Short-term trends remain bullish from late December lows as part of the larger ongoing downtrend from last January. Thursday’s CPI failed to shake prices lower, but Treasury yields did manage to stabilize, and it’s my thought technically that both $DXY and $TNX will show evidence of bouncing starting next week.
Until/unless longer term downtrends start to give way on SPX, QQQ, or many of the former leading sub-industry groups which are all up near meaningful trendline resistance, it’s going to be difficult to just point targets higher and say that markets are breaking out. For those short-term oriented, it’s essential that prices turn back down to multi-day lows to think a reversal has taken place.
Furthermore, the next few days should give some instance of defensive outperformance and/or negative market breadth to have advance warning of a meaningful trend reversal. At present, I continue to view US Equity indices to have traded up to areas where prices will need to prove themselves by breaking out if this cyclical downtrend as well as cyclical projections lower are going to be proven wrong.
Energy still chugging along, and expected to outperform in 2023
My thoughts for Energy in 2023 are similar to last year’s thesis. I remain optimistic on Energy and on WTI Crude. I feel that lows very well could be in place for WTI Crude, and pullbacks after recent strength likely turn out to be excellent opportunities to buy dips.
Daily $RYE charts shown below (Invesco’s Equal-weighted Energy ETF) have formed what I believe to be an attractive larger base from last summer, which is slowly but surely taking the form of a giant Cup-and-Handle pattern. An eventual push up to test and break last year’s highs is likely in 2023, and dips are seen as opportunities to add exposure.
WTI Crude oil is thought to have begun a new bull market originating from the 2020 March bottom, and higher prices are likely this year, even if not in a straight line. I’ll be discussing targets on WTI Crude in my 2023 Annual Outlook which takes place 1/24/23.
Sub-sector analysis shows XOP to still be an underweight in Energy
One interesting highlight worth discussing is the recent breakdown of $XOP (SPDR S&P Oil and Gas Exploration and Production ETF) in its relationship to $XLE (Energy Select Sector SPDR ETF, which many use as a benchmark for Energy).
As shown below, XOP’s underperformance started to accelerate vs. XLE relatively speaking back in mid-December, coinciding with a breakdown to the lowest level in nearly two years.
Thus, while Crude has been weak since last spring, nearly giving back all of 2021’s gains, Energy has still managed to turn in very good outperformance. Yet, XOP has more closely been linked to WTI Crude.
Until Crude starts to show more convincing signs of breaking out in a manner which will confirm a breakout of its seven-month downtrend, it’s thought that XOP should likely underperform a bit longer.
Relative charts of $XOP vs. $XLE shown below in ratio form show the underperformance of XOP vs XLE from 2018 into 2020, followed by a sharp recovery and superb relative strength in XOP/XLE from March 2020 into Fall 2021.
Unfortunately, XOP’s breakdown of a multi-year area of trendline support suggests that XOP likely still lags in early 2023 and should be underweighted vs. XLE (and while not shown, OIH as well)
The key takeaway is that XLE and/or OIH are much better ways to play Energy at the moment, and likely show better outperformance, regardless of near-term volatility in Crude oil.
(While not shown below, $OIH has shown some stark improvement vs. XLE, and for those who are short-term oriented (2-3 weeks in nature or less) OIH should be the best of Energy’s sub-industry groups when eyeing the major Energy ETF’s.
When XOP/XLE starts to turn back higher and recoups the area that’s been broken back in December 2022, the attention will turn back to overweighting XOP as a way for generating alpha within Energy.
At present, $SLB, $HAL, $HES, $XOM, $MPC are far better technical longs than $DVN, $PXD, $MRO, $EOG, or $FANG.
Utilities is thought to pick up in relative strength in the next couple weeks
Interestingly enough, when eyeing the Utilities Sector relative to S&P (both in Equal-weighted terms) one has been able to successfully time period of outperformance and underperformance using a combination of basic trend analysis overlaid with DeMark signals.
The big decline in Utilities underperformance happened in mid-September nearly two weeks before the broader US Stock indices bottomed and Counter-trend exhaustion signals occurred within a day of Utilities outperformance peaking.
Furthermore, Utilities bottomed out in mid-November, coinciding with a temporary peak in US Stock indices, which coincidentally marked a one-year anniversary of the all-time high for US stocks in mid-November 2021 for NASDAQ, DJ Transports, Russell 2000 along with European indices.. 1/3/2022 which many use as being “the top” for the stock market)
Late December brought about another TD Sequential “sell” (13 Countdown) directly coinciding with the late 2022 Santa Claus rally starting to get underway (despite proving muted, this still happened)
Fast forward to present day, $XLU vs. the Equal-weighted S&P 500 is now showing a TD Buy setup right above TDST support. In other words, this is an area where Utilities likely cease underperforming, at least temporarily. Another way to take this a step further is to claim that US Stocks very well could top out as Utility relative strength starts to kick back in gear.
