by Bryan Perry

June 28, 2022

Last week, the market encountered a sudden shift for the good. The ongoing narrative of higher inflation, fears of recession, and Fed rate hikes gave way to a new narrative that embraced lower inflation, less fear of recession, and fewer Fed rate hikes. As a result, stocks roared higher, setting a new tone for the market.

Investors now see that demand destruction from soaring energy prices and a little luck with farm-friendly weather around the globe could mean that oil, natural gas, and food-related commodity prices may have peaked in early June. Let’s start with commodities. The CRB Index tracks 19 (in alphabetical order): Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, RBOB Gasoline, Silver, Soybeans, Sugar, and Wheat.

The CRB Index (charted below) decisively broke its 50-day moving average uptrend at 312.29 signaling a top and a potential move lower, to its 200-day average around 266.

Commodities Research Bureau Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Natural gas prices topped out on June 6 at $9.32/MMBtu, breaking a sharp uptrend in light of the natural gas crisis in Europe, where Russia slashed gas shipments to several European nations by up to 50%. As this chart shows, the European natural gas futures price is off sharply (-33%), erasing the previous rise.

Natural Gas Futures Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The price of West Texas Intermediate (WTI) crude oil for August fell back to its key 50-day moving average support at around $107 per barrel on heavy futures-related selling pressure. It is also reported that Dubai is brokering Russian oil to India, China, and other non-western countries that have remained neutral on the war in Ukraine, opting for energy security over taking a public position against Russia.

Just because commodities have violated their near-term uptrend lines in no way removes the risk of another spike or set of spikes to come, based on a number of external factors. Energy and commodities have led the market all year, until last week, and this sharp pullback may prove to be brief. Time will tell.

West Texas Intermediate Crude Oil Price Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The one chart that still draws everyone’s attention is that of Treasury yields. While yields have risen from near zero, historically they are still very low when going back to 1980, when the 10-year Treasury Note hit 16%. What we can see from this 40-year chart is that the primary downtrend line for yields has now been breached, with 4% looking like the next level that could be realized.

Ten-Year Treasury Note Price Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

When energy prices peaked, consumer sentiment hit an all-time low of 50. The final University of Michigan Index of Consumer Sentiment for June dropped to 50.0 from the preliminary reading of 50.2, down sharply from the final reading for May of 58.4. The June reading compares to 85.5 in June 2021.

University of Michigan Consumer Sentiment Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

An Investment Strategy to Fit Today’s New Realities

So, let’s get to how investors may consider putting some powder to work – even if by just taking the long-term chart into view. Last week’s tape was by far and away dominated by big-cap software, and for good reason. Software companies are not dependent on commodities, low interest rates, supply chains, vast numbers of hourly-wage workers, ideal weather conditions, or a robust consumer.

Software companies bring cost-saving efficiency gains to businesses that seek to optimize productivity and maintain profit margins when external costs that can’t be controlled need to be better managed. This was seen in the pandemic, when businesses invested heavily in software upgrades to survive and thrive.

With every major economic shock, revenues might not recover to pre-2008 or pre-pandemic levels, but earnings will rise to record levels because productivity gains (doing more with less) are attributable to tech-based investments. This is especially true in the industrial sector, where layoffs are replaced by robotics and more cutting-edge automation processes. So, let’s take a fresh look at the broad market.

The economy finds itself on the cusp of recession – with two potentially negative quarters opening 2022 – and with the S&P 500 down by nearly 18% YTD, even after last week’s sharp gains. Looking at the SPDR S&P 500 ETF (SPY), the long-term uptrend support line is at $345, or 3,450 for the S&P index.

Ten Year Chart of the Standard and Poor's 500 Exchange Traded Fund Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Now, let’s do some basic technical analysis. Looking at the one-year chart, it’s a bearish stair-step pattern of lower highs followed by lower lows. That means the bottom will not be in until this rally undergoes a retest that puts in a higher low – above $360 for SPY. I think we get that retest over the course of the next month. as the Fed will very likely raise rates by another 75 basis points. If the retest fails, then a move lower to 3,500 for the S&P is likely and would mark a 37% correction from peak to trough that would fall in line with the average market drawdown for the 19 bear markets we’ve seen over the past 150 years.

One Year Chart of the Standard and Poor's 500 Exchange Traded Fund Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It’s easy to see the S&P rallying back to its downward sloping 20-day moving average as the market enters a pre-earnings wait-and-see period of pre-announcements. The market could easily add to its gains this week with any whiff of improving macro-economic data, but the recession inertia for Europe and Asia is pretty strong and not easily reversed. The data from these two regions will likely deteriorate.

The ray of sunshine in all this is that the U.S. stock market is close to a bottom based on the breach of the uptend lines for commodities. Wages have probably also peaked for the cycle amid reports of accepted job offerings being rescinded by multiple companies, which are cutting way back on their hiring. (This is a new phenomenon, and something akin to the larger “ghosting” phenomenon of the past few years.)

While there are forecasts of the S&P falling to 3,000 by some widely-followed Wall Street analysts, at this point, the primary long-term uptrend remains a good technical benchmark, meaning that there is about 10% further downside risk. If 3,500 for the S&P is violated, then a probable large-scale global liquidity event would unfold, but we won’t know this until (if and when) such an event is made known.

What I feel most strongly about now is that putting a new twist on an old saying is timely. While most are familiar with the saying that “sales fixes everything,” I’ll offer a new maxim: “Software fixes margins,” especially when revenues are lagging. The market rewarded the software subsector, where the highest level of innovation exists, rivaling that of the semiconductor sector, which has supply chain issues to fix.

North American Tech Software Exchange Traded Fund Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Last week, the market openly revealed to investors the sector it favors, with the fewest number of headwinds going into a protracted slowdown that could last into early 2023. Put it on the watchlist.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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