The long-term bullish “supercycle” scenario for commodity prices is beginning to fade as technical indicators begin to deteriorate, Ned Davis Research said in a Tuesday note.
That could have big implications for the stock and bond market, as investors grapple with the worst start to a year since 1970.
“The NDR commodity pattern has moved into the bearish camp, now at its lowest level since June 2020. As a sign of diminishing inflationary pressures, this may be a positive indication for bonds, stocks, or both. “, said NDR.
The research firm’s commodities model specifically saw its breadth deteriorate, as only seven of its 19 commodity components are trading above their 200-day moving averages. Meanwhile, only three of the commodity components are above their 50-day moving averages.
The damage to commodity prices has been seen across the board from copper to oil, with both commodities entering bearish territory in recent weeks. Copper fell 31% from its cycle high and WTI Crude Oil fell 24% on concerns about the economic environment.
Additionally, the Baltic Dry Index has experienced a sharp decline, falling more than 50% from its cycle peak. This suggests that supply chain bottlenecks are finally easing, according to the note.
“It remains to be seen whether demand is slowing enough to rein in inflation,” NDR said. If inflation continues to rise, it could help commodity prices regain their upward momentum, increase the risks of stagflation and lead to a secular crisis.
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But a pattern of lower highs and lows in commodity prices since 2009 points to a secular downtrend, and that could put further pressure on calls for structurally higher energy prices if the pattern holds.
“There is less and less evidence of a secular commodity bull, or what is often called a supercycle, especially now that our commodity pattern has turned bearish again,” NDR said.