Some minor stalling out has begun to happen in US indices, though short-term trends remain bullish, and it looks early to claim that even a short-term trading top is in place. Wave structure can allow for another push higher above last week’s highs in $SPX, $QQQ which likely takes SPX to near 4200 while $QQQ might reach 425 on gains. Overall, August is thought to show weakness in the early part of August which might last into Expiration before a big push higher into mid-September. After all, following a 12% gain in six weeks, some consolidation looks necessary, and particularly in $SOX, & $IWM with prices up against meaningful downtrends. At present, the short-term Elliott count suggests upside should be limited to 4200, but near-term trends remain bullish and a push back higher to complete “Wave 5” (shown below) likely happens sometime Tuesday-Thursday before a peak. Subsequent weakness is not thought to be too severe, but potentially reach 3850-75 before a push back to 4200 and above to near 4400 into mid-September. Those who are counting on a retest in the near-term likely are disappointed.
Mid-term year tendencies show August to be worse than non-mid-term. Yet September looks like the worst month
Seasonality studies during mid-term election years typically show a choppy period with mildly positive bias in August. Data since 1871 shows returns of 0.2%, a muted return compared to the average non-midterm election year.
The last 10 Mid-term Augusts were positive seven times, with just three down Augusts. Even the 20, 40, and 60 year cycles show a positive August which might translate into this August also being positive. However, the front end of the month could fare worse than mid-to-late August.
Crude pullback to multi-day lows likely jumpstarts decline to mid-$80’s
Following the initial snapback to $90 and directly under for WTI Crude into mid-July, I discussed the chance for some mild stabilization and a possible bounce.
Unfortunately, prices fell shy of the initial $107 target. Moreover, now Monday’s (8/1) decline to multi-day lows looks likely to continue in the short run and appears like a technical negative. This puts the June discussion of a selloff down to the mid-$80’s directly on the “front burner.”
Targets lie near $86 which would represent a 50% alternative retracement of the initial leg down from June peaks, with additional selling pressure finding strong support at $82.50.
Overall, I still expect that following weakness over the next 6-8 weeks that Crude should turn back higher. Thus, it’s tough making the call that WTI Crude has officially made a larger peak. Yet, in the short run, I expect that Crude should weaken pretty meaningfully and undercut mid-July lows. This could allow Growth to continue to outperform Value, which would largely come from Energy weakening more than Technology.
For those who need Energy exposure, both the Integrated Oils ($XLE) and Clean Energy ($ICLN) look more attractive than E&P’s ($XOP) or Driller/Services names ($OIH) in the short run. One should hold off on trying to buy dips in this group until late September/October.
Crude cycles show weakness into Sept/October before rebound
Interestingly enough, the daily WTI Crude cycle composite, when run since 2000, shows a decidedly negative bias over the next couple months, based on a combination of four specific cycles that have worked quite well for WTI over the last five years.
As shown below, WTI Crude peaked in 2018, 2019, 2021 but also Summer of 2022, the latter which seems to have played out nicely thus far. Lows materialized in early 2019, early 2020 mid-2021 and then October of this year.
I suspect that Energy likely will underperform in the short-run as Crude weakens more.