One reason for caution in commodities

Jay Kaeppel

2023-10-19

Key points

Given the state of geopolitics and the continued concerns regarding inflation, commodities seem poised for better days
Still, seasonality suggests that commodity traders not throw caution to the wind at the moment

CRB Seasonality enters a period of potential weakness

The CRB Index is a commodity index calculated based on the prices of commodity futures. The index consists of 19 components, grouped into four groups: 1) energies, 2) metals, 3) grains, and 4) softs. The composition of index components can change over time; this index is often the benchmark for many commodity ETFs.

The chart below displays the annual seasonal trend for the CRB Index. The period highlighted in the red box extends from TDY #198 through TDY #236. For 2023, this period extends from the close on 2023-10-16 through 2023-12-08.

It looks pretty ominous, right? And on one hand, it is. The chart below displays the hypothetical growth of $1 in the CRB Index only during the TDY #198 through TDY #236 period every year since 1995. The cumulative result is a loss of -54.5%.

So we should avoid commodities for the next several months, correct? Here's where it gets a little more complicated. As it turns out, the seemingly perpetual down-trending nature of returns shown in the charts above stems from the fact that down years tend to be significantly worse than up years. The actual number of up years versus down years is split pretty even.

The table below summarizes the performance of the CRB Index during the period in question.

Note that the Win Rate is essentially a coin flip - 14 times up, 15 times down. However, the average and median decline is significantly greater than the average advance. Even more telling, note that there have been seven declines of -7% or more. There have been 0 gains over +7% (the maximum gain was +6.7% in 2020).

What the research tells us…

With a 48% Win Rate, it is not technically correct to say, "History suggests that commodities will decline in the months ahead." However, It would be accurate to say, "If commodities decline in the months ahead, the threat of a significant decline is great." So the real question is, "Are you comfortable allocating money to commodities right now?" For a trader intent on owning commodities, some other recent research (see here, here, and here) appears to favor metals - particularly gold (which some research suggests is a leading indicator of overall commodity prices) - may be the place to focus.