Key Takeaways
- SPX’s roller coaster ride Tuesday proved inconsequential of any trend reversal
- Energy might weaken over the next 4-6 weeks, as Crude takes a breather
- Metals look to be turning down sharply given rally in Real rates
The selloff doesn’t look complete, and Tuesday’s bounce attempt failed to even climb over last Friday’s 4068 lows before weakening back lower to finish just fractionally positive. While some evidence of bearishness and intra-day oversold conditions have started to appear (and some Positive momentum divergence in recent weeks) nothing appears too oversold about daily and weekly RSI readings in the low 30’s compared to prior lows over the last decade. Furthermore, markets still are clinging to the hope of a bounce when no real capitulation has truly been present. Overall, this decline from late March is approaching a 100% alternative projection target to the initial decline from January yet might need to briefly undercut 3900 before even a minor bounce. Bottom line, insufficient evidence to buy dips, and trends remain bearish.
Commodities slowly but surely beginning to weaken
Hard and soft commodities have all begun to slowly roll over in recent days. Base metals have been very hard hit, and now precious metals look to be following suit. I view this weakness as temporary, but also as not having reached its conclusion.
Declines in Copper, Iron Ore, Aluminum, Nickel, Steel, Gold, Silver have caused daily momentum to roll over to negative in recent weeks, and some of the base metals have shown weakness greater than 10% in the past week.
Commodity ETF’s like DBC, the Invesco DB Commodity Index Fund, have severed uptrends going back since December 2021 following the last few months of momentum slowly weakening after many became overbought. A near-term pullback looks likely.
WTI and Brent Crude oil had largely ignored showing major weakness, but now Crude has pulled back to multi-day lows and broken minor two-week uptrends. This should result in gradual weakness to the high $80’s.
Precious Metals also have begun to weaken sharply and look to play catchup to some of the recent underperformance in the Base metals. I expect Gold and Silver to weaken down to test last year’s lows. Cycles for Precious metals like Gold show a June bottom.
Crude oil’s daily chart shows a break of the minor uptrend and could result in near-term selling for XLE and XOP to join some of the recent weakness seen in OIH over the last week.
OIH has been hit unusually hard in the last two weeks and it’s thought that this along with XOP will likely underperform XLE into June.
XLE has been the relative standout of the major Energy ETF’s given the recent market volatility. It’s thought that volatility brings more stability to the Larger-cap names like XOM and CVX, which offer relatively more stability during market weakness, particularly if Crude oil starts to weaken.
Charts below which highlight the relative trends of OIH vs XLE showed false breakouts into April and have now broken down to violate downside support. Much of this illustrates the weakness in BKR, SLB, and HAL which has taken a toll on OIH. This should translate into OIH likely underperforming XLE near-term (which I feel lasts into June). Bottom line, while OIH, XLE and XOP should be buyable on weakness, all of these likely show near-term pullbacks in price as Energy plays catchup.
Trading wise, XLE has technical stops (for those that wish) at 71, but for those who wish for tighter stops, one might consider any close under Tuesday’s 5/10 lows near $75. Any break of $75 likely means a decline down to the high $60’s has begun (which should eventually lead to buying opportunities).
XOP has stops at 124 and OIH (which has already broken support) has targets at $228.40 and then $225 which should prove to be an excellent area to buy dips.
Overall, while Energy remains an area of focus as an overweight this year, this gradual breakdown in momentum with price now following suit, is a technical negative and likely leads this group to weaken in the short run. How one plays this weakness all depends on one’s risk tolerance and time frame for investment. As discussed, this should be tactical only and lead to buying opportunities likely within 4-6 weeks.
Gold and Silver likely weaken further into mid-June
Finally, it’s worth highlighting the inverse relationship between real rates and Precious metals which seems to have worked perfectly in recent years.
As this weekly chart of gold shows going back over the last decade, there’s been a sharp rally in Gold as real rates have fallen (2008-2012) and the same thing also happened from 2018 into 2020. (Note that Gold peaked in August 2020 the same week as Treasury yields bottomed)
Its most recent weakness from mid-March 2022 has occurred just as real rates have pushed sharply higher. This doesn’t look complete and might continue to be an issue into next year.
In absolute terms, Gold should weaken to 1825, but below that level, (particularly on a weekly close), I’m expecting a more severe setback for Gold and Silver and prices could fall to test last year’s lows. (Whether one chooses to use this information for speculation or hedging purposes is completely based on one’s own time frame for investment and risk tolerance.) However, a break of 1825 in Gold does not look like a buying opportunity and could lead down to 1700 or below ahead of a bounce into the seasonally bullish Fall period.
My cycle composite also shows negative trends for precious metals into June before a bounce and then possibly further weakness if/when real yields turn back higher later this year. I’ll certainly monitor this as it goes along. The key takeaway here is that the common notion of Gold being an inflation hedge is not all that simple if real yields are rising.
