Crude Oil Continuous Contract (CL.F) & Gold Continuous Contract (GC.F)

It feels strange to say in a week where US indices like the Dow, S&P 500 and NASDAQ all reached new all-time highs but equity market action has been choppy this week, and it still feels like trading across asset classes may be entering a time of transition.

Performance across equity markets has been mixed. On the one hand, the Nikkei hit 40,000 for the first time in decades, on the other, Chinese equities continued their selloff. Following Tuesday’s selloff and Wednesday’s rebound, US indices are only up marginally over the week while Canada has actually performed a bit better. Most indices around the world are flat to up 2.0% from a week ago.

Out of the eleven primary sectors, seven are up over the last week, four are down. Leading groups include Real Estate, Utilities, Technology, Materials, and Energy, while laggards include Communications and Consumer Discretionary. Interest rate sensitive groups rebounded after a Fed official suggested the potential for changes to the Fed’s asset sale program (Quantitative Tightening) to potentially steepen the yield curve. As a result of Fed speculation in the asset side, treasury yields have been coming down this week even though central bankers at the Fed, the European Central Bank, and the Bank of Canada indicated that they have no plans to cut interest rates any time soon although later this year remains possible. The US Dollar has been dropping and Gold has rallied to new all-time highs. Crude Oil and Copper have also been climbing. Meanwhile, speculation has started that the Bank of Japan may finally be getting ready to start raising interest rates which has pushed the Yen up and the Nikkei down overnight. The largest and most violent swings have been in cryptocurrencies where Bitcoin soared to a new all-time high, plunged in a big correction and then rallied again. Earnings from retailers have also sparked several one-day moves of over 10%, a rally for Target, and 10%-plus losses for Nordstrom, Foot Locker and Hugo Boss.

The coming week is potentially a big one as investors try to figure out what the Fed may do about interest rates, quantitative tightening, and bank support (some of the programs enacted to help regional banks a year ago expire this month) at its March 20th meeting.

Tomorrow brings US nonfarm payrolls, Canada jobs and wage inflation, followed on Tuesday by US Consumer Prices and then Producer Prices plus US Retail Sales next Thursday. Today is a busy day for earnings with results due from Broadcom*, Costco and Gap followed by Oracle on Monday and Adobe on Wednesday. In this edition of Equity Leaders Weekly, we look at what breakouts by Crude Oil and Gold are telling us about inflation, investor sentiment and capital flows.

*Shares of Broadcom are held in some portfolios managed by SIA Wealth Management.

After an early 2022 rally fizzled out, Crude Oil (CL.F) spent the second half of 2022 and most of 2023 under distribution. In recent months, support has been established and retested near $65.00 and since the start of this year, oil has started to climb once again, pulling Energy stocks higher along with it.

There are several potential reasons for a recovery in Oil. On the demand side, commodities sensitive to Chinese demand have been picking up lately after its government brought in stimulus measures and developed economies have managed to avoid recession. On the supply side, wars continue to rage around the Middle East with the potential to impact shipping, OPEC+ has maintained its discipline and the US has stopped running down its strategic reserves.

An uptrend of higher lows has emerged since January and CL.F recently completed a bullish Double Top breakout. Initial upside resistance appears near $84.80, followed by $88.25 and $95.50 on trend, all of which are based on previous column highs or lows. Initial support appears near $73.80 based on a 3-box reversal.

Gold (GC.F) has broken out to a new all-time high this week, continuing an upward trend that started back in October. Prior to this recent breakout, Gold had been stuck in a sideways trading range since the summer of 2020.

There are a number of factors potentially supporting a gold rally including:1) Weakness in the US Dollar. Gold’s nemesis, the greenback, has been trending downward in recent months alongside falling treasury yields.

2) Gold has historically been seen as a safe haven in times of turmoil, especially financial. In addition to ongoing political uncertainty around elections and wars, the same uncertain forces which have been dragging on bank stocks over the last year, have put a tailwind behind gold.

3) Gold has historically been seen as a hedge against inflation. With Crude Oil trading back up above $80.00/bbl and copper on the rebound as well, investors may be starting to move capital back into Gold.

One potential headwind remains however, and that is cryptocurrencies. New Crypto ETFs and the increased alternative currency demand which has driven Bitcoin to new all-time highs may be a headwind for Gold. On the other hand, another crypto meltdown could become a tailwind.

Gold recently staged a bullish Triple Top breakout that completed a bullish Ascending Triangle pattern. Next potential resistance tests on trend appear near $2,250.00 based on a vertical count, and then $2,320.00 based on a horizontal count. Initial support appears near $2,058 based on a 3-box reversal, then the $2,000 round number.