Commodities may be due for a bounce

Key points

• After trending lower for twelve years, commodities rallied hard from April 2020 into July 2022
• Commodities as an asset class have spent the last seven month consolidating and pulling back
• The CRB Index is entering a seasonally favorable period, and commodities may be due for a bounce

CRB Index as a proxy for commodities

According to Investopedia:

The Commodity Research Bureau Index (CRBI) acts as a representative indicator of today's global commodity markets. It measures the aggregated price direction of various commodity sectors.

This commodity index comprises a basket of 19 commodities, with 39% allocated to energy contracts, 41% to agriculture, 7% to precious metals, and 13% to industrial metals. The CRB is designed to isolate and reveal the directional movement of prices in overall commodity trades.

The chart below displays the annual seasonal trend for the CRB Index.

Note that the period from Trading Day of the Year #28 through TDY #44 has a tendency to witness strength. For 2023 this period extrends from the close on 2023-02-10 through 2023-03-10.

CRB Index performance during this short favorable period

The chart below displays the hypothetical growth of $1 invested in the CRB Index only during this favorable period since 1994.

The table below summarizes CRB Index performance during this favorable seasonal window.

Real-world commodities performance

The CRB Index cannot be traded directly. However, numerous commodity-index-based ETFs are highly correlated to the CRB Index and can be used as a proxy for commodities as an asset class. One of the most heavily traded is the Invesco DB Commodity Index Tracking Fund (ticker DBC). As of February 2023, DBC holdings included:

• Energy 50.5%
• Precious Metals 11.37%
• Agriculture 24.02
• Base Metals 14.13%

The two charts below show the similarity in performance between CRB and DBC. This makes DBC a reasonable proxy for traders looking to add commodities exposure.

The chart below displays the growth of $1 invested in ticker DBC only during TDY #28 through TDY #44 for the CRB Index since DBC started trading in 2006.

The table below summarizes DBC performance during this favorable seasonal window.

What the research tells us…

Following a seven months long consolidation, traders should not be surprised if commodities attempt a rally. When we factor in the favorable seasonal period that the CRB Index is entering, the odds of at least a "bounce" rise to the level of consideration. In the old days, the only way traders could access commodities was via futures trading or the cash market; neither a good choice for most individual traders. Fortunately, traders can now gain exposure to commodities as an asset class just as they would buying shares of stock via the use of ETFs. The one caveat is that commodities can be quite volatile, and traders must first assess whether or not they actually want exposure to commodities.