iShares US Home Construction ETF (ITB) & iShares US Industrials ETF (IYJ)

Shrugging off the softness that emerged earlier this month, equity markets around the world have resumed their broad-based advance this week, particularly in the last two days. With a quiet confession season suggesting that corporate managements generally expect to be close to or exceed their Q2 targets, investor confidence has continued to improve heading into earnings season which starts this week.

Gains have been very broad-based across sectors over the last week with 29 of the 31 groups SIA Charts tracks posting gains. Leading gainers are dominated by cyclical groups including Automotive, Consumer Durables, Media, Metals and Aerospace. Laggards are dominated by defensive groups including Tobacco, Food & Beverages, Telecommunication Services, Wholesale and Utilities.

The big question now is whether guidance can meet expectations and whether investors who have been buying on anticipation of results are prepared to keep going or if some may be looking to take profits against the news. The first week of results is dominated by national and then regional US banks along with other Financials including brokerages and credit card providers. Results are also due in the coming days from airlines, railroads, US miners, and selected big names including Tesla Motors, Netflix, IBM, Schlumberger, Johnson & Johnson and others.

Renewed indications that we may be nearing the end of the rising interest rate cycle and shifting into pause mode also appear to be helping support stock prices. Following in the footsteps of the Fed, the Reserve Banks of Australia and New Zealand have paused rate hike programs this month, while the Bank of Canada announced a catchup increase as was expected.

A bigger than expected decrease in the US Consumer Price Index announced yesterday could reduce pressure on the Fed to resume rate hikes and potentially enable it to remain on hold for longer. The US 10-year treasury note yield which recently peaked above 4.00% has started to backslide, easing a headwind that equities had been facing.

Inflation and retail sales reports from the US, Canada, and the UK dominate the economic calendar for the coming week, along with US housing reports.

In this edition of Equity Leaders Weekly, we look at recent advances in homebuilders and industrials as examples of investor confidence in the economy and interest in cyclicals.

Homebuilders have the potential to be active in the coming week with several US housing market indicators on the way and some companies in the sector starting to report earnings.

As one of the largest purchases/investments most people make in their lifetimes, demand for new and resale homes provides insight into the state of consumer/investor confidence. As interest rates started to rise last year, the iShares US Home Construction ETF (ITB) fell under distribution, bottoming out in June and confirming the bottom in October.

With the North American economy remaining resilient in the face of rising interest rates, ITB has been under accumulation since October, advancing in an uptrend of higher lows and staging a series of bullish Double Top and Spread Double Top breakouts and Bullish Catapults. So far this month, the ITB has broken out over its January 2022 peak, retested its breakout point as new support and rallied to new highs once again, indicating continued accumulation.

Upside resistance may appear near $89.10 based on a vertical count, then $98.40 based on a horizontal count. Initial support appears near $83.10 based on a 3-box reversal.

Trading action in core cyclical groups such as Industrials reflect investor sentiment toward the economy and equities in general and can be a key indicator of market breadth. Industrials may attract attention in the coming days with leaders from several subsectors set to report results including Transports (Airlines & Railroads), and Defense contractors.

The iShares US Industrials ETF (IYJ) peaked in the fall of 2021 and unlike the S&P 500, it did not touch a new high in early 2022 before turning downward. IYJ bottomed out with the overall market last October and has been steadily recovering since then. In the last two months, gains by IYJ and underlying stocks in the Industrials sector have become a sign of increasing bull market breadth.

IYJ has been under steady accumulation since establishing a higher low in May. Over the last two months, IYJ has completed bullish Double Top and Spread Double Top breakouts and rallied to its highest level since January of 2022 without even a 3-box correction along the way.

Initial upside resistance appears at the fall 2021 highs near $113.15, followed by $115.40, $126.25 and $128.75, which are based on vertical and horizontal counts. Initial support appears near $103.45 based on a 3-box reversal and a retest of a recent breakout point.