset class, and with clearly defined levels of support and resistance, it’s not at all an understatement to say that commodities are at a make-or-break point…
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Article by Top Down Charts
