Natural Gas Continuous Contract (NG.F) & SPDR S&P Bank ETF (KBE)

Despite being interrupted by an extended long weekend in the US and Canada, the last week has been a constructive one for global equity markets. Major North American and Emerging Market indices finished June and Q2 off strong and have held on to their gains so far this week. There has been some softness in Europe this week which may be related to disappointing Manufacturing and Service PMI reports from several countries there. Manufacturing reports from the US and Canada were also soft but partially offset by strong US Construction Spending. The rest of this week brings a flurry of economic reports including US Non-manufacturing PMI, US ADP Payrolls today, and US Nonfarm Payrolls, Canada Employment, and wage inflation reports for both countries tomorrow.

Economic data is attracting particular attention this week as investors start to focus in on the environment for corporate earnings. Earnings season starts next Thursday and with equity markets having continued to climb since the end of the last earnings season, higher expectations have been getting built into stock prices. Confession season has been quiet so far which can be seen as supportive, but its unclear at this time whether investors may focus more on past results or forward guidance.

Friday’s Canadian numbers may also attract attention heading into next week’s Bank of Canada meeting where the central bank is widely expected to raise its benchmark rate by another 0.25%. The Reserve Bank of New Zealand, who has been a lead domino in the current monetary tightening cycle, also meets next week.

Market gains of the last week have been broad-based with interest sensitive groups (Financials, Utilities, and Real Estate), leading the advance. Energy stocks have also been doing well with oil and gas prices on the rise.

In this edition of Equity Leaders Weekly, we look at the recent rally in Natural Gas and at the US Banking sector.

Natural Gas (NG.F) trading tends to follow a relatively consistent seasonal trading pattern driven by seasonal swings in supply and demand. Demand tends to have a big spike in the winter for use in home heating and a smaller spike in the summer for home cooling. Meanwhile the potential for disruptions to supply during hurricane season can have short term impacts on the price as well.

Natural Gas and Crude Oil (CL.F) have rallied in recent weeks as demand for air conditioning has spiked from a heat wave in North America. The first El Niño in seven years may have the potential to spark additional weather disruptions in the coming months that could impact trading in energy markets.

After steadily climbing up out of the 2020 market bottom for over two years, the price of Natural Gas peaked in September of 2022. NG.F came under distribution through the fall and then really sold off near the end of the last heating season. Since March, NG.F has been bottoming and base building in the $2.00-$3.00/mmbtu range.

Earlier this month, NG.F staged a bullish Double Top breakout, but it needs to close above $3.02/mmbtu to confirm the start of a new uptrend. Should that occur, next potential resistance may appear near $3.40 and then $3.72 on trend based on a combination of vertical/horizontal counts and previous column highs/lows. Initial support appears near $2.53 based on a 3-box reversal.

Although it was the big bank selloff in March when investors and the press noticed the struggles of the banking sector, the downtrend in bank stocks which was primarily driven by co-ordinated global monetary tightening actually ran from January of 2022 through to May of this year.

For the last two months, the SPDR S&P Bank ETF (KBE) has quietly been climbing, establishing a new uptrend of higher lows, including one that contained a correction following a false breakout last month. Over this time, fears about the recent crunch and shakeout in regional banks spreading into a wider contagion has faded. Confidence in big banks has also improved in the last few days since the Fed announced that they all passed their annual stress tests last week.

Attention may now turn to the upcoming US bank earnings season which starts on Friday the 14th and runs through the week of the 17th. Investors may look to bank reports not only for their own results, but for commentary about the health of the sector and of the economy in general.

A breakout for KBE above $38.30 would complete a pending spread double top pattern, complete a base that has been forming, and signal the start of a new uptrend. Should that occur, next potential resistance may appear near $40.65 based on a horizontal count, $41.45 based on a previous column low, or a downtrend line near $44.00. Initial support appears near $35.00 based on a 3-box reversal.