Key Takeaways

Minor stabilization has occurred in US equities and prices could bounce next week with ideal targets above SPX 4637 found near 4671 before yet another peak in price
Grains have broken out again and longs look appealing within the Agricultural space
Mid-caps look to be following Small-caps lower and Large-cap Value remains preferred

The trend in Equities near-term appears to be stabilizing, and it’s likely markets can bounce into April expiration. While this past week has been hugely defensive in its focus, there’s been a bit of near-term stabilization in recent days and SPX prices have largely been range-bound right near Wednesday’s (4/6/22) close. Ideally, prices should push up to test and briefly exceed late March peaks at 4637.30 with probable maximum targets at 4671 before stalling post 4/18. Any downside price action which violates 4400 would cancel this short-term rally call.

Food prices spiked the most on record in March

Friday’s news of the UN World Food Price index for March rising to 159.3 has led this index to make the largest monthly move higher on record. While not an economist by trade, I suspect this means that commodity inflation could continue to be a global growth headwind.

This rise in the Food index directly followed a technical breakout which saw prices climb above former highs made back in 2011, and the lower part of the chart shows this Percentage change being the largest on record for the month of March. Thus, while many agree that inflation likely will eventually start to moderate next year or even later this year, this Food price index spike should translate into problems for Emerging markets along with Developed markets.

Grains are now breaking out again after a month of dormancy

Following their initial breakout into early March, grains largely have consolidated this move, albeit within triangle patterns within striking distance of 2022 highs. This now looks to be giving way, and on Friday, the $DBA, the Invesco DB Agriculture Fund, has officially broken back out to new highs for the year on a daily close, exceeding the highs of this triangle in the process. Soybeans and Wheat rose 2.50%+ while Corn also was higher by more than +1.20%.

This is a bullish development for the Grains, and DBA likely should push higher to $24.50-25, a level I discussed a few months ago as a possible upside technical target.

Note, the Triangle pattern following big run-ups like what’s happened this year likely means this is a fourth-wave pattern giving way to the final 5^th wave from an Elliott-wave standpoint. So, while prices likely push up into May, one should consider using this as a tactical long position and sell into strength in the weeks ahead, vs. considering Grain prices continue to press higher throughout the Summer. Typically, June is a bearish month for Grains seasonally speaking, and while this year has been very different than most given the geopolitical tension and understandably bullish for the Grains, it still looks likely that outperformance should happen between now and mid-to-late May. Bottom line, Grains are bullish technically, and Agriculture should continue to be overweighted as Corn, Wheat, and Soybeans push higher in the weeks ahead.

On a similar note, (while not shown here) some excellent price action is taking place with other commodities like Frozen Orange Juice and Sugar as well. Both of these look quite positive and should also push higher in the weeks ahead.

Large-caps remain the area of Focus- Mid-caps are equally as unappealing as Small-caps right now

Finally, it’s worth highlighting that Mid-caps have had a particularly difficult time in recent weeks and have largely joined Small-caps in falling since last February, nearly 13 months ago.

This relative chart of the S&P Mid-Cap 400 index relative to SPX shows the 15-year uptrend from 1999 broken as this uptrend gave way to more sideways trading. This turned down sharply back in 2019, ahead of the global COVID-19 crisis, showing that Large-caps have been leading in performance for nearly the last three years (outside of the brief November 2020-February 2021 period)

This larger weekly trend remains under serious downside pressure and momentum has been quite negative since peaking last February. Thus, for those seeking any type of Style shift in recent months, there certainly hasn’t been much to support the idea that Small-caps nor Mid-caps are the “place to be”.

In reality, Large-caps remain one of the only areas to favor right now, and Large-cap Value remains the best area to overweight. This chart below shows this thesis in motion as Mid-caps vs SPX continues to weaken and has gained speed since early March.

Thus, when leading sectors like the Transportation along with Semiconductors start to turn down, and are joined by Small and mid-Caps, it shows why this market remains difficult to expect a meaningful rally back to highs. While the near-term patterns look favorable for the next 1-2 weeks, I still believe a test of 4100 comes ahead of a test of 4800. Have a nice weekend.

MDY vs SPY below (Ratio form)