The near-term two-day pullback attempt hasn’t resulted in much technical damage, and the late snapback should set up for a push back higher into end of week. As mentioned, while some might be eyeing the 200-day moving average (m.a.) as having importance, the real resistance lies above this up at 4110-4120. This area would allow for both “legs” of our rally from mid-October in SPX to be equal. Furthermore, this area is intermediate-term trendline resistance from January 2022. Overall, I don’t feel this week’s minor pullback is the start of the decline discussed earlier this week, but key support on any further weakness lies at 3850 and cannot be breached without changing this opinion quickly. Overall, there has been some minor stabilization in both TNX and DXY over the last 24 hours. If these get back over 3.91%, and 109.53, respectively, then I feel December could prove to be a tough month indeed for risk assets. Until then, it’s right to stay the course expecting strength back up to 4120 area and particularly into early December.
Crude oil should bottom likely by next week and turn higher
Energy looks appealing for gains back into end-of-year following this week’s minor pullback. Crude’s rally into October has been partially given back, but broader trends and momentum remain bullish for a push higher into year-end.
Additionally, WTI Crude cycles also show a sharp upward bias between now and early next year before some weakness in February into March.
Overall, as has been discussed, it’s right to consider $XOP, the S&P SPDR Oil and Gas Exploration and Production ETF as a way to play long positions in Energy vs. XLE or OIH, which likely both underperform relatively speaking.
Given that WTI Crude looks to have begun a new intermediate-term bull market back in 2020, it’s pullback from Spring looks appealing to consider buying dips in Energy for two key reasons:
First, hardly any real damage has occurred in the Energy sector, which still leads all other S&P Sectors in performance for 2022 on a 1-month, 3-month, 6-month and Year-to-date (YTD) basis. Until some evidence of underperformance starts to result in charts of XOP, OIH, or XLE breaking uptrends and not looking as technically sound, it looks right to buy dips in this space.
Second, Crude breakout into October looks bullish as a technical move, which should allow for Crude to move back meaningfully higher and eventually to new highs. Given that Cycles also support Crude oil bottoming before it takes out late September lows just above $76, I feel like downside is limited for Crude oil and that Energy should begin to stabilize ahead of Thanksgiving.
Solar Energy has been gaining ground on XLE and still attractive
Technically speaking, Alternative and solar energy stocks still look attractive to gain ground in the days/weeks ahead. Relative charts of TAN vs. SPX and vs. XLE both showed evidence of trying to bottom out in late October, and this outperformance has been meaningful in recent weeks.
Stocks like $SEDG, $FSLR, $SPWR, and $RUN have all shown gains of more than 35% in the last month, and relative charts of TAN vs XLE (shown below) have turned up sharply since October, having bottomed out right near prior lows from May.
While this remains a tactical overweight only, and will need to break existing downtrends to truly favor intermediate-term outperformance in Solar energy over Fossil fuel energy, the strength is interesting and the uptick in relative strength meaningful at a time that WTI Crude has been falling.
Given that I believe that WTI Crude is in the final stages of its decline, there should be some notable rebound in fossil fuel Energy stocks into mid-to-late December, coinciding with Crude snapping back.
Until Crude futures climb back over $84 or show further near-term weakness down to $78-$80, favoring Alternative energy relatively speaking still makes sense. FSLR is one of my favorite technical names, but both SEDG and $ENPH look like excellent risk/rewards of the names which are not at 52-week highs.
Performance leaders over the last month likely will require consolidation
Interestingly enough, when eyeing the S&P GICS Level 3 groups that have shown the best outperformance in the last month, Auto Components and Semiconductor & Semi Equipment have both gained more than 30% in just the last month.
Moreover, other groups like Building Products and Metals and Mining have also risen 24-26%.
Given that these stocks have gained ground as the US Dollar and Treasury yields have dropped quickly, I expect all of these groups to consolidate and likely show some mean reversion as both $DXY and $TNX move back up.
Overall, it’s likely wise to consider avoiding the top performers on a one-month basis heading into a period where mean reversion typically starts to take place between December and February of next year. Buying dips in technically strong groups with bullish momentum makes sense as a general strategy. Yet, all of the top groups higher by more than 25% look vulnerable between now and December expiration, making selectivity imperative.