RRG Momentum Weekly Update | Julius focuses on outperforming energy stocks
JThe big picture for global equity indices remains largely unchanged this week, with US indices moving towards the “lagging” quadrant (the bottom left corner of the chart below), putting them in a relative downtrend against the l MSCI World Benchmark Index. Meanwhile, most other markets are moving in the opposite direction, heading towards the “main” quadrant in the upper right corner.
European markets including French CAC, German DAX, FTSE 100 [UKX] and the pan-European STOXX index, remain in relative uptrends. Japan’s Nikkei also enjoys continued relative strength [NKY] and the Australian ASX 200 [AS51].
The Russell 2000 Index [RTY] shows noticeably low rotation, from the “improving” upper left quadrant to the “lagging” lower left quadrant.
Are US markets ready to rebound?
On the daily Relative Rotation (RRG) chart below, the picture is more or less reversed. RTY, moving in the negative direction on the weekly RRG above, is moving in the positive direction on the daily chart below, which was compiled on May 26th. At the same time, European markets that were heading in a positive direction on the weekly chart turn to the lower left corner from May 26.
What does this tell us? In short, US markets are expecting a rebound. Because the US indices – RTY, SPX and NDX – are to the left of the chart and to the left of the majority of the markets on the chart, and because all the markets on the positive side, to the right of the weekly chart are always on the In part right of this daily chart, evidence suggests that US markets are temporarily moving against the prevailing trend.
Focus on US markets
A closer examination of the indices in question supports this view. First, the S&P 500 Index is resting at an intermediate support level, after breaking below an important support level a few weeks ago, as shown in the chart below. More serious support is only found in the area around 3,500.
Our data indicates that the recent trend is on pause and a reversal may be imminent. Given the downtrend shown in the chart above, we would consider any rally off the current lows as a rebound within the prevailing trend.
It is entirely possible that additional supply will come into the market once the S&P 500 rallies back towards the area around 4,100.
Moving on to the Russell 2000, we can see from the chart below that this index has fallen more than the S&P 500 and is currently resting at a major support level offered by the 2018 and 2020 peaks. The relative strength of this index, as measured against the MSCI World Index, is therefore even lower than that of the S&P 500.
Our analysis also indicates that the index is now pushing against the resistance created by last week’s high. A break above this level will unlock potential upside towards the former horizontal support zone around 1940. We view this as a short-term and tradeable move, but still within a downtrend at higher long term.
Energy stocks are doing well
The current composition of our basket of US Growth 1000 RRG Momentum+ shares is shown in the RRG below. The high concentration of energy stocks in this basket makes it one of our best performing baskets in the current quarter.
Companies in this chart that deserve closer examination include Coterra Energy [CTRA]Halliburton [HAL]and Freeport McMoran [FCX] inside the “improving” upper left quadrant.
Starting with hydrocarbon exploration company Coterra, this stock has recently reached new highs after a slight setback. It is now back in the upward trend that began at the start of the year. In the lower third of the image below, recent CTRA movement is pushing the green line, which captures momentum, above 100. On the chart above, the tail of CTRA is moving towards the quadrant “major”.
Second, oil, gas and fracking heavyweight Halliburton is not doing as well as CTRA, but has recently managed to break out of the consolidation zone between 34 and 38, as seen in the chart below. HAL is now on track to test overhead resistance at 42. With both RRG lines still pushing above 100, the outlook for HAL remains strong in the RTY universe.
Finally, mining company Freeport McMoran is starting to see an upside after a steep decline since March. As the chart below illustrates if the stock can hold at these price levels and improve further, we could see it turning towards our “primary” quadrant.
However, there is a caveat. The potential formation of a rising wedge, as shown in the chart above, is a notoriously weak price formation. A breakout could signal a continuation of the prevailing trend and possibly even an acceleration downside.
That said, support from the November and January lows is provided at the base of the formation, which could help mitigate downside risk.
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