Commodities Supercycle?

1) RATES – The 2YR is still in a slightly bullish trend (upward bias), which suggests the Fed isn’t likely to cut rates. Yet, at the same time, we have the longer-dated maturities (10YR, 20YR, 30YR) all failing at important resistance, suggesting the market isn’t yet “seeing” runaway inflation. So the Fed isn't likely to raise rates either. Especially with bond volatility back up toward 80, now also in a bullish trend. So, with volatility moving up again, we can expect some chopping with yields until the market gets some resolution on inflation…coming out tomorrow.

2) COMMODITIES – Timeframes matter a lot for these assets. Prices are rising across the complex, and people are finally starting to notice. When you see magazine covers and headlines about commodities, you know the word is getting out. Does that mean we’re due for some kind of mean reversion? Shorter-term…Probably. Technology and other growth areas that underperformed recently could easily catch a bid for a while too. Shorter-term rotations happen all the time. But that doesn’t change the bigger picture. We’re only about five years into what could be described as a commodities supercycle. Historically, these cycles don’t last a few years. They often last a decade or two. Some are betting that this will be the shortest commodities supercycle in history. I don’t think that’s a good bet. The index shown below is a good representation of the entire commodity complex. Roughly one-third of it is energy, including West Texas Intermediate crude oil, Brent crude, RBOB gasoline, and natural gas. Another third is metals, split between precious metals like gold and silver and industrial metals such as aluminum, copper, nickel, and zinc. About 21% is in grains, including corn, wheat, and the soybean complex. The rest is made up of soft commodities like coffee, cotton, sugar, and cocoa, along with livestock such as live cattle, feeder cattle, and lean hogs. What this index is showing is that strength is showing up across the entire asset class. Could commodities pull back for a while? Of course…that’s how trends work. Historically, cycles like this don’t end in five years. And so far we haven’t seen any evidence that this one is any different.

3) VIX – Yesterday, markets gave us what I was hoping/expecting to get.  VIX went from bright green to red, and the S&P 500 had a strong intra-day reversal (with good volume) after opening down fairly hard. Does that guarantee an immediate bottom? No, but these conditions tend to only show up when a bottom is either in or near. VIX is still signaling overbought too. Dealer gamma is still negative. Mostly, that means that while the pressure should be on a declining VIX, it might be within a volatile context. Volatility of volatility is still quite high at 122, but down from 140! Declining volatility of volatility is good. Implied volatility for the S&P 500 proxy (SPY) is at 110% this morning, up from 57% one week ago. That suggests a lot of put buying has happened amidst the uncertainties of war issues. That size of put buying (protection buying) is good as it tends to put upward pressure on prices if VIX can continue to decline within this negative gamma environment. Volatility goes both ways!