I spend a lot of time talking about markets.
That comes with the territory. It happens every day whether I plan for it or not.
Sometimes it’s a conversation with a colleague on the phone or through text. Other times it’s at dinner or a happy hour.
Even when I’m on vacation with my family, someone at the pool eventually figures out what I do for work and the questions begin.
Last week I was in Miami, where I grew up, visiting my grandmother. Even she wanted to talk about markets.
She was asking me about gold and why it is above $5,000 an ounce, mostly because she’s trying to figure out what to do with a bunch of jewelry she never wears.
So yes, it follows me everywhere. And there’s one thing I notice in almost every one of these conversations.
Investors are usually talking about completely different timeframes without realizing it.
One person is thinking about the next few hours. Someone else is focused on next month. Another person is talking about the next 10 years.
And yet everyone is debating the same question as if they’re talking about the same thing.
They’re not.
Are we discussing what the market will do this week? Next month? Over the next year? Or sometime in the next decade?
Because the answer can be totally different depending on the timeframe you choose.
Know your timeframe.
Commodities Supercycle
If you want a good example of why timeframes matter, look no further than commodities.
These markets have had an incredible run. 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? Probably.
Technology and other growth areas that underperformed recently could easily catch a bid for a while. Shorter-term rotations happen all the time.
But that doesn’t change the bigger picture.
We’re only about five years into what looks like a commodities supercycle.
And historically, these cycles don’t last a few years. They last a decade or two.
So the real question becomes this: Are you betting that this will be the shortest commodities supercycle in history?
I’m not.
Kevin Gordon, Head of Macro Research and Strategy at Charles Schwab, pointed out this week that the Bloomberg Commodity Spot Index just hit new all time highs:
That index 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.
In other words, strength is showing up across the entire asset class.
Could commodities pull back for a while? Of course they could. That’s how trends work.
But a temporary pause is not the same thing as the end of a cycle.
Historically, cycles like this don’t end five years in. And so far we haven’t seen any evidence that this one is any different.
Rotation Among Commodities
Just like sector rotation drives bull markets in equities, you see similar rotation within commodities.
They rarely all move at the same time.
First it was gold. Then silver joined the party. After that came copper. More recently it’s been energy.
Along the way you’ve seen different agricultural markets step in and take their turn.
That’s how these cycles tend to unfold. Not everything goes up at once. Not everything goes down at once.
But over time the group continues to put in higher highs and higher lows as leadership rotates from one pocket of the market to another.
And here’s the part that really stands out to me.
Nobody owns this stuff. Especially energy.
Americans don’t own commodities. Foreign investors don’t own commodities, either. What they own is technology. They own American technology. They own growth stocks.
That’s where the capital has been concentrated for years.
Which is exactly why I think the opportunity in commodities is still so interesting.
I want to keep monitoring the space closely and to continue picking our spots, both in terms of timing and which commodities we want exposure to.
Because I believe the opportunities are still ahead of us.
New all-time highs are not evidence of a downtrend.
And if this truly is a commodities supercycle, we’re probably still in the early innings.
Maybe this lasts another five years.
Maybe it lasts 20.
Either way, the lesson is the same.
Know your timeframe.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs