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.
$.SPX(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $.IXIC(.IXIC)$ $Invesco QQQ(QQQ)$ $NASDAQ 100(NDX)$ $.DJI(.DJI)$ $GLOBAL X DOW 30® COVERED CALL ETF(DJIA)$
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