NASDAQ Composite Index (NASD.I) & iShares US Financials ETF (IYF)

While investors have been patiently waiting for the start of earnings season, equities have continued to be well supported. Just about every day in the last week, one or both of the Dow Jones Industrial Average or the S&P 500 has closed at an all-time record, while the NASDAQ Composite has started to rebound from a late winter correction.

Meanwhile, the upward trend in the US 10-year treasury note yield has levelled off. Although the Fed did restore bank capital requirements to pre-crisis levels reducing some liquidity, continuing comments from Fed Chair Powell of no plans to raise US interest rates this year has eased some investor concerns about Fed tightening. Next Wednesday, the Bank of Canada meets with the question of whether Canadian asset purchases may start to be scaled back at the top of investors minds with the bank needing to weigh the near-term impact of new lockdowns against the hot Canadian housing market.

Earnings season in the US has kicked off this week with strong results from JPMorgan, Wells Fargo, Bank of America, and Goldman Sachs, but mixed numbers from Bed, Bath and Beyond, highlighting a potential theme for the coming earnings of whether sectors that can benefit from a reopening economy are seeing acceleration and whether sectors which benefitted from the stay-at-home economy last year are able to maintain their momentum or if they are seeing slowing.

The coming week brings reports from senior companies across a broad range of US sectors including: Banks, Airlines, Railroads, Electronics & Semiconductors, Miners, Drillers, Consumer Products and Telecom Services.

In this issue of Equity Leaders Weekly, we look at recent action in the NASDAQ Composite Index and the iShares US Financials ETF for insights into the state of investor sentiment.

The NASDAQ Composite (NASD.I) led the charge up off the bottom last year, recovering all of its COVID Crash losses and reaching a new high by June of last year. Since then, the NASDAQ has continued to climb but its trend now appears to be reaching an inflection point.

After achieving another new all-time high back in February, the NASDAQ staged a correction as investors took profits in momentum stocks and groups which had benefitted from the stay-at-home economy such as technology and communications and rotated capital into value/catchup stocks and sectors which could benefit from a wider economic reopening.

This month, the NASDAQ Composite has started to bounce back, completing bullish Double Top and Spread Double Top breakouts, and is now retesting its previous high. A breakout over 14,115 to a new high would complete a bullish Spread Double Top pattern and indicate that recent trading was another common consolidation phase within a larger uptrend such as last fall’s symmetrical triangle pause.

Next potential upside resistance levels should the NASDAQ manage to break out include 14,685 based on a horizontal count, then the 14,980 to 15,000 area where a vertical count and a round number converge.

On the other hand, a failure to break out would indicate that the NASDAQ has moved into a more persistent sideways range which could persist for several months or even quarters, such as the one back in 2019 (circled).

A three-box reversal into an O column with a drop below 13,560 would confirm that upward momentum has slowed with additional downside support possible at previous column lows near 13,035 then 12,525.

The financial service sector lagged behind the initial market recovery last year but has caught up dramatically in recent months. Financials are one of the earlier groups to report results in earnings seasons, and with many leading national banks, regional banks, brokerages, asset managers and consumer credit providers reporting over the next week or so, the sector may continue to attract interest in the coming days.

Announcements from JPMorgan Chase and Wells Fargo yesterday, and Bank of America today that the strengthening economy has enabled them to free up capital for lending which had been put aside last year to cover the increased risk of loan losses shows that improving business conditions has its benefits for banks and along with June stress tests results, may be setting the stage for them to resume dividend payments next quarter.

The iShares US Financials ETF (IYF) struggled through the early months of the market recovery last year. An initial recovery rally stalled out in June and the sector recovery didn’t really get going until November. Since then, the sector has been under steady accumulation with a series of bullish Double Top breakouts (including one this month) building on a high pole and bullish Spread Double Top and Triple Top patterns. IYF recently climbed above $75.00. Next potential upside resistance appears near $83.25 and $86.30 based on vertical counts, then $88.00 based on a horizontal count. Initial support appears near $74.33 based on a 3-box reversal.