S&P 500 Index (SPX.I) & Gold Continuous Contract (GC.F)

The fear which had gripped markets last week has started to ease off this week. With central banks and major banks taking steps over the last few days to shore up confidence in the banking system and avoid a contagion, equity markets have started to rebound, with yesterday’s middle of the road Fed decision and forecasts helping to soothe fears and rebuild confidence.

The US central bank raised the Fed Funds rate by 0.25% as was widely expected, but it backed away from the hawkish rhetoric of a few weeks ago. At the same time, it did not hit the panic button, only mentioning the word “banking” once in the statement compared with 9 mentions of “inflation”. FOMC member forecasts for the Fed Funds rate, GDP, unemployment and inflation were not radically different from the December numbers.

The US 10-year treasury note yield has resumed its downward trend following the Fed meeting and bonds have started to bounce back. That being said, we are not out of the woods yet. Although Gold did not blast through $2,000 it continues to trade within striking distance of that key round number and the Japanese Yen has continued to reassert its role as a defensive haven. Today the Bank of England is expected to hike rates again particularly with yesterday’s upturn in UK inflation adding pressure on them to remain hawkish. The Swiss National Bank is also meeting with its own banking system in turmoil. After tomorrow’s flash PMI reports from around the world, the economic calendar is pretty quiet until late next week.

2023 has seen its shares of ups and downs so far but interestingly, a look at the performance of the 31 sectors which SIA Charts tracks has revealed a surprisingly balanced market year to date. At the close last Friday, 17 of the 31 groups had a positive return on the year while 14 were negative. 2 groups had gains of over 10%, 7 groups had gains of 5-10%, 8 groups had gains of 0%-5%. Meanwhile, 2 groups had losses of more than 10%, 1 group had a loss of 5-10% and 11 groups had losses of 0%-5%. Rather than piling up at either end of the spectrum which would suggest an overbought or oversold market, the majority of groups are clustered near breakeven with only a few outliers, a somewhat normal distribution and a balanced market.

The strongest groups year to date have been Electronics and Semiconductors, Computer Software, Computer Hardware, Leisure, Media and Construction. The weakest groups year to date have been Banks, Energy, Drugs, Insurance, Wholesale and Tobacco. Overall, this suggests despite recent market volatility, a focus by investors on Growth over Value groups.

In this week’s issue of Equity Leaders Weekly, we look at what the S&P 500 Index and Gold are telling us about market trends and sentiment.

Considering the significant swings in sentiment seen since the start of this year, and the big differences in sector performance, a look at the bigger picture through the S&P 500 Index (SPX.I) can help to indicate the tone of trading.

Back in October, the S&P 500 bottomed out near 3,565 when a ten-month downtrend was finally contained by a long-term 45-degree support line. Since then, the index has been steadily recovering lost ground, snapping a downtrend line in December. Bulls have shown resilience with downswings in both December and March bottoming out at lower highs. More recently, SPX.I has returned to a column of Xs which appears encouraging and the index remains in an uptrend.

There are two potential concerns in the chart, however. First the last breakout was only by one row which then turned into a potential bear trap which has not been called off by a new breakout or confirmed by a bearish breakdown. Second a symmetrical triangle of lower highs and highs lows has emerged which suggests that all of this could be a consolidation phase within a larger downtrend.

A close above 4,180 or below 3,745 would resolve this impasse and signal whether bulls are bears are asserting themselves. Next potential resistance on a breakout appears at previous column highs near 4,307, then closer to 4,500. Next support on a breakdown appears at previous lows near 3,565 or 3,635.

Gold (GC.F), as priced in US Dollars, struggled through the middle months of 2022 in the face of a major US Dollar rally, although it did gain against non-North American currencies over that time. Over September-October, Gold established a floor near $1,635 and since breaking out in November it has been steadily climbing.

The first Gold rally from November to February was sparked by a pullback in the US Dollar which helped to lift other currencies. Following a moderate correction that did not trigger a high pole warning, Gold has rallied again recently, this time boosted by capital flows into defensive havens due to concerns over the health of the banking system. Gold recently completed a bullish Double Top that also generated a Bullish Catapult signal.

Currently Gold is bumping up against the $2,000/oz round number barrier. If it can break through there, a challenge of the March 2022 peak near $2,060 or the August 2020 peak near $2,080 appears possible. A horizontal count suggests potential long-term resistance near $2185. Initial downside support appears near $1,900, based on a round number and a 3-box reversal.