Sector Scopes Monthly Update September 2023 & iShares MSCI Germany Index ETF (EWG)

Equity markets continue to struggle with direction this week. The typical September slide was halted for a couple of days by bargain hunters and then resumed following soft earnings and guidance from the technology and airline sectors, which raised concerns about cost increases outpacing revenue increases. In addition, the Bank of Japan has started to hint that it could be ready to exit negative interest rates sometime next year; a hawkish turn from the last remaining dove.

Eight of the eleven main industry groups lost ground in the last week with Technology, Communications and Consumer Discretionary posting the largest declines. Utilities, Energy and Financials were the three positive performers boosted by a combination of rising energy prices and treasury yields levelling off.

The main reason for investors sitting on their hands, indecisiveness about what the Fed may do about interest rates in the coming months, could potentially get resolved next week. On Wednesday the 20th, the US central bank announces its latest interest rate decision and releases member forecasts for Fed Funds, GDP, inflation and employment.

The Fed is widely expected to hold steady this meeting and then potentially announce one more rate hike at its next meeting based on the last dot plot and a shift to increases every other meeting. Any change or hints toward change from the decision, statement, forecasts or press conference could potentially spark a reaction from investors.

The European Central Bank meets today and the Bank of England meets next Thursday, of the two, the ECB appears more likely to raise rates as it has the furthest to catch up. The earnings calendar is light but the economic calendar is active with a focus on inflation numbers, retail sales and housing market data for several countries.

In this edition of Equity Leaders Weekly, we take our monthly look at what the sector scopes are telling us about capital flows and at the troubling weakness in German equities.

The Sector Scopes feature in SIA Charts, found in the Markets – BPI section, provides investors with a visual snapshot of the Bullish Percent (percentage of stocks in the sector on a bullish signal) for 31 industry groups. This provides insight into which sectors are attracting capital, and which are not at a given point in time and also how capital flows and investor sentiment change over time.

A month ago, most groups were clustered near the middle of the chart and spread evenly out on both sides, a sign of a neutral, balanced market. In recent weeks, the bulk of sectors have shifted leftward, meaning that bullish percent has decreased. The majority of groups are now in the center-left columns, a sign of a bearish, but orderly market decline, that is not oversold, a sign of a moderate correction not a panic.



Over the last month, sectors with the largest, bearish, leftward shifts include Banks, Tobacco, and Transportation, while the larger bullish rightward shifts include Computer Software, plus Electronics and Semiconductors. Energy and Insurance remain at the right end of the spectrum with high bullish percent, while Utilities continue to struggle on the left side.

The relative strength of International Equity markets has weakened significantly over the course of the summer, falling in the SIA Charts Asset Class rankings from first place to fourth between June and August as US Equity, Commodities and Canadian Equity left International in their dust.

This relative weakening in international markets has emerged in both developed and emerging markets. As an example of developed markets starting to struggle, Germany, represented by the iShares MSCI Germany Index ETF (EWG) has started to roll over. Even into August, EWG remained in an uptrend but in recent weeks, it has faltered and recently completed a bearish Triple Bottom pattern, signaling the start of a new downswing.

Next potential support for EWG appears near $25.55 based on a previous low, followed by $24.55 based on a horizontal count. Initial resistance appears near $28.25 based on a 3-box reversal.