Caution! The "rotating bull market" in the commodity market may be an illusion

In recent months, the commodity market has not been characterized by a rotational bull market across different sectors and varieties, but rather by isolated preferences for certain commodities by funds. The absence of a rotational bull market indicates a lack of macroeconomic forces acting on the entire commodity market. Given that many varieties have already reached high levels and weaker varieties have begun to catch up, it is expected that the commodity market may enter a prolonged adjustment period.

In recent months, the commodity market has seen the emergence of star varieties that have rapidly surged, such as gold, silver, corn, PTA, and styrene, all of which have been quite impressive at times. This inevitably raises the question of whether the commodity market is experiencing a rotational rise that ultimately leads to a broad increase in commodities. However, the volatility pattern of the commodity market in recent months has been quite strange and does not exhibit typical rotational characteristics. Even if we assume that commodities are in a sector rotation, the recent trends in non-ferrous and chemical products do not lead to a conclusion of a bull market.

Rare Historical Volatility Pattern in Recent Months

The traditional patterns of the commodity market can be roughly divided into three categories:

First, the differentiation pattern. This is the most common type. The trends of various commodities mainly follow their own fundamentals and fluctuate independently, with relatively limited inter-sector linkage effects in terms of both direction and amplitude. This pattern generally occurs in a macroeconomic context lacking significant themes, where the price movement logic of commodities is dominated by their own fundamentals.

Second, the leading pattern. A typical case is during the supply-side reform period in 2016. At that time, the black series was the clear leading line, with other varieties showing significantly weaker gains compared to the black series. When the black series experienced a correction, other varieties often followed with significant declines. The distinction between leaders and followers is quite clear.

Third, the sector rotation pattern. The commodity market in the summer of 2023 is a typical representative of this pattern. In recent years, sector rotations have typically started in the order of non-ferrous - black - chemical.

The reason the commodity market in recent months is described as strange is that it exhibits characteristics of both a rotational pattern and at times shows signs of a leading pattern, with the two attributes intertwined but not clearly belonging to one category. Precious metals, corn, PTA, nickel, and other seemingly unrelated varieties have all experienced rapid surges at one point. Moreover, the specific trend patterns of different varieties show considerable similarity, leading us to believe that the commodity market was in a rotation, albeit not in the traditional order of non-ferrous - black - chemical, but rather in a disorderly emergence of multiple star varieties, ultimately achieving a broad increase in commodities as the rotation deepened.

However, from the correction of non-ferrous metals in early January, a clear leading pattern characteristic has emerged. When non-ferrous metals corrected, black and chemical products also followed with a comprehensive decline. Non-ferrous metals have had a significant impact on industrial products, and the previous gains of other varieties have generally not matched those of non-ferrous metals. From this perspective, the commodity market is again in a leading pattern. Therefore, it is currently difficult to distinguish which pattern the commodity market truly belongs to.

Chemical Products Struggling to Take Up the Rotation Mantle

Current market sentiment generally believes that the commodity market is in a rotational bull market state. After the strong performances of precious metals and non-ferrous sectors, chemical products are expected to take up the baton for rising prices and initiate a rotational surge. However, we believe that there is a deviation in the market sentiment's judgment First, from the performance of the non-ferrous sector, non-ferrous metals led by copper and nickel have accumulated significant gains and have been on an upward trend for a long time. Currently, although they are consolidating at high levels, the extent of the consolidation is insufficient, and the energy reserves are also not adequate, making it difficult to further initiate a substantial rally.

Second, from the perspective of the chemical products sector, although the market currently has high expectations for it, there are still hidden concerns: on one hand, the starting point for the recent surge in chemical products is not at a relatively low level, but rather has accelerated upward after a long period of significant rebound. This characteristic combines the features of weak varieties catching up and the rebound market's "flash in the pan." On the other hand, looking at the leaders in the chemical products sector, pure benzene and styrene have performed relatively the strongest, but styrene has already accumulated sufficient gains, and the structure of its upward trend is quite complete, making a correction highly probable. Pure benzene, on the other hand, belongs to the weak varieties catching up, with its upward momentum lagging behind styrene and rising extremely quickly, indicating that bulls are unwilling to stay in the battle. Overall, the leaders in the chemical products sector lack the momentum for further upward movement, and the entire sector is in an accelerated phase after a significant rebound, thus chemical products do not have the foundation for sustained long-term increases.

Therefore, the commodity market in recent months is not a rotating bull market related to different sectors and varieties, but rather a situation where certain varieties are favored by funds in isolation. The absence of a rotating bull market indicates a lack of macro forces acting on the entire commodity market. Given that many varieties have already reached high levels and weak varieties are catching up, it is expected that the commodity market may face a prolonged adjustment period.

Source: Hedging Research

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