2023-06-22 13:59:57 ET
Summary
- The Invesco DB Commodity Index Tracking Fund printed a bullish engulfing candlestick pattern last week, indicating a potential shift in favor of the resource trade.
- DBC has a high management fee and lackluster long-term performance, however, making it better suited for tactical trades and intermediate-term views.
- The long-term technical trend appears bearish, but there are signs that the downtrend is losing strength, leading to a hold rating on DBC.
- Softening global real GDP growth estimates for 2023 and poor seasonal trends also lead me to issue a hold rating.
The tech trade has been hard to beat this year. High-growth equities have sharply outpaced cyclical stocks and the value style in 2023, and that includes the broad commodity complex. But I see some signs that investors are turning back toward the resource trade.
Hence, I have a hold rating on the Invesco DB Commodity Index Tracking Fund ( DBC ). Just last week, DBC printed a bullish engulfing candle on the weekly view, but there are other cautious data points to acknowledge.
DBC Weekly View: Bullish Engulfing Candlestick Last Week
Indeed, there is more to asset allocation than just what the chart might say. For background, DBC seeks to track changes in the DBIQ Optimum Yield Diversified Commodity Index Excess Return plus interest of the fund's holdings. The rules-based index is composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world. The Fund and the Index are rebalanced and reconstituted annually in November, according to the issuer .
DBC features a high management fee of 0.85% annually (a 0.02% estimated futures brokerage fee yields a total expense ratio of 0.87%) and carries a low 30-day median bid/ask spread of just 4 basis points as of June 21, 2023. Traders can own DBC on margin, trade its options, and engage in short selling. With a 30-day average trading volume of more than one million shares, it's a popular way to play commodities. I assert, though, that its high fee and lackluster long-term performance make it better suited for tactical trades and for expressing intermediate-term views.
Digging into the portfolio and its process, DBC is a 3-star Bronze-rated ETF by Morningstar . Energy is by far the biggest commodity component of the allocation. More than 48% of DBC is WTI crude oil, Brent crude, Gasoline futures, NY Harbor ULSD, and Henry Hub Natural Gas. Precious metals are a small piece of the ETP while agricultural soft commodities are a material 27.2% of the fund.
DBC Portfolio: Heavy In Energy Commodities
A key risk for a long position in DBC is how the US Dollar performs. In general, a rising greenback is a negative for commodities. Also, important to monitor are global growth trends. Softer demand around the world is a bearish factor, particularly right now, should 2023 Real GDP estimates fall.
USD Has Trended Lower This Month
Global Real GDP Growth Forecast Takes A Dip (Goldman Sachs)
Seasonally, now is a lousy time to be long commodities, however. The below chart from Equity Clock illustrates that the early June through early October stretch is often a period of downside price action in the resource trade, so this is a bearish factor to weigh.
Commodities With Bearish Q3 Seasonal Trends
The Technical Take
With a positive near-term rebound but weak calendar trends taking place, the long-term technical trend appears bearish at first blush. Notice in the chart below that DBC is mired in a protracted downtrend that began more than a year ago. With a negatively sloped 200-day moving average and a series of lower highs and lower lows, the bulls have their work cut out for them.
But I notice that along with the aforementioned weekly bullish engulfing pattern, there's also a bullish RSI momentum divergence as the price has drifted lower. Now, the onus is on the bulls to take the fund higher through the falling 200-day and above the April peak of $24.59, but there are inklings that the downtrend is losing its strength. I also see that DBC found buyers at $22 - that is right near the October 2021 peak, which had been resistance. Technicians call this a point of polarity - the old "what had been resistance becomes new support" mantra. Therefore, we have a bogey price point to watch from the long side should DBC dip.
DBC: Persistent Downtrend, Falling 200-Day, Declining Volume, Bullish RSI Divergence
The Bottom Line
Putting it all together, I have a hold rating on DBC. There are signs that commodities are starting to catch a bid, or at least that the bears are slowly losing their grip on the complex.
For further details see:
Commodities Trying To Rally Amid Bearish Global Growth Trends, DBC A Hold