Commodity trade starts to kick into gear
- SPX and QQQ remain range-bound, and trends have not given way despite churning.
- Precious metals and mining stocks remain one of the better areas for outperformance.
- Crude oil shorts have reached near four-year highs just as WTI Crude is bottoming.
Equity indices continue to grind in the short run, and near-term trends over the last week have been neutral as part of the downtrend from early February.
SPX is guided by a 130-point range with 3909 being important support, while 4039 is key to exceed to drive SPX higher. Until last week’s high to low range is exceeded, it’s correct to call the near-term trend neutral, not bullish or bearish.
Technology has dropped off in relative strength over the last few days. However, timing indicators suggest Tech should still push back towards highs in the seasonally bullish month of April. Despite the minor drawdown, stocks like AAPL 0.04% and MSFT -0.23% have not broken uptrend line support of their rallies from March lows and remain well over support from December lows.
Thus, some mild rotation has gotten underway which has aided the Defensive sectors like Staples and Utilities along with Healthcare.
Energy to its credit has snapped back right on time given the combination of bullish cycles, bullish seasonality and bearish sentiment. Additional strength still looks likely for Energy as this sector should begin to outperform.
Commodities have begun to spring back to life with outsized gains in the precious and base metals along with Energy in the last week. Most of the soft commodities have begun to trend higher along with the Grains. Overall, the commodity space looks attractive, and I expect both Energy and the Metals should be excellent longs along with the stocks that correlate closest to performance.
As the daily chart shows below, breaks of this recent congestion bordered by the trendlines, up and down (shown in green) will be important towards driving the near-term trends and momentum. Until resolved, this pattern is choppy, and neutral.
Gold miners attractive near-term into April
Given the recent rolling over in real rates in the last few weeks, Gold and silver have turned back up sharply. Metals and mining stocks have also followed suit, with short-term breakouts being seen on popular ETFs for mining stocks like VanEck Gold Miners ETF (GDX 3.34% )
This looks quite positive for gold miners and likely drives this ETF back to new monthly highs into April. While late January peaks might offer some minor resistance, it’s expected that GDX is headed back to the high $30’s without much trouble.
Following this rally, which should coincide with Gold rallying $100 to test last year’s highs just over $2070, Gold and Silver likely could begin a correction into Summer.
Bottom line, the short-term, and intermediate-term trends remain bullish. The key time of “concern” for Gold lies between May and Late July. Following a correction from 2070, one should look for Gold to bottom in the Summer and start back higher to match its bullish Fall seasonality at a time when rates should move steadily lower.
Weakness in May could be driven by US Dollar strength and Treasury yields turning back higher, which for now, looks premature.
Short Bets on WTI Crude have reached four-year highs
CFTC data (Commodity Futures Trading Commission) on WTI Crude short bets illustrates that shorts have expanded sharply for non-commercial positioning.
This is interesting and is a key part of the sentiment equation that argues from a contrarian perspective that Crude could be close to bottoming.
Overall, negative sentiment combined with bullish seasonal factors and bullish cyclical patterns suggest Crude should be turning higher. Energy should be overweighted for Q2, and very well could outperform Technology which I discussed in recent notes.
Treasury sentiment still looks quite muted; Rates likely to fall into May which should benefit Banks with unrealized losses
Interestingly enough, this rapid 70 basis point decline in rates looks to be having precious effect on Treasury sentiment.
CFTC data from 3/20/23 shows that non-commercial Treasury positioning remains quite negative (i.e. most investors expect yields to still rise).
While this might be correct in the back part of Q2, the current momentum and cycles still project rates to fall into May.
Overall, I see this recent stabilization in rates near former monthly lows to prove short-lived, and expect a further plunge in rates as April gets underway. I’ll discuss downside targets for yield as this move back lower gets underway.
The weekly chart below highlighting CFTC non-commercial Treasury positioning remains near the lowest levels in five years. While the recent rate hike might have caused many to expect an upcoming pivot, it doesn’t seem to be widespread in this Treasury sentiment. Despite a one-week lag, this remains quite bearish (indicating from a contrarian perspective, that yields should still have an excellent chance of trending lower).
