Energy stocks have diverged sharply from WTI Crude
- SPX near-term trend still bearish, but decline likely complete by end of week.
- Energy stocks have diverged positively from WTI Crude. This looks important.
The selloff which began last Tuesday does not yet look complete, but I’m expecting this will be finished by this Friday into Powell’s Jackson Hole speech. Given the extent of the recent selloff and accompanying gaps, it’s possible that 4100 might be violated by a small amount. However, I’m not expecting that 50% of SPX’s rally from mid-July should be undercut. Thus, expecting a bit more weakness, though with a floor near 4000 makes sense into end of week. As has been discussed, cycles still point higher into September, and counter-trend signals of DeMark exhaustion were not present on daily, nor weekly charts last week. These facts along with near-term intra-day oversold conditions and the fact that Growth remains trending up vs Value, give me confidence that markets should still push higher into September.
WTI Crude doesn’t look to have bottomed just yet, though Energy is acting quite well
Despite the last four of five “UP” days for Crude, this doesn’t seem to have bottomed just yet and weakness looks likely down to $80-$82 which might prove more important.
Energy stocks largely have ignored Crude’s decline of late and XLE-0.29% , XOP and OIH-1.21% have all recently turned up fairly sharply. Energy remains the best performing GICS Level 1 sector on a rolling 1-month basis as well as a rolling 1-week percentage basis.
This positive divergence between Energy Stocks and Crude is worth paying attention to, and likely makes the Energy sector attractive to consider buying dips in, on any selloff in September.
Downtrends remain intact for WTI Crude and cycles point lower into September/October.
WTI Crude has weekly trendline support near $80, and Elliott wave formations show its selloff from June as being corrective and should translate into buying opportunities in the next month.
Overall, buying dips makes sense in Energy and while my forecast was correct on Crude selling off the mid-80’s, I assumed this would have a larger negative effect on Energy as a sector (which largely has not materialized). One should look to position long on any further WTI Crude weakness to the low $80’s and buy dips on seasonal SPX weakness in Energy in September.
Healthcare downturn vs SPX looks meaningful, but likely to stabilize in September as SPX peaks
Interestingly enough, Healthcare’s attempted breakout relative to the SPX looks to have been a bust. We see that this multi-year relative breakout (in the lower part of the chart below) of RYH, the Equal-weighted Healthcare ETF by Invesco vs. SPX has really failed to gain much traction with multiple failed breakout attempts.
The breakdown in July has resulted in Healthcare underperformance at exactly the same time as multiple other sectors like Financials and Industrials started to show some positive relative strength.
While Pharmaceutical stocks have shown some near-term outperformance in the last week vs. Biotechnology, it’s likely that Biotech should outperform between October and December as this stock market rally enjoys a Q4 rally.
Healthcare likely will underperform until more meaningful signs of stock market indices starting to weaken takes hold. This might prolong the underperformance until mid-September, but ultimately would suggest buying dips should make sense.
Growth showing just minor weakness vs. Value
Large-Cap Growth has shown some evidence of turning down in the last week, relatively speaking vs Value, as can be seen in the ratio chart below of IVW-0.96% vs IVE-0.07% .
However, this is a minor downturn and the larger breakout in July seems far more important for this ratio and bullish.
Large-cap Growth remains in much better shape technically than either Small-cap or Mid-cap Growth which have lagged substantially this year, breaking longer-term uptrends.
Ratios of Large-cap Growth vs. Value have not broken intermediate-term uptrends and it’s thought that Large-cap Growth should outperform into Year-end, likely coinciding with a bigger breakdown in Treasury yields from October to December which positively affects Growth.
At present, one should look to position long in Growth on this pullback, expecting a rally into September, and there hasn’t been sufficient deterioration in relative trends to favor Value.
