COM - COM: Dynamically Trading Commodity Markets
Summary
- I've analyzed static commodity exchange-traded funds before. But now, here's a very interesting commodity ETF with a dynamically changing bias on various commodities.
- Currently, Direxion Auspice Broad Commodity Strategy ETF has net long exposure to gold, soybeans, sugar, copper, and silver.
- I have a neutral outlook on both gold and soybeans; commodities which together make up more than 56% of the overall net exposure. Technical analysis also suggests mixed views.
- Hence, I have a "hold" outlook on COM.
Introduction
I have analyzed various commodities exchange-traded funds ("ETFs") before; broad commodities ( COMT ), energy-focused ( DBC ), and industrial metals ( DBB ). All of these ETFs are static in their exposures. In other words, the exposures are roughly consistent all the time.
As I was browsing Seeking Alpha's ETF Screener , I came across a very interesting commodity ETF that dynamically changed its weights over time. In other words, an actively managed ETF. Here's my analysis of it.
COM: Betting on a Commodities Trader
The Direxion Auspice Broad Commodity Strategy ETF ( COM ) dynamically invests in various groups of commodities. So, investing in this ETF is like investing in a commodity-specialist investor.
Exposures Mix
Current commodity positioning
COM ETF Sector Exposure (COM ETF Website, Author's Analysis)
Currently, COM's positioning is bullish on key precious and industrial metals; gold, silver, and copper. It is broadly neutral on agricultural commodities, except for sugar and soybeans, where the bias is bullish. In the energy sector (crude oil, natural gas, heating oil, and gasoline) the net positioning is flat.
Net exposures mix
COM ETF Net Exposures Mix (COM ETF Website, Author's Analysis)
The two largest active bets in COM right now are long gold with an almost 30% weight and long soybeans with a 27% weight.
Fundamental Drivers of COM
Naturally, the underlying supply-demand dynamics of the five long commodity exposures will drive the performance of COM. In this article, I deep dive into the top two exposures: gold and soybeans:
Recession and rates keep gold neutral
Gold currently finds itself range-bound between $1630 and $1990:
Gold in a Range (TradingView, Author's Analysis)
Gold is an effective hedge over inflation over the long term. However, in the shorter term, fear in the stock market and interest rates are far more important drivers of gold prices:
When markets are expected to go down, gold is often viewed as a safe haven instrument to store value and escape the equity market routs. Hence, gold typically performs well in a recession. That may be part of the reason for why gold prices have been rising recently, especially as the chances of a recession have increased over the past few months.
Rising Federal Funds Rate (TradingView, Author's Analysis)
However, this effect is offset somewhat by interest rate hikes, which makes holding gold, an instrument that gives zero yield, much more expensive. With the Fed keeping a hawkish view , and on the back of the largest sequence of rate hikes since over a decade, there will probably be a limit to how much gold can advance.
Overall, this leads me to have a neutral outlook on gold.
Soybean shortage, but also waning global demand
Brazil, USA, and Argentina are the top 3 producers of soybeans in the world:
World Soybean Production Shares (Soybean Processors Association ((SOPA)))
Soybean is currently facing a supply constraint because of severe La Niña-related weather impacts in Argentina and Brazil. This is a tailwind for soybean prices.
Major users of soybean are China, the United States, Brazil, India, the EU, and Argentina. Demand for soybean oil from major users such as China and India is expected to be low . India's 2022-23 soybean oil imports are expected to go down by more than 20% on the year at 3.35 million MT due to a good domestic harvest in the country. China's demand may be dragged by COVID restrictions, especially if it continues to be plagued with re-opening interruptions .
Overall, this leads me to lean neutral on soybeans as well.
Technical Analysis
If this is your first time reading a Hunting Alpha article using technical analysis, you may want to read this post , which explains how and why I read the charts the way I do, utilizing the principles of Flow, Location, and Trap.
Relative read of COM vs S&P 500
COM vs SPX500 Technical Analysis (TradingView, Author's Analysis)
After looking at the relative chart of COM/SPX500 above, I anticipate a downward movement toward the immediate support level, suggesting underperformance vs. the S&P 500 ( SPY , SPX ). Historic volatility can be observed at the support level formed in 2022, which previously acted as a key resistance area in 2020 and 2018. COM/SPX500 fell 39.7% from its all-time highs and later gave a pullback towards key resistance zones.
Standalone read of COM
COM Technical Analysis (TradingView, Author's Analysis)
A signature bubble move can be observed in the standalone COM chart above. A bubble move is identified by observing a sudden, accelerating rally without any preceding trap. These moves are typically followed by sharp selloffs after the euphoria in the market sentiment is exhausted. I believe $32 can act as a key weekly resistance zone with historic volatility. There seems no reliable support area, but the $26 to $27 zone can act as a demand zone. I anticipate some downward movement but not immediately.
Summary
Due to my neutral outlook on the key commodities for which Direxion Auspice Broad Commodity Strategy ETF has long exposure and my assessment that COM is due to go down but not immediately, I have a "hold" outlook on this ETF. I will monitor the underlying supply-demand dynamics (as I always do) of the core commodities present in COM to look for opportunities at another point in time.
For further details see:
COM: Dynamically Trading Commodity Markets