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US Dollar Downturn helping to boost commodities as Equities reach key levels

SUMMARY:  Further gains might be difficult to come by for US Equities, Crude and Treasury yields in the short run after all three have pressed up to near key make-or-break areas.  The SPX is up over 11% from intra-day lows in mid-February, just 16 trading days ago, while SPX, DJIA and Russell 2k have moved right back to areas that were formerly important as support throughout most of 2015. (which now should be important as resistance)  While extreme overbought conditions look important as a factor that could drive a near-term top for stocks, just as prices have neared key levels, most of the breadth improvement at this juncture still argues for additional upside on a 2-3 month basis.  Looking back, most were convinced that at any sign of a rally from recent lows, it would be a selling opportunity.  (Myself included) Structurally speaking, it's still tough to disagree that this "shouldn't be the case, labeling the bear market as "dead" just based on three sharp weeks of rally,  with prices still not having achieved the level of improvement necessary to call for a move back to highs.   Yet the bearish sentiment combined with strong positive breadth is a powerful argument that argues that this rally from three weeks ago isn't yet over when looking out between now and May/June.  For now though, given the combination of strong resistance coupled with extreme overbought conditions, we're likely close to a time when at least "some" consolidation plays out before this move can continue.  Extreme selectivity looks prudent, with Commodity-based stocks still appearing as an attractive risk/reward.

Near-term, five factors seem important to thinking that the rally likely has "Legs" in the upcoming months.   First, Breadth has exploded in the last few weeks, with the breakout in McClellan's Summation index, McClellan Oscillator readings North of 94%) ,the percentage of Stocks trading above their 50-day MA doubling, while from a momentum standpoint, RSI has reached the highest levels on daily charts in nearly three years. Second, Pessimism still reigns supreme.  When looking for extremes in Sentiment brought on by the 11% rally in three weeks, we see little to no evidence that this has affected market sentiment.  AAII polls are just barely positive, with Bulls showing a 32% weighting vs Bears at 29.3%.  Daily Sentiment index readings also hover in the mid-60s, a far cry from 90% + readings which typically mark tops.  Third, Defensive participation looks to be waning, as seen by Utilities turning down this past week (Partly on Rising yield concerns) while Financials have started to gain more traction (along with sub-par groups like Energy and Materials following suit to the Commodity gains)  Fourth, broad based indices that had broken down technically under prior lows such as the DJ Transportation Avg. and NY Composite have now reclaimed those former lows, while Russell 2k has reached its own key area.  Additionally, European indices like STOXX 600 have broken out from downtrends and have reclaimed former lows, which is a positive.   Fifth, seasonally this period remains strongly positive for equities, particularly in the March/April months following a Down January and February (S&P 500)  According to Stock Traders Almanac, March tends to be positive, with average gains of 1.68% with April even better, at 1.95%.  (However, the year as a whole is typically down an average of 3.63%)

Aside from Equities, the downturn in the US Dollar of late vs. both Developed market and Emerging market currencies of late has helped Commodities to push up to near the highest levels of the year.  Early year stabilization in WTI and Brent Crude has been followed by sharp gains in the Precious and Base Metals, and recent breakouts in Lumber.  The grains have also begun to stabilize and make at least short-term signs of Bottoming out, though much work remains to be done in this regard to improving their technical structure.  Overall, this should serve as a boon to Emerging Markets, the Materials and Energy Sectors,  as well as from a non-technical perspective to allay some of the fears surrounding the weak trade data last week.  Below we'll further some of last week's thoughts on the metals stocks with some examination of some of the more commonly watched gauges for commodities along with the US Dollar and some attractive stocks which look like attractive risk rewards at this juncture. 

Short-term Thoughts (3-5 day)  Neutral- Tough to buy Equities here, and as of yet, no confirmation of a short-term reversal.   Recent gains aren't likely to persist too much longer given the presence of the highest overbought conditions in nearly three years after 17 trading days from mid-February while equities have pressed up against former lows (RTY, DJIA) from last year which were important.  (Note- SPX is above this by a small amount, but other assets which have correlated strongly with Equities positively of late, such as TNX, USDJPY, Crude, remain below their own respective key overhead resistance areas)  While one can't rule out 3-5 days further of gains the risk/reward looks poor from a trading perspective, and any gains into this week likely will be reversed with a 1-3% pullback of this current move before additional upside.  So while the area at 1940-1960 would be a very good risk/reward area in all likelihood to buy into this move, at 2000-2010 it has very little appeal from a short-term perspective.

Intermediate-term Thoughts (6-8 Months)-  Bearish-  Despite the improvements in breadth suggesting that rallies likely can take indices ever higher on a 2-3 month basis, it will be very difficult to erase the downturn in momentum which started over a year ago and has accelerated on the pullback into last August's lows as well as into February of this year.  Indices like the Russell 2000 have not yet moved back up above former August lows, while the broader Bloomberg World index along with the NY Composite still show this rally to be a counter-trend bounce, structurally speaking.  The selectivity of this market which caused Small-caps to turn down nearly two years ago followed by Mid-caps and then Large hasn't been dramatically reversed by the sharp rally of the past three weeks, and markets are still well overdue for a 20% correction which normally follows long bull markets which begin to rollover, similar to what we saw back in 2000 and 2007.  Historically, drawdowns average 40-50% after lengthy rallies, like markets experienced from 2009-2015.  Overall, given the extent of the momentum downturn, along with the structural weakness, gains into late Spring should be used to pare back longs with the idea that intermediate-term weakness between June-September/October remains very likely.

 

SPX has reached the area right near former highs from November/December near 2000 while having risen over 10% in the last 17 trading days.  Near-term Overbought conditions are in place based on breadth, while momentum is nearing the 70 level on RSI which was hit back in early November near prior peaks.  Overall, over the next 3-5 days, a stallout and pullback should begin that retraces 38-50% of recent gains since mid-February.  Following a correction of this advance, further gains do appear likely into the late Spring.

SPX monthly --SPX chart when viewed on an Arithmetic scale has not broken the trend from '09 lows, yet shows momentum in poor shape after the rollover into last August's trough.  Counter-trend rallies back to highs at this point would not be sufficient to help this turn back positive, and should be used as a selling opportunity in the months ahead, thinking that a much larger correction is possible into the Fall and after the election into next year given the breakdown in momentum. 
 

  The Materials sector ETF, XLB,  has risen nearly 20% in the last seven weeks, but still has to deal with substantial trendline resistance overhead.  However, given the US Dollar breakdown and beginning of Metals stocks to strengthen over the last week, along with Chemicals and Construction Material stocks, this trend is likely to breakout and allow for a further follow-through in XLB into the late Spring. Weekly closes back over $44 would be a sufficient technical sign of strength to argue for a much larger rally to the low to mid-$50's back to challenge highs, which for now is premature.

 

The Materials sector ETF, XLB,  has risen nearly 20% in the last seven weeks, but still has to deal with substantial trendline resistance overhead.  However, given the US Dollar breakdown and beginning of Metals stocks to strengthen over the last week, along with Chemicals and Construction Material stocks, this trend is likely to breakout and allow for a further follow-through in XLB into the late Spring. Weekly closes back over $44 would be a sufficient technical sign of strength to argue for a much larger rally to the low to mid-$50's back to challenge highs, which for now is premature.

The relationship between Materials and SPX however, tells a different story on a relative basis, as this has begun to stabilize in a big way since late January, making an upcoming period of outperformance likely.  In the near-term a bit more strength is necessary to help this ratio chart show improvement to climb back over February highs, but this looks likely given the breakdown in the US Dollar index which has caused many precious and base metals to breakout and trade up substantially in recent weeks.  Overall, Materials looks like an attractive risk/reward from a relative standpoint and will grow stronger on the ability to trade a bit higher.

The relationship between Materials and SPX however, tells a different story on a relative basis, as this has begun to stabilize in a big way since late January, making an upcoming period of outperformance likely.  In the near-term a bit more strength is necessary to help this ratio chart show improvement to climb back over February highs, but this looks likely given the breakdown in the US Dollar index which has caused many precious and base metals to breakout and trade up substantially in recent weeks.  Overall, Materials looks like an attractive risk/reward from a relative standpoint and will grow stronger on the ability to trade a bit higher.

US Dollar index's break of the trend from early February should allow for further near-term Dollar weakness, something which could result in a test of early February lows at 95.24 while below would result in a far larger decline down to test August lows.  For now, most of this weakness is against the Euro and Pound Sterling, which make up roughly 75% of the currencies vs the US Dollar in this index. 

US Dollar index's break of the trend from early February should allow for further near-term Dollar weakness, something which could result in a test of early February lows at 95.24 while below would result in a far larger decline down to test August lows.  For now, most of this weakness is against the Euro and Pound Sterling, which make up roughly 75% of the currencies vs the US Dollar in this index. 

CRB index, while not perfect in its construction, has broken out above late January highs to nearly the highest level of the year which should help Commodities rally further in the short run.  The area near 175 looks important, with breaks of this leading to a confirmed intermediate-term breakout in this index.  For now, Grains have lagged the movement in Metals and Energy, but appear to be attempting to put in short-term bottoms. 

Crude Oil's rally, similar to what's happened in Equities and in Treasury yields, has risen to test the area near the former breakdown back last Fall.  The area from $36 up to $38 arguably has importance for the structure for Crude, and should result in this slowing and pulling back in the near-term before additional gains can occur. Weekly closes over $38, while not anticipated right away, would suggest further acceleration, and put off any stalling out.   

Crude Oil's rally, similar to what's happened in Equities and in Treasury yields, has risen to test the area near the former breakdown back last Fall.  The area from $36 up to $38 arguably has importance for the structure for Crude, and should result in this slowing and pulling back in the near-term before additional gains can occur. Weekly closes over $38, while not anticipated right away, would suggest further acceleration, and put off any stalling out.   

Copper broke out above 2.15 last week, which caused a surge in the Metal and still looks to move higher on a 2-3 month basis as a result of last week's technical progress.  Near-term upside targets lie near last Fall's highs at $2.50, with an outside chance at $2.75 if the US Dollar begins a larger breakdown.  For now, the current pattern shows a very bullish breakout of a Reverse Head and Shoulders pattern, and any pullback down under 2.20 down to 2.15 in the days/weeks ahead should constitute an excellent chance to buy dips for an ongoing rally

US Dollar index's break of the trend from early February should allow for further near-term Dollar weakness, something which could result in a test of early February lows at 95.24 while below would result in a far larger decline down to test August lows.  For now, most of this weakness is against the Euro and Pound Sterling, which make up roughly 75% of the currencies vs the US Dollar in this index

Lumber is yet another commodity which has broken out of late, with gains just in the last few trading days having exceeded the highs from late December 2015, which should help prices accelerate up to test last Summer's highs near $300. 

 

(Note:  Does not take merger effects into account, and treats as if separate entity, until deal is complete)

Dupont Co. (DD- $63.18) DD has been steadily gaining ground since bottoming out in mid-January, and looks likely to move back higher to test peaks made in early to late 2015 near $74.  The stock has traded within the range from 2015 over the last six months, with both declines and advances falling within this range.  Movement back above 63 should now allow for a continuation to the high $60s over the next couple months, regardless of the fact that it's already gained 20% since mid-January.  When looking at weekly DD charts, one can see that recent gains have been part of a larger period of choppiness in DD where the stock actually lost more than 30% of its value just from December into January alone before embarking on a sharp rebound.  Given the extent to which DD fell into January lows, its recent rise hasn't taken it back to overbought territory yet, so given the structural improvement of late, it still looks likely that DD should push higher.  Near-term upside targets lie at $67.50-$68 while downside support should contain pullbacks near $58. 

 

Nucor (NUE- $42.96) NUE Looks technically attractive but overbought following its breakout above eight-month trendline resistance which has caused over a 10% advance in the last eight trading days.   While $41 was important to the short-term downtrend, the area near $43

intersects the downtrend from highs in 2014 which is currently being tested.   Given the move in many of the Base metals in the last few weeks, NUE has steadily appreciated and Technically should be able to reach $46 without much trouble once the stock has had a chance to consolidate recent gains, with intermediate-term targets near last year's highs at 49.  Initially though, momentum has gotten stretched and pullbacks down to $31 would offer a much better risk/reward entry to longs.  Overall, a long position over the next 2-3 months looks favorable for NUE, looking to buy any dips in bigger size if given the chance.  Pullbacks under 37.75, although not expected in the near future, would change the outlook to near-term bearish and postpone the advance.

 

International Paper (IP- $38.73) IP's success in reclaiming the downtrend that was broken from the early part of 2015 is important, as the stock lost over 50% of its value in the last 12 months and now has decisively moved back up above $37 which helped to break this one-year trend.  While overbought on daily charts, the weekly charts are just starting to look more attractive.  Momentum began to diverge positively last month and held up very well even while price fell to new lows, something which was considered a bullish sign for IP technically.  Movement up to the stock's 50-week moving average looks likely, near last Fall's highs before this finds any real resistance, and near-term pullbacks ahead of that time should be used to buy dips.

Monsanto (MON- $85.89) MON remains in a negative downtrend, both from last December's highs, as well as mid-2015, from where the stock has fallen over 35% from last Spring.  At present, MON isn't as bullish as some of the others in the space, and will need to demonstrate better signs of stabilization before arguing for a low at hand.  Given the weekly chart above, a better area to take a crack at buying lies down near $80,  or nearly 7% lower.  For now, the late week recovery effort failed to turn the weekly chart positive, which still turned in its lowest close for 2016, keeping the weekly chart still bearish.  Momentum indicators like MACD are rolling over to negative and will require some ability to hold and turn back up above $90 quickly to have much effect in turning back positive.

As in the case of Dupont (DD) given the pending merger with Dow Chemical (DOW), this chart is being analyzed completely independently from this merger, and treats it as if it the stock is its own separate entity. 

Dow Chemical (DOW-  $50.29) DOW's gains I the last four of five weeks have helped bring this stock back to near highs of the two-year range-bound consolidation, which eventually should be resolved by a move back up through the highs.   DOW's range spans from near $40 on the downside to the mid-$50s as resistance, but the recent upside momentum should continue given that DOW is not overbought, and has held up relatively quite well given the severe underperformance in the Materials sector.  Given that the US Dollar decline looks to continue near-term, this could prove to be a nice tailwind for this stock to move back to near $54, which would be the first area of tradable Resistance, given its price history over the last two years.  Consecutive weekly closes over $54 would argue for an intermediate-term rise up to $60, which would be likely on signs of sustained weakness in the US Dollar and further intermediate-term strength in the Materials sector.  For now, another 7-10% upside does appear possible, technically speaking. 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.   

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investorsNewton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: DD, NUE, DOW, IP and/or MON.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC