iShares S&P/TSX Capped Energy ETF (XEG.TO) & Dow Jones Utilities Average (DUX.I) 

The trading bounce which capped off August has faded into the start of September, historically the seasonally weakest and most volatile month of the year for stocks. With investors returning from summer vacation and responding to last week’s stronger than expected US Nonfarm Payrolls and US Construction Spending reports, equity markets have started to backslide again this week.

Between indications of a robust North American economy and energy prices continuing to rise with Russia and Saudi Arabia extending their supply cuts through to the end of the year, inflation and interest rates remain a concern for investors, impacting interest sensitive groups such as Utilities, Financials and Real Estate in particular. In late August, Fed Chair Powell left the door open to more interest rate hikes, and the 10-year US Treasury Note Yield has climbed toward 4.35%. So far this week, the Bank of Canada and the Reserve Bank of Australia have held their benchmark rates steady.

A number of significant economic announcements are due over the next ten days which may give an indication of how much pressure the Fed is under to raise the Fed Funds rate again when it meets later this month. Headline numbers include US Consumer Prices on Wednesday, US Producer Prices, Retail Sales and an ECB meeting Thursday, and US industrial production next Friday.

In this edition of Equity Leaders Weekly, we look at the impact of rising energy prices and hawkish talk in interest rates have had on the Energy and Utilities sectors.

Renewed interest in Crude Oil, which we highlighted in last week’s (August 31, 2023) edition of the Equity Leaders Weekly, has carried through into energy stocks across North America with individual names rising up the rankings in broad market reports, and sector ETFs climbing.

The Canadian Energy sector, represented here by the iShares S&P/TSX Capped Energy ETF (XEG.TO), has been in consolidation mode since a big rally topped out in May of 2022. The sector started to climb in July and in August, XEG.TO completed a bullish Spread Triple Top breakout and snapped a downtrend line.

Currently XEG.TO is retesting its May 2022 high near $17.60. A close above that level would signal the start of a new advance for the Energy sector. Next potential upside resistance for the ETF price appears near $19.85 and $20.65 based on horizonal counts. Initial support appears near $15.95 based on a 3-box reversal.

In contrast to the accumulation in resource sectors such as Energy, interest sensitive sectors such as Utilities and Financials across North America have come under distribution over the summer on growing concerns that interest rates may have to either keep climbing, and/or remain at an elevated level for longer than had previously been hoped by investors.

For example, the Dow Jones Utilities Average (DUX.I), peaked a year ago and has been steadily sliding since, establishing a new downtrend of lower highs set in January and May. Selling pressure has intensified over the last month, continuing into September with DIX.I taking out a significant support level near 880, completing a bearish Spread Triple Bottom pattern and continuing to fall through the floor. With a dismal SMAX score of 0, DUX.I is exhibiting weakness across the asset classes.

DUX.I is currently approaching its October 2022 low near 838 where a breakdown would confirm the start of a new downtrend. Should that occur, next potential support appears near 789 where the March 2021 low clusters with vertical and horizontal counts. Initial rebound resistance appears near 890 where a retest of the recent breakdown point converges with a 3-box reversal.