Sector Scopes March 2023 Review & Dow Jones Utilities Average (DUX.I)

A rebound attempt late last week in equity markets turned out to be just a dead cat bounce that faltered at another lower high. This week, equity markets have turned downward once again as several of the factors which had driven the New Years Rally continue to fade.

In particular, the notion that central banks could pivot to dovishness this year had another bucket of cold water thrown on it by Fed Chair Powell. In testimony to Congress, Powell indicated that economic conditions remain positive and declines in inflation pressures have slowed or even started to reverse. As a result of this, Powell indicated that US interest rates are likely to continue to a higher terminal value than previously anticipated and that the pace of interest rate hikes may need to accelerate if inflation picks up again. Meanwhile, the Bank of Canada paused its rate hike program but continued Quantitative Tightening and indicated it is prepared to resume raising interest rates if needed.

Meanwhile, the other bullish notion from the start of the year, that China’s economy could stage a rapid recovery from COVID lockdowns had a bucket of cold water thrown on it by China’s government who forecast GDP growth of about 5.0% for this year, down from 2022’s 5.5% target, but better than last year’s actual growth of 3.0%.

The combined impact of these two developments was putting an increased tailwind behind treasury yields and the US Dollar, and a headwind in front of equities, commodities, bonds and non-US currencies. Within equity markets, interest rate sensitive sectors have particularly struggled (more on this in the Sector Scopes commentary below).

With earnings season now over, investors have fully turned their focus to the economy, inflation and monetary policy. The coming week brings a number of notable reports which could impact whether the Fed raises interest rates by 0.25% or 0.50% at its meeting later this month, particularly since ADP payrolls exceeded expectations yesterday. Friday brings Canada jobs, US Nonfarm Payrolls, and wage inflation for both countries. Tuesday and Wednesday feature US Consumer and Producer Price inflation reports plus US Retail Sales.

In this week’s issue of Equity Leaders Weekly, we take our monthly look at what Sector Scopes are telling us about market sentiment and sector rotation and at the Dow Jones Utilities Average as an example of the impact of recent central bank hawkishness on interest sensitive sectors.

The Sector Scopes feature in SIA Charts, found in the Markets – BPI section, provides investors with a visual snapshot of the Bullish Percent (percentage of stocks in the sector on a bullish signal) for 31 industry groups. This provides insight into which sectors are attracting capital, and which are not at a given point in time and also how capital flows and investor sentiment change over time.

A month ago, the sectors were clustered in the rightmost four columns of the chart, which was indicative of a rising and potentially overbought market. Over the last month, there has been a significant leftward shift, representing a decline in Bullish Percent across many sectors. Currently, the sectors are widely spread across the spectrum with one large concentration in the center-left area. This suggests a neutral, not oversold market and suggests a downward correction may be underway.

Interest-sensitive Utilities currently has the weakest Bullish Percent. The left-hand side columns also suggest relative weakness among Retailers, Materials, Health Care and Energy stocks. Sectors which have held up relatively well in the current environment can be found in the rightmost columns and include Conglomerates, Transports, Construction and Manufacturing.

When preparing the Equity Leaders Weekly, we review over 100 charts, including indices, commodities, currencies, interest rates, and bonds. We also look at a number of equity sector and ETF charts.

From this week’s review, we were struck by the large number of sectors which have rolled into O columns and High Pole Warnings, which is common in a market correction, but also the low number of charts which have staged actual pattern breakdowns. Of those sectors which have broken down, the majority have been interest rate sensitive groups such as regional banks (IAT) and telecom services (IYZ), along with retailers (XRT) coming off a disappointing round of earnings reports and guidance (XRT), and biotech stocks (IBB), historically among the higher beta parts of health care.



The Dow Jones Industrial Average (DJI.I) is currently on a bearish Double Bottom signal, but only by one row, while the Dow Jones Transportation Average is on a bearish High Pole Warning signal. The Dow Jones Utilities Average (DUX.I) is currently on the most decisively bearish signal of the three.

A fall rally in DUX.I was unable to overcome resistance near the 1,000 round number, or a 45-degree downtrend line. In recent weeks, the index has turned decisively downward, completing a bearish Double Bottom breakdown and extending its slide into a bearish Low Pole.

Next potential downside support appears in the 821 to 837 area where previous column highs and lows converge with a horizontal count. Initial rebound resistance appears near 934 based on a 3-box reversal.