Russell 2000 Index (RLS.I) & iShares MSCI Emerging Markets ETF (EEM)
Equity market action, both in North America and overseas, US has been quite constructive over the last week. June kicked off with a rally in response to positive US employment numbers and a positive resolution to the US debt limit crisis (until the next one in a couple of years).
June kicked off with a rally for US stocks which have held on to their gains into this week. While the Technology sector continues to provide upside leadership, Financials, particularly banks are also showing renewed interest as recovery plays with the regional bank crisis subsiding. Non-miners in the Materials sector are also starting to pick up, particularly the steel, agricultural and forest products groups, along with their homebuilder customers. The main economic event of the coming week is next Wednesday’s Fed decision. A pause to rate hikes had seemed like a slam dunk until the Bank of Canada and the Reserve Bank of Australia both surprised investors by raising interest rates when they were expected to hold steady. While both of those countries have benchmark rates lower than the US, these moves indicate that the fight against inflation isn’t over yet and there can still be bumps in the road ahead. Ahead of the decision US Consumer and Producer numbers are out which may stir the pot. Investors may also look to the member projections, particularly the Fed Funds forecasts for insights into the future direction of interest rates.
In this edition of Equity Leaders Weekly, we look what the Russell 2000 Index and emerging market action are telling us about market breadth.
Russell 2000 Index (RLS.I)
As US markets have climbed back up from their March lows, they have steadily climbed a wall of worry, overcoming concerns over a number of issues including the future of interest rates, the health of the banking system, the debt ceiling manufactured crisis and earnings/guidance.
One question that has been lingering in the background has been related to the breadth of the market, whether gains have been too concentrated in large caps or the technology sector (particularly Artificial Intelligence related stocks) and whether the market rally is sustainable. Market action in the last week suggests that this question may also be heading toward a positive resolution with breakouts by the Russell 2000 Small Cap Index, along with the Dow Transports and the Dow Utilities indicating that breadth is starting to increase and that the troops are starting to follow the generals higher, a bullish sign.
The Russell 2000 Index (RLS.I) has essentially been trending sideways since August in a range between 1,650 and 2,000. A winter rally peaked at a lower high in February, which was followed by a higher low in March. In recent weeks, RLS.I had not been doing much of anything, but it has attracted renewed interest into June as a bullish Triple Top breakout in the last week has signaled the start of a new upswing.Currently RLS.I is testing resistance at a downtrend line. A close above 1,892 would confirm the start of a new upswing with next potential resistance near 1,989, 2,029 and 2,070 based on previous column highs. Initial support appears near 1,800 where a recent breakout point, a round number and a 3-box reversal converge.
iShares MSCI Emerging Markets ETF (EEM)
While International Equity remains the top ranked asset class in the SIA Charts Asset Class Rankings, leadership within international equity markets appears to be changing. Developed markets in Western Europe, which have done much of the heavy lifting this year, have started to consolidate/correct previous gains while markets in Eastern Europe, Latin America, and Semiconductor-sensitive Taiwan have been climbing.This shift from conservative developed markets to aggressive emerging markets suggests that investor confidence and a willingness to take on risk for potential return has improved significantly. It also suggests that investor sentiment around the state of the global economy has tipped away from fear and caution toward cautious optimism.
The iShares MSCI Emerging Markets ETF (EEM) spent all of 2021 and most of 2022 in a downtrend until bottoming out in October of 2022. An initial rebound sparked by Chinese reopening anticipation ran through February then fizzled out. Following a March correction, EEM consolidated through April and May. Into June, EEM has resumed its upward course with a bullish Double Top breakout.
Next potential upside resistance appears at the February high near $42.30, followed by $45.35 which is based on a horizontal count. Initial support appears near $37.90 based on a 3-box reversal.
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