Russell 2000 Index (RLS.I) & iShares MSCI Emerging Markets ETF (EEM)

Equity markets have continued to trend broadly downward over the last week. Headwinds from rising treasury yields continue to increase as the US 10-year Treasury Note yield touched 5.00% for the first time since 2007 and the German 10-year Bund yield took another run at 3.00%.

Although the majority of results from big cap stocks to date have been coming in above expectations, this really has not helped equity market sentiment. Stocks who have missed expectations have tended to be punished, several stocks like American Express and Alphabet sold off even though their headline numbers beat the street, and even stocks that have rallied on earnings like Netflix, have not moved up enough to offset previous declines. Overall, the market reaction to this round of earnings reports appears to be investors looking for reasons to head for the exits more than looking for reasons to step up and buy more.

Even areas of the market which had done well recently such as Energy and Gold have paused this week, part of which may be related to consolidation after a move, and also perhaps due to hostilities in Gaza pausing enough to allow aid trucks to move in and deliver supplies to civilians. This situation remains fluid, however, and really could go either way in the coming days. Looking across countries and sectors there really hasn’t been anywhere for investors to hide this week. While few of the Sector ETFs we follow have actually broken down, many which recently staged 3 or 4-box reversals to the upside have now reversed these moves rolling down 3-4 rows and back into O columns. Similarly, every Country ETF we follow declined in the last week, nearly all dropping more than 1.0% and some falling 5-6%, with declines happening in both Developed and Emerging Markets.

The next ten days are extremely active for business news. The main event is next Wednesday’s Fed meeting. FOMC members have forecast the potential for one more interest rate increase this year, which leaves this meeting or the December meeting. While Fed members have kept up their hawkish rhetoric, investors should note that other central bankers have kept rates steady this month, including Canada and Australia.

Two key economic numbers the Fed may look to for help with their decision-making included US Q3 GDP out this morning, and US Core PCE Inflation due tomorrow morning. The turn of the month next Wednesday also brings a flurry of economic numbers including Manufacturing PMI reports from around the world, plus ADP payrolls and US Construction spending.

Earnings season continues to roll on. In the US, Amazon.com, Intel, Merck, MasterCard and many others report results today, Big Oil names like Chevron and Exxon Mobil report tomorrow,. Headliners next week include McDonalds on Monday, and Apple plus Starbucks next Thursday. Earnings season ramps up this week in Canada as well with several senior miners, energy producers and industrials set to report including Air Canada on Monday and Shopify next Thursday.

In this edition of Equity Leaders Weekly, we look at how recent breakdowns in US small caps and emerging markets indicate that investor appetite for risk has declined and sentiment has become more cautious lately.

The Russell 2000 Small Cap Index (RLS.I) is commonly utilized by investors as an indicator of risk appetite/tolerance among investors and for breadth confirmation of market trends. After selling off in the first half of 2022, the Russell 2000 has been stuck in a sideways trading range between 1,640 and 2,000.

Although RLS.I did have upswings in Jan-Feb and June-July of this year, the bounces in small cap stocks this year have been modest relative to some of the big cap names, particularly the so-called “Magnificent Seven”, a sign that what index gains there were this year have mostly been contained to a few large-cap, high-profile stocks and sectors, a sign of high concentration, low breadth, and perhaps a false or unsustainable rally.

Since August, when RLS .I failed to overcome resistance between the 2,000 round number and 2,030, small caps have been under distribution. A bearish Triple Bottom pattern breakdown in September signalled the start of a downswing.

Currently, RLS.I is testing channel support. A close below 1,635 would complete a pending bearish spread triple bottom pattern and signal the start of a new downtrend which could be confirmed if long-term 45-degree uptrend support near 1,575 were to be broken as well. A horizontal count suggests potential downside between 1,395 and the 1,400 round number. Initial resistance on a rebound appears between the 1,800 round number and 1,810 based on a 3-box reversal.

As we mentioned earlier in this report, it has been a difficult week for International Equities, both in developed markets, where Germany and Hong Kong broke down and in emerging markets where a pullback in commodity prices and US Dollar strength appears to be weighing on exporters like Canada, Mexico, the UK and South Africa.

From the end of 2022 through the first eight months of this year, emerging markets, represented here by the iShares MSCI Emerging Markets ETF (EEM), were bouncing back from a major 2021-2022 selloff. At the time this suggested improving investor confidence and anticipation of a strong economic rebound in China as it reopened from COVID lockdowns. In August, however, EEM failed to break through its February peak and since then, it has turned back downward.

EEM has really started to break down in the last week, completing a second bearish Double Bottom pattern that has combined into a Bearish Catapult, and also snapping an uptrend line to confirm the start of a deeper downturn. Previous column highs and lows suggest the potential for downside support near $35.70, $34.00, or $32.95. Initial rebound resistance appears near $38.30 based on a 3-box reversal.