Key Takeaways
- Monday’s rally confirms a short-term Equity rally is underway into early next week
- Growth might rebound temporarily, but Value still looks compelling for 1H 2022
- Coal stocks have recently broken out again and remain extraordinarily strong
Short-term BULLISH– Equities look to be turning up on schedule, and further strength looks likely into next week before any stalling out and/or reversals back down into May. The churning of the last couple days has now given way to a minor downtrend line break, which structurally turns trends higher in the short run, despite many technical momentum indicators still being negative. Overall, I expect a technical rally in US Stocks to last into 4/19 at a minimum, which should be led by Small-caps, but also a bounce in Technology and Growth. However, this strength likely will prove short-lived, and I still am of the opinion that further weakness is likely into May/June timeframe. Upside targets lie at SPX-4526, with a maximum (in all likelihood) near 4560 before a downside reversal gets underway.
Small & Mid-Cap Growth/Value ratios have broken multi-year uptrends
Given my thoughts on a rally, it’s likely that QQQ outperforms SPY in the next week. Moreover, there are signs also that IWM should outperform both QQQ and SPY. Thus, Small cap Growth, which has been hardest hit, likely rebounds until post April Expiration.
However, this weekly ratio chart of S&P Mid-Cap 400 index relative to SPX shows the break of a relative uptrend going back since 2016 in Growth vs Value. This same intermediate-term trend exists and was broken also for Small-caps vs. SPX. Thus, while a rebound could happen at any time, and should be getting underway for 4-6 day basis, I’m skeptical we recoup this longer-term trend that was broken.
Bottom line, rallies in Growth likely stall out post April expiration and it’s right to consider re-upping the Value trade into mid-to-late April and/or finding ways to hedge longs in Growth. Cycles, momentum and breadth all suggest above-average chance of a retest of February lows into May, and particularly into late June.
Coal breakout looks important and should help this sub-industry continue to show excellent near-term technical strength
This group looks favorable to outperform considering its recent technical breakout combined with a strong geopolitical backdrop which could favorably impact fundamentals. Last week, the European Union officially announced their decision to ban coal imports from Russia starting in August. We’ve heard similar news from Japan as well as the United Kingdom which plan to phase out their imports potentially as early as the end of 2022.
Additionally, we’ve seen this strong sub-sector grow even stronger in recent days as the ascending triangle formation in Coal stocks over the last month just gave way to a favorable technical breakout this week. Thus, at a time when a short supply situation is meeting a technically bullish condition, it looks right to position long, expecting even further strength in the weeks/months ahead.
While Triangle formations can often represent Elliott-wave style “Wave 4” patterns that give way to a “final” wave 5 breakout, it’s going to be right to stick with Coal names until this group gives us a reason to avoid.
Technically favored names include: BTU 2.38% , AMR 1.96% , GLEN, ARCH, CEIX, all of which I expect to be higher in the weeks ahead. Thus, this trade does not look to be late to initiate, and I expect further outperformance out of this part of Energy.
Investors Business Daily has a composite for Coal, shown below, that contains all of these names. Out of 179 “sectors” it tracks, Coal is now number 2 and has moved hardly at all in the last six months. (It previously was Number 1) Thus, until evidence of weakness arises, I favor Coal as a technical long trade and endorse the names above as ones to consider.
Natural Gas also has further upside into May and additional strength likely
Natural Gas has also been “on a tear” lately, and its breakout of last year’s peaks has helped this recent acceleration extend to overbought territory. Note the progress of UNG, the US Natural Gas Fund LP in not only having exceeded last year’s peaks but also to have recouped the prior lows which were important resistance on gains.
Overall, I expect the technical positives of this structural improvement along with lack of completed DeMark weekly exhaustion in UNG -0.23% should translate into additional technical strength in Natural Gas and UNG into May before any reversal. Upside targets for UNG lie at $27.71, then $30.88 and longs are preferred at current levels, looking to use any weakness as a chance to buy dips.
