Key Takeaways
- US equities bounce continues, but is nearing upside price targets for SPX and QQQ
- SLX has just broken out to new yearly highs which bodes well for continued strength
- Materials 2021 relative breakout vs SPX is now continuing and this group should continue to be overweighted for outperformance
The near-term bounce for US equities continues, and likely can extend up to levels near SPX-4550-70 for SPX and QQQ-363 for QQQ. However, this bounce is getting extended, and I don’t expect that prices push to new highs right away, technically speaking. Given current Elliott-wave patterns, cycles, DeMark exhaustion, and the start of negative momentum divergence on intra-day charts, I feel that February 2022 peaks should mark strong resistance for this bounce. How one plays a possible reversal and how to position depends on one’s timeframe and risk tolerance as there remain many things still working very well. For timing purposes, any daily close back under 4455-SPX and 350-QQQ would mark short-term sell signals into next week.
Steel ETF breaks out, as base metals continue to soar
While Technology has been a notable laggard on the bounce from late February, many groups continue to work quite well. Of the four groups I had highlighted to outperform for 2022, three of these are in the top quartile for best performance on a rolling One-month percentage basis: Energy, Materials and Healthcare. These are all outperforming groups and should be overweighted, and each has shown gains of more than 6% on a one-month basis through 3/24/22.
Overall, commodities continue to show very good strength given the supply shocks, and the Russian invasion could continue to make high inflation an issue for the next 4-6 months in my view. Thus, some of the recent strength seen from Base metals like zinc, iron ore, copper, tin, and lead should not likely dissipate anytime soon.
Steel, of course, is formed by the base metal Iron and SLX 1.40% , the VanEck Steel ETF, has just broken out above last Spring’s peaks to new yearly highs. This is a very constructive one-year base, and the surge above May 2021 peaks of 68.21 likely carries SLX up to targets at 77.81, or a 1.618x Fibonacci extension of the initial rally from 2016 lows. The top five constituents of SLX are: VALE 2.37% , RIO 0.87% , NUE 0.37% , MT 1.97% , and X 1.18% . All of these are technically attractive despite being near-term extended, and I anticipate today’s move helps the Steel group continue strengthening.
Materials as a sector is also set for further outperformance and should be overweighted
Sector-wise, Materials has returned over 8% in the last month, lagging only Energy and Utilities. Much of this has been commodities driven, and the Agricultural chemical stocks like MOS and CF are sector leaders, while the base and precious metals names are outperformers as well.
The performance, however, has been staggering, and doesn’t look to be ending anytime soon: MOS 1.82% , CF -0.10% , NUE 0.37% , FCX 2.50% , and NEM 2.50% are all up more than 17% in the rolling one-month period, and these remain Materials stocks to overweight until proven otherwise.
In equal-weighted terms, Materials broke out vs SPX in mid-2021, breaking a 10-year downtrend for the group. This was the early warning signal of potential outperformance for me technically speaking, and a key reason why I chose this group to outperform in 2022. Following just a brief period of consolidation, the Materials group has come back with a vengeance this year on the ongoing commodity boom. Its performance of -2.55% is far better than any other S&P SPDR ETF in YTD performance except Energy and Utilities (which are the only two groups positive for 2022 in data through 3/24/22)
It’s bullish for me to see a technical breakout of a long-term downtrend line which is followed by just brief consolidation before turning higher again. (Invesco’s Equal-weighted Materials ETF (RTM) is shown below plotted in relative terms in the bottom half vs SPX) I expect this group should continue to outperform, and despite its low representation within SPX, further relative strength looks likely in 2022 as the base/precious metals and agricultural commodities strengthen more.
Equity Put/call ratio starting to show aggressive call buying vs Puts This rally in recent weeks doesn’t look to have gone unnoticed. The CBOE Equity Put/call ratio has now dropped back down under 0.50 in recent days, signaling that calls are being bought at a more than 2/1 ratio over puts. This ratio was this low back in early February ahead of the minor market peak and bottomed out under 0.40 last November, when Equal-weighted indices like Value line peaked as well as the NASDAQ Composite and DJ Transportation Average.
Overall, this isn’t a comforting sign to see this P/C ratio dive to these levels when QQQ has not even regained 50% of its former decline. In my view, this signals that our bounce likely will not be able to continue unabated, specifically given some of the other signs I’ve pointed out regarding Cycles, negative momentum divergence, and DeMark exhaustion (TD Sell Setup possible by Friday/Monday) that should make April potentially a more difficult month than March. Bottom line, this is but one piece of the sentiment puzzle; Yet it shouldn’t go overlooked, as investors seem to be climbing aboard this rally quickly and sentiment is certainly no longer bearish.
