iShares MSCI Hong Kong Index Fund (EWH) & iShares US Basic Materials ETF (IWM)

Major indices in the US bounced back a bit this week as US politicians reached a deal to raise the country’s debt ceiling, easing political risk concerns about a government default while the agreement moved to Congress for ratification.

A look under the hood, however, raises significant questions about market breadth. Of the eleven major industry groups, only one, Information Technology, had a positive return. All ten other groups fell over the last week with the commodity groups, Energy and Materials, turning in the worst performance. In addition, the small cap Russell 2000 fell slightly, indicating that the troops are still not really following the generals.

The highlight of the week was a post-earnings pop by Nvidia* which was boosted by the company’s exposure to Artificial Intelligence and Cloud Computing applications, that spread out to other semiconductor and technology stocks. It remains a concern, however, that AI and semiconductor stocks seem to be the main group rallying during a seasonally weaker time of the year for stocks. The reaction to other earnings reports was mixed to negative particularly yesterday’s 35% post-earnings plunge by retailer Advance Auto Parts following a bad miss. Today, the last notable day of earnings season, may give an indication of whether these themes are continuing into the summer with results due from chipmaker Broadcom*, and big-name retailers Macys, lululemon, and Gamestop.

Recent weakness in commodity prices and resource stocks suggests there may be growing underlying concern about the health of the global economy a year into the current monetary tightening cycle. Investors may get a better idea on how economies around the world are doing comparatively with Manufacturing PMI reports due today and Service PMI reports coming on Monday. Several other notable US reports are on the way including ADP Payrolls and construction spending today, and nonfarm payrolls tomorrow. Canadian employment is due next Friday.

Next week, the Bank of Canada and the Reserve Bank of Australia may give an indication on how their battles against inflation are going and how their economies are faring. With the Bank of Canada having been on pause for a few months now and the Australians having surprisingly raised rates at their last meeting their actions and statements may give investors something to think about as the mid-month US FOMC meeting, with its big pause or keep raising decision, approaches.

In this edition of Equity Leaders Weekly, we look at recent weakness in Hong Kong and resource stocks.

*Shares of Nvidia and Broadcom are held in some portfolios managed by SIA Wealth Management.

Trading action in the iShares MSCI Hong Kong Index Fund (EWH) can be used as a proxy by investors to help understand sentiment toward China and related markets. EWH last peaked in June of 2021 and spent over a year in a downtrend that accelerated in the second half of 2022 as the country imposed a new round of COVID lockdowns.

Anticipation of China reopening drove an initial recovery rally that ran between October of 2022 and February of 2023. Things were looking up back in February when EWH snapped a downtrend line, but success was fleeting and EWH faltered after a breakout of only one row, staging a bearish Bear Trap peak instead.

Since February, EWH has been under distribution, with lower highs and bearish pattern completions including two Double Bottoms and a Bearish Catapult indicating that the longer-term downtrend has resumed. With a bearish SMAX score of 3, EWH is exhibiting weakness against the asset classes.

Potential downside support for EWH appears at previous column lows near $17.95 or $17.40 with the October low down near $15.75. Initial resistance on a bounce appears near $19.65 based on a 3-box reversal.

As a significant contributor to global resource demand, the health of China’s economy is often a significant driver behind commodity prices and through them, the stock prices of resource producing companies.

This relationship can be seen in the similarities in the trends of Hong Kong equities (EWH above) and US resource producers, represented by the iShares US Basic Materials ETF (IWM). As Chinese recovery anticipation ramped up, commodity prices and resource stocks rebounded between October and February. Since March, however, IWM has turned downward and in May, the start of a new downtrend was signaled by a bearish Spread Triple Bottom breakdown.

The recent downturn in commodity prices has been broad-based led by Energy, Base Metals and Agricultural commodities initially turning downward and Precious Metals starting to fall more recently. Similarly, resource stocks across a number of subgroups have been under pressure of late including miners, energy producers and services, agricultural companies, steelmakers and others.

Next potential support for IWM appears at an uptrend line near $115.00, followed by a column low near $111.50 and the October low near $105.00. Initial rebound resistance appears near $125.60 based on a 3-box reversal.