Trend bullish- Expect that minor weakness is buyable into end of week and provides some strength into end of month and into mid-July. Under SPX 4300 represents the first sign of possible larger pullback, which looks unlikely technically in the near-term
Minor pullback has now spanned three trading days. Yet, sector performance on an Equal-weighted basis showed a far more positive picture than what might have been gleaned from studying SPX or NDX performance alone.
5 of the 11 sectors turned in positive performance, with outperformance coming from Energy, Industrials and some of the Defensive groups like Utilities, while Technology was hard hit to the tune of -1.50% (RYT lower by -1.46%)
The key takeaway for Wednesday revolved around the sharp selling pressure in the US Dollar (DXY) which largely began trending lower just as Equities began their broad-based rally last month.
Commodities have slowly but surely respected this pullback in DXY, with recent breakouts in the Grains and Copper. Meanwhile, precious metals have lagged performance, which is thought to largely depend on rates turning back lower (Expected into July)
With regards to SPX, any further weakness could find support at either SPX-4320, or SPX-4280 but is not expected to violate SPX-4238 before turning back higher to exceed Monday’s intra-day peak of SPX-4448.47.
Commodities are now beginning to rally…. Finally..
The ratio of Equal-weighted GSCI Commodities index vs. SPX has officially broken out of minor downtrends of the past few months, while momentum gauges like Relative Strength index (RSI) have done the same.
The positive momentum divergence which was discussed last week proved to be a reliable sign of a slowing in momentum, but this week’s breakout in the relative ratio itself suggests that commodities could likely outperform SPX over the next few months.
Many had banked on this commodity rally playing out heading into 2023 but have been caught “flat-footed” I suspect that the months ahead could allow for a decent snapback higher.
Commodities stand on the brink of a a possible fifth consecutive quarterly loss as of the End of June which would mark the worst streak for the commodities complex this century (Bloomberg). Technically speaking, despite Crude oil still under pressure, many other soft commodities, grains, and Metals are looking increasingly attractive.
Specifically, Sugar and Live Cattle have been a couple of the best performing commodities. Meanwhile, Corn, Soybeans and Wheat have just broken out of meaningful downtrends.
I discussed both Copper and Natural Gas as likely starting to bottom out, and I expect both to push higher in the weeks to come.
Precious metals remain a laggard in the space, and it’s thought that a bigger downturn in real yields and the US Dollar (already underway) would allow for a decent snapback rally in both gold and silver.
The ratio of Equal-weighted Commoditeis vs SPX is showing a minor trend breakout, arguing that Commodities likely can kick off Q3 with better performance than has been seen in recent quarters.
Wheat surges, joining Soybeans and Corn in breaking out of 1-year+ downtrends
This week marks a significant move higher in the Grains which have been under pressure since last Spring.
This downtrend line breakout looks significant for Wheat, which has lagged others like Soybeans and Corn. However, all of these look attractive technically and can move higher.
Various ETF”s like DBC -0.02% and DBA 0.41% can help to give exposure to the commodities and grain complex, respectively while WEAT 1.27% is an ETF by Teucrium that was mentioned last month and has begun to trend higher sharply. (While WEAT has low volume, it offers exposure to Wheat while not investing in front-month futures contracts, thus reducing the effects of the futures roll which affects many commodity based ETF’s.)
Overall, I favor grains moving higher in the weeks and months to come. This move looks to have just gotten underway this week.
Materials sector has not begun to push higher, but should be watched carefully for evidence of trend breakouts given declining US Dollar
Ratios of the equal-weighted Materials sector vs. Equal-weighted SPX (RTM vs RSP 0.16% ) continue to trend down, though have stabilized a bit since mid-May.
Technically I suspect that this sector should begin to turn higher, though at present has lagged performance in recent months given poor performance out of SEE 0.60% , IFF -0.09% , EMN 0.71% , IP 0.90% , LYB 1.37% , and NEM 2.50% .
Thus, some of the Chemicals and Paper names, along with precious metals stocks tied to Gold have all lagged performance. Largest gainers have been stocks like ALB -0.91% , FCX 2.50% , CF -1.69% , NUE 0.37% , and VMC 0.07% over the last month which have returned between 6-13% in the rolling one-month period ending 6/21/23.
Overall, I expect Materials to bounce in the weeks and months to come. However, technically, this has not yet been seen in the charts, and more strength is needed before deciding to weigh in more positive on Materials.
Given the small percentage of Materials within the SPX, this doesn’t have much effect on SPX performance, but likely trends higher as the commodities complex starts to work better.
