Tough to make much of Tuesday’s intra-day reversal, but the strength in Technology looked like an interesting and positive development that served to take away a bit of the negatives of what’s been happening lately within the commodity space. WTI Crude’s nearly 10% drop on Tuesday caused meaningful breakdowns in many Energy related ETF’s which looks to continue. Meanwhile, breakdowns in Gold, Silver, Copper all look to show further weakness over the next few weeks. Daily charts of SPX show the important areas of trendline resistance that will need to be exceeded to have any real confidence of a meaningful bottom. Initial areas of interest lie at 3946 near late June peaks, which shouldn’t be surpassed before SPX makes a final stab lower to break 3636. I’m expecting that Treasury yields bottom out in the next 1-2 days, and a lift higher in rates could cause a deterioration in Technology that should prove to be an excellent buying opportunity by the third week of July. Overall, weakness in July should be buyable.
WTI Crude tactical decline has started to pick up speed
While it might be early to speculate that recession fears are driving Crude lower, the Dollar’s recent surge might be finally having the bearish effects that many thought should have been bearish for WTI Crude for some time.
Crude oil fell over 8% in trading Tuesday based on its front month August futures contract. This brought prices to the lowest levels since mid-May and suggests that additional weakness should be likely which could take prices down to $91-92 initially, but eventually to the high $80’s.
Energy ETF’s like XOP, XLE, OIH all dropped to multi-month lows in trading Tuesday, and an additional 5-7% weakness looks very possible in the weeks ahead before these start to stabilize.
Crude oil’s two-hour chart is shown below which illustrates this substantial breakdown to new monthly lows. Technically, I believe it’s likely that the selloff from late June should at least approximate the one originating from early June in price points lost. This would put near-term targets down in the low $90’s, a level which seems reachable within the next few weeks.
Overall, one should avoid trying to buy dips in Energy until the 3rd or 4th week of July, and it’s expected that both Energy and Materials are premature to buy.
Gold breakdown likely results in weakness into late July before a bottom
Gold also finally joined Silver in weakening back to new monthly lows and looks to be setting up for the final stage of its washout to test last summer’s lows.
Technically this break of the near-term triangle in front month Gold futures signals that Gold should be in the final 5th wave of its 5-wave decline from March 2022 peaks.
US Dollar strength has directly coincided with Gold’s weakening, and until we see more evidence of real yields starting to recede, having a bullish bet on Gold requires a bit more patience between now and late July.
Downside targets lie at 1685, and a drop back under 1700 looks probable in July, ahead of a seasonally bullish bounce. At present, Tuesday’s breakdown looks to extend, and buying dips looks early. Investors should hold off on buying XME 0.09% at current levels for 2-3 weeks, and expect that both precious and base metals likely could weaken further.
5-Year Breakevens show inflationary pressures likely ebbing
Interestingly enough, one of the most closely watched inflation gauges looks to be suggesting that a new disinflationary trend could be taking hold.
The 5-Year breakeven rate measures the difference between a nominal bond and an inflation-linked bond of the same maturity. This largely implies what market participants feel inflation should be like in the next 5-years, on average.
Given that this was trading back at 2.46% back in mid-April and has recently fallen to 2.06%, this looks like a substantial drop which has occurred as the commodity selloff has continued.
While a rally does appear likely over the next couple months, I’m skeptical that April peaks need to be surpassed, given the extent of recent momentum deterioration. The symmetry of this current pattern argues for a bounce, which likely makes a lower high before rolling back over. I’ll be monitoring this closely in the weeks to come, but at present, this looks like a fairly important drop in such a quick amount of time. Technically speaking, this looks to be a positive for the FOMC at a time when most have concentrated closely on how or what might be possible to bring down inflation.
