US Equity markets largely remain in choppy range-bound consolidation with SPX within 1 point of levels hit two weeks ago at this time (SPX-4132). Rates have pushed back higher again following Wednesday’s strong retail sales print, giving hope that the economy very well might be positioning for a soft landing, or “No landing”.
Real yields turning higher seems to be negative for commodities, and as charts will show in this report, still makes buying dips in many areas outside of Energy look early.
This sideways consolidation didn’t really bring about much evidence of any shift in sector rotation lately, as the two top performing sectors over the last week remain the top performing groups on a rolling one-month basis, namely, Technology and Consumer Discretionary.
However, both Energy and Healthcare look ready to bottom out, and both of these sectors look relatively attractive for strength into the month of March.
Regarding SPX price action, not much has changed in the last 24 hours. There remains a realistic threat of minor weakness into late February, and this would be officially underway on SPX break of 4060 (though even weakness under 4095 would warn of this possibly getting underway). Conversely, 4160 and also 4176 are the two areas to monitor on the upside.
One cannot realistically “guess” what direction SPX will move given its history of grinding sideways over the last 10 trading sessions. However, US Equity markets are holding up far better than might be expected with Treasury yields pressing higher. This will be something to continue to watch carefully.
Commodities have turned back down vs. SPY in relative terms as Dollar bounce continues
The ratio of Invesco’s DB Commodity Index Tracking Fund, or DBC to the SPY has just dropped to multi-month lows.
This is a bearish development given the break of last Summer’s lows, and likely signals a period of underperformance over the next few weeks.
While there remain some bright spots within the commodity space, like Sugar, Live Cattle, Coffee and most of Energy, other commodities like Cotton, Lumber which are under pressure, and many of the precious and base metals have begun short-term corrections.
Overall, I endorse owning Energy and would hold off on most of the Metals until more evidence of US Dollar turning back lower resurfaces. Many of the soft commodities are a mixed picture, and important to be more selective until these can turn up as a group.
Grains, in particular, remain in sideways consolidation, but suspect there should be a window of strength between March and May before seasonal June weakness takes hold.
The weekly relative chart below of DBC to SPY shows the peak in Spring of 2022 for the commodity space, which has been largely under pressure ever since. Note, much of this is oil-driven, as DBC is not based on an equal-weighted index within the commodity space.
The violation of last Summer’s lows looks like a technical negative and makes buying dips in commodities as an asset class likely premature. Any break under $23 in DBC could temporarily take prices lower down to $20.60.
However, within the next 3-4 weeks on weakness, it’s likely that weekly charts could begin to show downside exhaustion as DBC becomes oversold on an absolute basis. One should look at overweighting commodities into March as the US Dollar shows evidence of making minor peaks and rolling back over to new monthly lows.
While sentiment and momentum might suggest that much further lows could prove difficult for DXY, it doesn’t yet appear like Winter 2023 lows are in place.
Coffee is one commodity that could see “Grande” gains
Technically, Coffee is one commodity that looks appealing for further gains in the weeks/months ahead. Prices look to have carved out a perfect “ABC” type Elliott wave decline complete with a five-wave impulsive “C” wave from last August into January before a healthy bounce got underway.
My interpretation on the possible wave count is shown below and the chart shown represents a daily chart of JO, representing the IPathA Series B Bloomberg Coffee Sub index Total Return ETN.
Upside targets lie at $54.20, then $56-$57.33 initially for JO, which then should be followed by a complete retracement of the prior year’s decline. Thus, an eventual test and breakout over 2022 peaks looks likely.
Overall, while some other commodities like Sugar are at/near 52-week highs, Coffee “C” remains about 30% off its 2022 highs.
Technically, I’m expecting further gains in Coffee “C” in the months ahead, and one should give this ETF consideration.
Copper’s downturn should prove temporary; However, it still looks early to buy dips after Wednesday’s breakdown
The recent spike in the Dollar and Yields certainly has had some negative effects in many commodities, and Copper has been falling now for about a month, dropping off from $4.25 to near $4.02 in recent days.
Until/unless the US Dollar index begins to turn down sharply, it’s unlikely that Copper will reverse back to test its 2023 highs over the next month.
However, intermediate-term trends from last Fall remain positive, and it’s pullback is now nearing a structural area of support which could have some importance.
Technically $3.94-$3.96 has initial appeal on pullbacks. However, any violation of this would lead straight to $3.80, which could be a more significant area to buy dips on weakness.
Interestingly enough, prices have been falling lately despite upbeat economic news. Thus, some of the weakness in this “leading indicator” commodity likely could concern the Fed not being near complete with its interest rate hikes. Furthermore, hiking rates further would eventually be thought to have an impact on job growth and the labor market, which have escaped thus far.
Thus, it’s right to hold off on buying dips too quickly. However, opportunities will present themselves for buying weakness in both Base metals as well as Precious metals in the weeks to come, which likely coincides with the US Dollar rolling back over.
Key ways to consider playing the Copper market outside of copper futures would involve considering the ETF, called COPX. (Global X Copper Miners ETF) Additionally, FCX should be close to bottoming out if/when it reaches $39.
Check out my 2/14/2023 interview on CNBC here.
