The near-term technical trend improved even further with SPX’s push back over 4060 in Monday’s trading. This helped to recoup the prior 2/10 lows, and SPX has now recouped more than 50% of the entire decline from early February in a mere three trading days. While this was partially given back as US Treasuries reversed earlier gains, the recent three-day surge has been anything but bearish.
The breakdown of Treasury yields looks to have directly coincided with US Equity index strength on Monday. While many suspected some “squaring of shorts” ahead of Powell’s comments might be the likely reason why yields started to pullback during a time of low supply, rates should be in the process of peaking out, and this early week yield decline looks to be a starting point for the breakdown in momentum in US Treasury yields.
Specifically with regards to SPX, It’s thought that prices very likely could face consolidation post FOMC Chairman Powell’s comments on Tuesday. However, dips should prove temporary and buyable with an area of downside SPX support found at 3980-4005. While short-term trends have turned bullish, consolidation will provide a better risk/reward entry for those looking.
Overall, a long bias remains preferred in March into April, looking to buy dips. Following some initial consolidation this week, a push back to test and exceed February peaks near 4195 looks likely.
Technology remains a preferred sector, but Energy and Healthcare are both showing evidence of turning back higher, and I’ll discuss the Energy sector in a bit more detail in this report.
Crude oil’s breakout should begin a process of turning back higher; Energy should be overweighted
Energy should begin to snapback quickly in performance following a lackluster first couple months of underperformance.
The act of WTI Crude having rebounded to exceed near-term resistance of $78.60 in front month Futures resulted in a breakout last Friday which has now followed through higher in Monday’s trading. This likely represents the start of Crude pushing back higher to the $90’s initially, with $82.50 representing an initial area of resistance.
China’s lowering of GDP Growth to 5% for 2023 might suggest to some investors that a pivot to a consumer—focused economy might be happening this year. (China targeted a 2% drop in 2023 Energy intensity) However, a meaningful reopening should certainly be a bullish factor for demand, and bullish price action in Crude and the US Energy sector seem to be sniffing out higher prices for the weeks and months ahead.
As I’ll discuss later in this report, Exploration and Production stocks should be an area within Energy that’s most ripe for near-term outperformance after having lagged for the last few months.
Energy’s attempts to breakout relatively vs. S&P are in its early stages, but should fuel some upcoming outperformance
Energy’s decline looks to be complete given Crude’s breakout and the recent rally in Energy as a sector. I expect this sector should offer outperformance to investors in the months ahead.
Relative charts of Invesco’s Equal-weighted Energy ETF ($RYE) are arguably breaking out vs the Equal-weighted S&P 500 in the last week. This downtrend for Energy has lasted nearly four months and now looks to be giving way to strength.
Cycles project higher prices for WTI Crude into the Spring, and it’s thought that Crude’s breakout could likely jump-start this sector and help Energy to show some positive mean reversion back higher after the last few months of underperformance.
Performance in XOP is starting to gain ground on both XLE and OIH
Exploration and Production could be the best part of Energy in the weeks/months to come
The recent snapback higher in relative charts of XOP to XLE as well as XOP to OIH looks important and bullish towards expecting further outperformance in the months ahead.
On an absolute basis, XOP regaining $138 looked like a real positive, exceeding its downtrend from last November. Rallies up to $160 look likely initially.
However, what’s happening right now with XOP vs. XLE (Shown below) looks even more important. Relatively speaking, $XOP, the SPDR S&P Oil and Gas Exploration and Production ETF, had attempted a breakdown vs. XLE after violating two-year support. However, the act of regaining this area of prior lows which should have held on its retest looks clearly bullish technically for the prospects of XOP relative strength in the weeks/months to come.
Thus, this entire support violation looks to have been proven false on this breakdown attempt for XOP vs XLE, and normally failed breakouts in either direction have the potential to be more powerful than original breakouts. (Thus, a failed breakdown, in this case, that recoups former lows could help propel XOP much higher in relative terms.)
My favorite technical names within XOP are:$VLO, $MPC, $KOS, $BRY, and $HES. Others like PDCE, RRC, and APA have lagged performance of the XOP leaders, but are expected to eventually follow suit and trend higher. One should keep a close watch on when intermediate-term downtrends are broken in these latter names, which would likely jump-start some near-term outperformance.