24 April 2019

Commodities Breaking Out From 2 Year Base

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The markets staged an impressive rally yesterday with the R2K index setting its 4th consecutive record high and the other major indices less than 6% from their respective records.  However for some perspective volume was among the lowest this year.  Today the market opened fractionally higher and is mostly unchanged for the most part with five sectors in the green led by Utilities (+0.7%) and Financials (+0.6%), and REITs (-0.3%) lead to the downside.  Concerns over trade with China continue to abate with both sides offering concessions, though both the WSJ and NY Times write that China has the upper hand.  Treasuries are slightly higher, the Dollar is off 0.1% and Gold up 0.1%, and crude oil adds gains another 0.3%.

  • Risk on (somewhat) for the markets as U.S. - China trade tensions continue to thaw. China has agreed in principle to cut car import tariff by 10% to 15% from 25%.  Auto imports into China totaled $51 billion in 2017 with $13.5 billion coming from North America. This goes hand in hand with the White House pausing its proposed Chinese tariffs and lifting it sales ban on Chinese cell phone maker ZTE. The markets are reacting as trade tensions begin to ease with the Russell 2000 Index making an all-time high, reflecting a confidence in the small and mid-cap names. Overall market volumes are lighter on the composite tape which is also a sign of a passive investing environment which is good for the bulls.
  • Does the leadership in Small Cap stocks translate to broader market rallies? Not necessarily.  The WSJ points out that the record is mixed, with strength in the Russell 2000 often coinciding with weakness in the S&P 500 rather than small caps passing the leadership baton to larger cap brethren.  According to Doug Ramsey of Leuthold Group, when the Russell 2000 had a relative strength ratio above its 40-week moving average, the S&P had an annualized return of 4.2%.  However, when the Russell's relative strength was below its 40-week average, the S&P averaged a 13% return.  Jason Goepfert of Sundial Capital also looked at the relatively few times in the past four decades when the Russell was the first to hit a 52-week high after 30 days without one.  His data shows a mixed record in continued small cap leadership and in overall stock performance.
  • Crude oil continues inching its way higher with WTI firming above the $72 line and Brent just crossing above the $80 mark. Investor sentiment is shifting from a glut mentality to seeing potential scarcity in the not too distant future.  Long-dated futures have also steadily risen lately in a sign of 'how stretched supplies have become' the WSJ says.  Potential disruptions in Iran and Venezuela only add to the upward bias.  Needless to say but higher oil means higher gasoline prices, which are already at three-year highs and some analysts saying gas might reach $4/gallon in some part of the country.
  • Today is National Solitaire Day.  If you've never heard of it, it's because today is the first. Microsoft founded National Solitaire Day to celebrate one of the most played computer games.  In 1990 MSFT included the game in Windows 3.0, partly to help users learn how to use a mouse.  According to the National Day Calendar (yes there is one and today is also National Vanilla Pudding day), in 2012, Microsoft evolved Solitaire into the Microsoft Solitaire Collection , which features five of the top Solitaire  games in one app. Since then, the game has been played by over 242 million people and has become so popular that each year 33 billion games are played with over 3.2 trillion cards dealt.

Technical Take:  Commodities breaking out from a 2-year Base 

The US dollar's recent surge since the February lows has done little to slow down the normally inversely correlated commodities sector.  Both asset classes bottomed in early to mid-February and have since been rising in tandem.  Over this time the inverse correlation between the two has weakened from -0.68 in March to last week's low of -.18.  The dollar's recent strength appears to be a bear market rally following a steep decline throughout 2017 and January 2018.  This week's high has come within a few ticks of the 38.2% retracement of the prior downtrend and thus the greenback's strength could be nearing completion.  If so, a downside reversal in the dollar could provide a nice tailwind for commodities which are just beginning to breakout from a large consolidation pattern.  The Bloomberg Commodity Index (BCOM) is up 4.7% QTD largely on the back of Brent and WTI crude which have gained 17% and 12% QTD and combined make up nearly 17% of the index.  Other members including gasoline, aluminum, wheat, and nickel are also up double digits so far in Q2.  Gold is the second biggest weighting in the index, yet the precious metal is down -2.7% QTD.  Gold also has a strong inverse correlation to the dollar and likely would benefit on a reversal lower in the greenback.  Unlike the dollar, the recent strength in the commodity asset class may have plenty of upside left as the commodity index (BCOM) is this week breaking out from a 23-month consolidation pattern.  Breakouts from such large bases are often proceeded by accelerating upside momentum.  With the BCOM index making 30-year plus secular lows just over two years ago in Q1'16, it wouldn't be a major stretch to see the index making a run from here.  However, with Brent and WTI having already gained 81% and 73% over the last eleven months, the driver of an accelerated move higher would likely need help from other constituents.  In our BLOG earlier this month we noted the constructive technical setup in the long term structure of gold which has the 2nd biggest weighting in the commodity index.

Nasdaq's Market Intelligence Desk (MID) Team includes: 

Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq's Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).

Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.

Click here for the original article from Nasdaq.

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