COMT: Bearish Q1 Macro Risks, Poor Momentum As 2024 Gets Going

The US Dollar Index got off to a hot start in 2024. After falling below the 101 level for a moment during the holidays, the greenback has shot higher, above 102, near a key area of long-term support. Financial conditions loosened substantially from October amid rising stock prices, compressing credit spreads, lower interest rates, and indeed a weakening dollar. A reversal may be happening now.

Strength in the dollar is often bearish for dollar-denominated commodities. With weaker Q1 and Q2 US real GDP growth expected, as well as a bearish turn in commodity price technicals, I have a sell rating for Q1 on the iShares GSCI Commodity Dynamic Roll Strategy ETF (NASDAQ:COMT).

Dollar Bounces Off Support, Bearish for Commodities

Best 2-Day Gain for the Dollar in 11 Months, Dollar Up 4 Sessions in a Row Through January 2

For background, COMT seeks to track the investment results of an index composed of a broad range of commodity exposures with enhanced roll selection, on a total return basis. It offers investors access to commodities across energy, metals, agriculture, and livestock sectors, through a rules-based futures strategy designed to minimize costs associated with futures investing and can be used to hedge portfolios as well as diversify against inflation, according to iShares.

The inflation battle may indeed be over. I took a look at the future breakeven markets, and TIPS yields have moved lower, implying a 10-year expected inflation breakeven rate under 2.2% today – the lowest percentage since late 2020.

Inflation Forecast to be Benign: 10-Year Breakeven Near 2.2%

Of course, domestic growth is another key variable for commodities, and Goldman Sachs sees slower growth over the first half of 2024. The consensus economic expansion outlook is even more lukewarm, with real GDP advances near just 0.5% on a seasonally adjusted annual basis.

US Real GDP Growth Seen Slowing in 1H24

The bull case for COMT is that tensions in the Red Sea, among other ongoing conflicts in the Middle East, lead to an upside in oil prices. We are not seeing that play out in price action yet, however. As it stands, the current prompt-month price of WTI is merely near $70, down from its recent high in the mid-$70s while domestic gasoline prices threaten to break below $3.

I do see strength in the gold market amid big global central bank buying and a solid technical chart, but gold represents just a small part of COMT’s exposure. Its top 10 holds feature a high weight in the technically vulnerable January 2025 contract of WTI crude oil, with global Brent Crude commanding a nearly 20% weight in the fund. In the aggregate, iShares notes that the portfolio is 57% in Energy, 18% in Agriculture, 11% in Industrial Metals, 8% in Livestock, and just 6% in Precious Metals.

COMT: Holdings & Dividend Information

COMT Exposure: Energy Heavy

The bigger picture for investors to consider, COMT features a moderate annual expense ratio of 0.48% while share-price momentum, which I will detail later in the article, is quite weak in COMT and a more heavily traded commodity tracking ETF. COMT has paid a high $1.30 per share dividend over the past year, but the payout history tends to be volatile. Seeking Alpha’s ETF Grade assigns a poor Risk grade, too, though liquidity with COMT is decent given its average daily volume of more than 280k shares, but its 30-day median bid/ask spread can be wide at times, averaging eight basis points, so applying limit orders is encouraged in order to manage risk, in my view.

Seasonally, COMT tends to post mixed returns in the first quarter with an average unchanged performance in January, a notable February advance, but then a loss in March. April tends to see the best returns in the fund’s 11-year history.

COMT Seasonality: Mixed Q1 Results Historically

The Technical Take

For the technical outlook on commodities and COMT, I investigated the chart of perhaps the most liquid commodity ETF – the Invesco DB Commodity Index Tracking Fund (DBC). I compared the total returns of both DBC and COMT over multiple timeframes, and the results were similar, so I am confident that spotting key price points on DBC can help when investing in COMT. Notice in the chart below that DBC is threatening to break down below key support at the $22 mark.

Given a recent high above $25.50, which came about in the middle of a bearish rounded top pattern, a measured move price objective to near $19.50 would be in play, particularly if we see a weekly close under $22 – that would have similar negative implications for COMT. With a declining long-term 200-day moving average, the trend favors the commodity bears right now. Moreover, there is a high amount of volume by price in the $22 to $27 zone, which may make rally attempts tough on the bulls. Finally, the RSI momentum gauge at the top of the graph is quite bearish, printing lower lows, confirming the trend down in price.

Overall, the chart has more bearish than bullish risks as DBC threatens to break down significantly.

Commodities Breaking Lower, Another 10% Retreat In Play

The Bottom Line

I have a sell rating on COMT. I see bearish macro and technical factors on the fund looking out to the end of the first quarter. Buying on a pullback about 10% lower from here on COMT could be a more prudent tactical approach.