Chart of the Week - Commodities Cheap

from Supercycle to Cyclical Bear Market, now what?

Remember the “Commodity Supercycle”?

Back in 2021-22 a lot of folk were talking up the Supercycle narrative, and for some very good reasons e.g. prolonged underinvestment in supply by commodity producers, structural and thematic drivers of demand such as the energy transition, but also short-term factors like the stimulus-fueled surge in growth, and let’s face it a key driver of supercycle-narratives was just plain fizzy bullish sentiment.

Since then we’ve been through a cyclical bear market — not the type of cycle many were expecting, and certainly not very super.

But now is not the time to give up on commodities or even to deride the idea of a supercycle, because there are a lot of very good fundamental reasons for commodity prices to go up over the medium/long-term, and a couple of very interesting tactical signs appearing.

This week’s chart shows my composite valuation indicator for commodities (talking in aggregate —at the asset class level; specifically looking at a diversified index of commodities). The key point is commodities look cheap again.

Aside from the reset in valuations, I’ve also noticed a material reset in sentiment, positioning, and allocations: the mood is bearish-to-skeptical now, and a stark contrast to crowded longs and consensus bullishness around the peak of the supercycle-sensation back in 2022.

Meanwhile, commodity producers continue to run tight capex discipline (meaning constrained supply growth), the index itself has established a fairly robust support level as you can see below, and there’s decent odds of a global growth reacceleration into 2025.

So on all counts I’d say things are looking up for commodities.

Key point:  From super cycle to cyclical bear market, commodities are cheap again.

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Cycles & Valuations in Commodities

The chart below is from a post I wrote earlier this year outlining how cycles + valuation signals work in commodities (and how you can design unique valuation indicators like the one I highlighted above to help navigate those cycles).

Just like the stockmarket and economy moves in cycles, commodity markets also move in cycles —driven by clear underlying fundamental, macro, and financial cycles.

When commodity markets are expensive, producers respond by increasing supply and consumers feel the pinch and often demand softens… prices therefore subsequently decline as supply rises + demand falls.

But then it usually goes too far in the opposite direction, prices become too cheap, producers cut back, consumption rebounds, and then prices start moving higher again.

A well-designed indicator will consistently give logical signals (e.g. indicating expensive around market peaks, cheap around market bottoms), and ideally for good reason. Most importantly they will help investors understand where we are in the cycle, and this week’s note is a good worked-example of this in practice.

For more thoughts and concepts on Valuation Signals & Cycles, check out the Video below (from a presentation I delivered yesterday, covering: research process, market cycles in theory and practice, conceptual market models, indicator design and selection —and where we are currently at in the cycle across the major assets and markets):

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Topics covered in our latest Premium Report

Aside from the charts above, we looked at several other themes and issues:

• Market Update: sector rotation, interest rates, spreads, oil and gold

• EMFX Outlook: checking in on EMFX technicals, next steps

• US Dollar: review of USD indicators/charts, where-to next

• China Stocks + Property: getting less bad, and new bull markets

• Commodities: extensive review of the bull case, outlook

• Oil & Energy Stocks: weighing up risks vs opportunities

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Thanks for your interest. Feedback and thoughts welcome.

Sincerely,
Callum Thomas
Head of Research and Founder at Topdown Charts

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