Sector Scopes Monthly Review & Dow Jones Transportation Average (DTX.I) 

Stock markets around the world have continued to struggle over the last week, as investors continue to struggle with the prospects of a stagflation environment. Much weaker than expected US nonfarm payroll growth and more comments from companies about supply chain struggles added to the case for slower economic growth.

Meanwhile, higher than expected US wage growth and consumer price increases added to the case for rising inflation and increasing pressure on the Fed to start tapering back asset purchases this year and on central banks in general to potentially more toward rate hikes sooner than previously planned, perhaps sometime next year. Interestingly, gold, a traditional inflation hedge, picked up steam yesterday on signs of increasing inflation pressures in the US, but not enough to break out of its current range.

Earnings season kicks off with results from several senior US banks, and other financial firms. Initial results were positive although managements did express that supply chain difficulties, COVID delta wave and increasing energy costs were issues that they had to manage through. Next week, the spotlight moves over to the Transportation sector, particularly railroads on both sides of the border, and US airlines, which may give investors a better indication of how serious the supply chain problems are and whether they can be mitigated quickly or not. Reporting also expands into a number of other sectors including Consumer Products, Technology and Industrials with a particular focus on big caps with 8 of the 30 Dow companies set to report over the next ten days.

Economic numbers continue to roll out over the next few days which may continue to be viewed through the stagflation lens as the November 2nd Fed decision on whether and when to taper approaches. US producer prices today and house prices next week may give more color

on inflation, while US retail sales on Friday, US housing starts and industrial production next week, plus Chinese GDP and retail sales due over the weekend may give more color

on economic growth prospects.

In this issue of Equity Leaders Weekly, we take our monthly look at what the Sector Scopes are telling us about the market and at key levels for the transportation sector heading into a key week for earnings from the group.

The Sector Scopes feature in SIA Charts, found in the Markets – BPI section, provides investors with a snapshot of the bullish percent (percentage of stocks in a group on a bullish charting signal) for 31 industry groups. This provides us not only with a snapshot of market sentiment at a point in time, but also a visual way to evaluate changes in attitudes and capital flows over time

A month ago, the majority of groups were in the center-right columns of the table, indicative of a rising but not overbought market. Over the last month, the bullish percent for many groups has declined, which is not surprising considering the broad markets have been in correction mode. Currently, the bulk of groups are in the center-left part of the chart, which is indicative of a downward trending, but not oversold, market.

Heading into earnings season, the strongest sectors with the highest bullish percent are energy, insurance and banking. Sectors which have shown the most rightward improvement have been autos and aerospace, both of which were particularly depressed on the left side a month ago. Sectors with the greatest deterioration (largest leftward moves) include construction, retail, and computer hardware.

After rallying through the first half of this year, which helped to confirm an overall bull market trend, the Dow Jones Transportation Average (DTX.I) peaked back in June. Since then, capital has been leaving the transportation sector and the index has been steadily declining. The Dow Transports have diverged from the Dow Industrials. The Transports refused to confirm recent new highs for the Industrials and the Industrials have refused to confirm the Transports’ downturn, leaving Dow Theory with mixed underlying signals which seems appropriate in the context of a sideways consolidating market.

The Transports retreat has been due to a number of factors including staffing issues, widespread flight cancellations, supply chain disruptions and rising fuel costs. In the coming days, several transportation companies which are part of this index, particularly railroads and airlines are due to report resultsWith a bearish SMAX score of 4, the Dow Transports are currently exhibiting weakness relative to the asset classes. They also are on a bearish Double Bottom point and figure charting signal. It would take a move up through 1,512 to complete a double top, call off the Double Bottom, and signal the start of a new upleg. Initial downside support appears near 1,411 based on a 3-box reversal. A decline below 1,397 would complete another double bottom and signal the start of a new downleg.