Energy likely outperforms in September
- SPX, QQQ rally continued as rates fell on further economic misses. Technically SPX has resistance at 4527, 4556 while QQQ could stall near 380-1
- September likely provides strength for WTI Crude and Energy as a sector
- WTI Crude cycle looks bullish for balance of this year after bottoming in July
US Equities have now retraced more than 61.8% of prior decline from late July and have shown no evidence of turning down. Yields have slowed their descent, while the US Dollar has extended losses. Overall, with no evidence of stalling, it’s probably going to be right to expect SPX reaches 4527 or 4556 while QQQ can hit 380-1.
Weak economic data continued to support higher prices in both Treasuries and Equities on Wednesday, albeit at a more muted pace. Yields in particular seem to have held minor support near 4.10% for TNX while 2, and 5-year Treasury yields fell at a bit of a faster clip.
Market breadth proved to be a bit muted, with Advances not sweeping declines in a meaningful fashion like what might be expected after Tuesday’s surge. After one of the best days of the month in breadth, Wednesday failed to follow-through, and both A/D and volume came in just 3/2 positive. Thus, while trends showed little evidence of giving way, increasingly this rally will require consolidation given hourly overbought levels as part of a negative weekly momentum situation.
Daily SPX charts below show price having pushed up to retest the prior uptrend that had been violated last month. Moreover, price is now testing this area of the Ichimoku Cloud resistance on daily charts. I suspect that if yields stabilize and attempt to bounce Thursday/Friday, it might prove difficult for Equities to continue following through higher in the near-term. However, no DeMark-based exhaustion is now present on hourly, nor 2-hour charts for SPX nor QQQ.
Overall, the near-term trend has gotten stretched and has exceeded the length of the first rally off the 8/18 lows. While near-term overbought conditions at some point will be consolidated, I’m not willing to fight trends until I see evidence of it getting underway. Bottom line, to repeat targets listed above, with no evidence of stalling, it’s probably going to be right to expect SPX reaches 4527 or 4556 while QQQ can hit 380-1.
Energy’s strength likely will persist given low Supply and bullish cycles
Energy likely can continue its gains on an absolute and relative basis given evidence of the global market tightening up, while US inventories are being drawn down rapidly.
In recent months, Saudi Arabia has announced supply cuts during the first week of every month, and announced previously that the cutback would extend into September. Given supplies from other producers like Iran and/or Venezuela might pick up, and Crude has languished during August, it might make sense for Saudi Arabia to announce a further supply cut.
Technically speaking, it looks right to expect a test of former highs from last year initially before much resistance comes into play.
Technical structure and momentum have improved, and cycles along with the fundamental supply/demand balance seem to indicate higher prices can occur.
As relative charts of Invesco’s Equal-weighted Energy vs Equal-weighted S&P 500 show below, the breakout of Energy’s relative downtrend in recent months paved the way for upside acceleration.
Energy is now the only major S&P Sector that has shown positive gains for the month of August, both in Equal-weighted terms (RSPG -0.46% +2.66% (1-month return %) and when viewing the cap-weighted Sector SPDR Energy ETF (XLE -0.92% – +2.99% (1-month return))
Given that momentum is positively sloped and not overbought, and a potential further output cut could be around the corner, it makes sense to continue to overweight Energy as a sector favorite in the month of September.
My expectations are for WTI Crude to exceed August’s peaks of $84.89 and likely rally to $86-$87 at a minimum before some consolidation sets in. In front month WTI Crude futures, the first 38.2% Fibonacci retracement level of the decline from last March 2022 into May 2023 hits near $89 which should be an additional upside target to keep an eye on, if/when Crude exceeds $87.
My UPTICKS list for both FS Insight and Fundstrat clients has Energy long exposure in MPC -0.56% , HES 0.67% , and VLO -0.80% . I continue to endorse these Energy names, technically.
WTI Crude cycle composite looks bullish following its Summer bottom.
My cycle composite for WTI Crude oil when utilizing weekly cycles has a bullish bias for Crude into next year before a more meaningful decline occurs from late 2024-2026.
One of the more historically accurate Crude cycles according to my own research is the 45-week cycle along with 143 weeks for Crude. When adding another few cycles to the composite, we see that this has made several peaks and troughs that seem to align nicely with prior turns.
While the future obviously can be quite different, it’s worth noting that the last few turns seemed to arrive on schedule and this bottomed most recently in July 2023.
The next meaningful top is set to peak near October 2024. While the length of this current bullish projection might exceed the timeframe of many market participants, the key takeaway is that cycles seem to paint a bullish picture for Crude into 2024.
Crude Cycle Composite – Bullish after July 2023 bottom
Marathon Petroleum still looks quite attractive technically
MPC -0.56% has largely consolidated near all-time highs over the last few weeks following its massive run-up in mid-July.
This slowdown directly coincided with a period of Crude oil weakening. However, little overall technical damage occurred in MPC, and this remains near striking distance of all-time highs.
MPC surpassed the first resistance at $138 without much trouble, but found strong overhead supply near the 2nd area at $150.
While MPC is set to make a new monthly all-time high close potentially if Thursday 8/31’s close finishes over $134.83 (closed 8/30 at $143.17) monthly charts have been starting to reflect some negative momentum divergence.
At present, this divergence is unlikely to adversely affect MPC if Crude presses higher to the high $80’s. I expect $160 should represent the next key area higher followed by $170. If further gains fail to lift momentum meaningfully, it might be right to consider $170 more meaningful upside resistance.
At present, this remains attractive technically, and further gains back to new all-time highs look likely in September.
