Sector Scopes Monthly Review & High Grade Copper Continuous Contract (HG.F)

Investor confidence which started the year off strong then shifted into a more cautious stance for a few days has started to bounce back. A week ago, the New Years Rally was snuffed out by more hawkish than expected FOMC minutes. This week, concerns about a hawkish Fed have been overcome by renewed enthusiasm after Fed Chair Powell talked up the recovering economy as the main reason for normalizing interest rate policy and indicated that the Fed isn’t really thinking about starting to run down its balance sheet until late in the year at least.

Powell’s positive pronouncements have had an even bigger impact on commodity markets, with expectations of an improving global economy boosting expectations for resource demand and flowing through into strong broad-based commodity market gains, led by copper and lumber. What is most interesting is that the highest reported US consumer price inflation report since 1982 at 7.0% didn’t seem to rattle investors at all, indicating that expectations remain for the Fed to take a methodical not panicked approach to managing the economy and inflation through monetary policy.

So far this year, economic reports and chatter related to monetary policy has dominated the headlines and impacted sentiment. Starting on Friday and continuing into next week and beyond, investors’ focus turns to corporate earnings. In particular, investors will likely be looking for signs of how much of an impact, if any, the Omicron Wave and supply chain problems have had on earnings across various sectors. Investors may also key in on guidance for indications on what to expect in the coming year.

Earnings reports start with big banks on Friday expanding regional banks, brokerages, airlines, railroads and other sectors next week, with big tech likely later reporting the week after. Note that Monday the 17th is a holiday in the US but Canada is open.

In this issue of Equity Leaders Weekly, we take our monthly look at Sector Scopes and at the significance of an upswing in the price of copper.

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 indication of market sentiment at a point in time, but also a visual way to evaluate changes in attitudes and capital flows between groups over time.The last two months have seen the Sector Scopes swing back and forth like a pendulum. In early November, the majority of sectors were starting to pile up on the right-hand side, indicating a bullish to slightly overbought market. By early December, the Omicron correction had pushed the majority of sectors over to the left-hand side, indicating a bearish to slightly oversold market.

The market rebound that started in late December and has continued in fits and spurts has eased oversold conditions. The current Sector Scopes report shows sectors relatively well balanced and even across the spectrum with the largest cluster of groups in the middle. There are a few more groups on the right side than the left, indicating moderately bullish market conditions.

Some of the sectors that have shown the strongest improvement (rightward move) over the last month include Energy, Tobacco, Aerospace and Banks. Sectors that have underperformed their peers of late (leftward moves) include Computer Software, Internet, Electronics & Semiconductors, and Drugs.

In recent issues of the Equity Leaders Weekly, we have mentioned improving sentiment toward commodities and resource stocks particularly energy (January 6) and Lumber (December 16). Perhaps the most significant development yet occurred yesterday with a copper breakout and leading a broad-base advance for commodities that included other metals, energy, grains and soft contracts.

Because of its wide variety of applications, investors tend to view action in the copper market as an indicator of economic activity and demand for resources around the world and particularly for China. While Lumber has been soaring with strong housing starts in the US and Canada indicating strengthening demand, and energy contracts (crude/heating oil and natural gas) have benefitted from seasonal heating demand, copper taking charge and leading a breakout after struggling for months suggests that investor attitudes toward commodities have turned broadly more bullish.

The High Grade Copper Continuous Contract (HG.F) soared for a year up off of the 2020 market bottom but has been stuck in a sideways consolidation range between $4.00 and $4.75 since May. Over the last eight months higher lows have indicated that underlying support remains intact. Yesterday, copper broke out over $4.50, completing a bullish Double Top to signal the start of a new upswing that could initially retest the May high.

A breakout over $4.75 would indicate that the current pause has ended and copper’s broader upward trend has resumed. Based on a horizontal count, next potential resistance appears near the $5.00 round number. Initial support currently appears near $4.36 based on a 3-box reversal.