The persistent melt-up for US Equities has been far more resilient than I expected to end the week, showing little to no evidence of turning lower. Prices have escalated over 17% in eight weeks’ time amidst a sea of ongoing pessimism. This has proven to be truly an amazing rally, fueled by Technology, Consumer Discretionary, and increasingly better performance out of Industrials and Financials. In the short run, prices have pushed above my SPX-4250 threshold, making me unwilling to continue to try to fade prices. While minor selloffs look possible and even likely in the near-term, I no longer feel SPX needs to get to decline to 3900 right away and selling pressure probably proves muted and just reaches 4100-50 before turning back up to 4350-60 into late August/early September. In the bigger scheme of things, prices are nearing a 61.8% Fibonacci price retracement level while nearing a 38.2% Fibonacci time retracement, which should prove to be very strong into next week. Moreover, Elliott wave structure from July looks nearly complete. However, until this trend from July starts to give way, there’s not much value in trying to fade this rally, despite what appears to be minimal upside to the tune of 1.8% higher.
Sentiment still appears to be Offsides
Interestingly enough, while S&P has risen over 17% over the past eight weeks, CFTC data still shows Institutional positioning to be negative.
Charts below of the Non-Commercial S&P Futures positioning remains at the most bearish levels seen since 2020. Following huge positive positions coming into 2022 which proved to be wrong, this has steadily dropped and now showing -48k Short positioning in S&P Futures contracts despite the recent rip in prices.
What’s interesting here is that following the initial rally off June 2022 lows, positioning became even more negative as institutions shorted into the rally throughout the back half of July. It’s my thinking that bearish sentiment remains a positive for risk assets into September. While near-term selloffs could happen at any time, it’s apparent that the broader skepticism for risk assets has not really dissipated in recent weeks and bearish sentiment remains a bullish factor for $SPX.
Natural Gas shaping up for a rally higher into early September
While European Natural Gas remains understandably high and has been quite bullish in recent months, Henry Hub Natural Gas contracts have shown evidence of bullish consolidation near recent highs. This now looks to be setting up for a bullish breakout.
Prices have pushed back sharply higher this past week to test July peaks following just a minor amount of consolidation. This looks quite bullish technically, with price patterns appearing like Cup and Handle pattern which likely is resolved by a breakout back to new high territory.
Cycles show bullish prices into September before a turn back lower, but for the weeks ahead, it looks likely from a technical perspective that a breakout back to new highs is quite likely in the weeks to come.
I’m expecting a move back to $10 in front month Natural Gas ($NG_F) and feel that stocks with natural gas exposure like $EQT, $LNG $KMI $SWN $RRC are all excellent technically and should work quite well in the weeks to come. Movement back over $9/MMBtu should allow for acceleration over the next few weeks, and it looks right to consider tactical long exposure in the stocks above and/or ETF’s like $UNG or $BOIL for those who have the risk tolerance for something more aggressive.
Japanese Equities should be favored for gains into September
Friday produced a breakout in the NIKKEI 225 and TOPIX which looks positive for Japanese Equities over the next few weeks.
While this structure cannot yet be called bullish technically to allow for a move back above last Fall’s highs, I do expect gains in the weeks to come.
Upside targets for $NKY should arrive near $29,500-$30,500 into late August, and $DXJ could be considered as a long position (WisdomTree Japan Hedged Equity Fund) which provides exposure to the Japanese Equity market while hedging exposure to the Yen (which I expect to fall further in the next few weeks).
See this technical breakout in NKY below which looks similar to the TOPIX. This looks to be a better risk/reward for longs for August in all likelihood than US Equities given that it has just broken out.