S&P 500 Index (SPX.I) & Dow Jones Utilities Average (DJU.I)

On the surface it has been a positive week for world equity markets with the Dow Industrials reaching 38,000 the S&P 500 rallying to new all-time highs and most major indices in the green. Looking under the hood, however, there do appear to be reasons for concern.

First, index gains remain concentrated in a few sectors, specifically Technology, Communications, Health Care and Consumer Staples. On the other hand, the interest rate sensitive groups like Financials, Utilities, Homebuilders, and Real Estate have been struggling to start the year and the response to earnings reports from the Financials who have reported so far was muted at best.

Second, China-sensitive stock markets, commodities and resource stocks (Energy and Materials) have bounced back in the last three days but that was primarily because China announced a series of support moves including a fiscal stimulus package, and a cut to bank reserve requirements in a big to try and prop up a weak economy, avoid a real estate collapse, and stop their equity markets from falling off a cliff.

Third, outside of Consumer Staples, Netflix* and IBM, where results were well received, most of the giants in the sectors which have been driving the market forward so far this year have not released earnings or guidance yet. That situation is going to change dramatically over the next ten days. The market response to the results that are already out has been mixed to date overall with a number of significant selloffs post earnings including Tesla, 3M, and UnitedHealth.

Fourth, many investors are familiar with the work of Charles Dow, founder of the Wall Street Journal and father of western Technical Analysis. Over a century ago, Dow indicated that for a trend to be valid, the Dow Industrials and Dow Transports need to confirm each other. Currently, the Dow Industrials have broken out to new all-time highs, but the Dow Transports have failed to confirm with their own breakout, and in fact have been struggling with negative reactions to FedEx and Delta Airlines results in recent weeks, an ominous sign.

We are now moving into the heart of earnings season with a big week for results coming out of Big Tech, Big Pharma, Big Industry, and Big Oil, including 5 of the “Magnificent Seven” (Tesla reported last night and Nvidia reported last month). Headliners include Intel* and Visa tonight, Caterpillar tomorrow morning, Microsoft*, Alphabet, General Motors and Starbucks on Tuesday, Boeing, Mastercard and MetLife next Wednesday, Apple, Amazon.com and Meta Platforms* next Thursday and ExxonMobil plus Chevron next Friday. Canadian earnings season gets underway next week starting with Canadian Pacific on Tuesday, Rogers next Thursday and Imperial Oil next Friday.

Central banks and the direction of interest rates also move back into the spotlight. The market rally of November and December was driven by speculation of a dovish Fed pivot toward cutting interest rates. That may have been overdone, however, as treasury yields have rebounded as Fed officials have been walking dovishness sentiment back toward neutrality since the start of this year.

Yesterday, the Bank of Canada announced a “neutral hold” indicating that it is expecting a more or less flat economy this year and that while inflation pressures have eased, core inflation has not come down as quickly. In other words, they hinted that rate hikes are likely done but they are not ready to start cutting rates either pending more improvement in inflation.

The European Central Bank this morning and central bank meetings continue next week with the Fed meeting on Wednesday and the Bank of England next Thursday. While interest rates are likely to remain on hold, investors may be keen to search for hints on how long central bankers intend to keep rates high, if any more hikes are still being considered, and when they may start to cut interest rates.

Other notable economic announcements on the way include US Q4 GDP today, US Core PCE inflation tomorrow, ADP Payrolls next Wednesday, Manufacturing PMI reports next Thursday and US Nonfarm Payrolls next Friday.

In this edition of Equity Leaders Weekly, we compare the S&P 500 Index and the Dow Jones Utilities Average as examples of diverging investor sentiment.

*Shares of Netflix, Intel, Microsoft, and Meta Platforms are held in portfolios of SIA Wealth Management.

The S&P 500 Index, the premiere benchmark for the US equity market has been on a roll since November, rallying from near 4,180 toward 4,850 without even so much as a 3-box correction on a 1% chart. Shrugging off a late summer/early autumn correction the S&P has resumed the uptrend which started back in October of 2022.

This month, the S&P has finally clawed back all of its 2022 bear market losses and has broken through its January 2022 peak to signal that a new advance for equities has commenced. Initial upside resistance may emerge near 4950 based on a horizontal count, then the 5000 round number, and 5470 based on a vertical count.

While many investors who look at Dow averages focus mainly on the Industrials and Transports, the Dow Jones Utilities Average (DJI.I) can also provide useful insights, particularly in relation to how investors are viewing interest rate sensitive and mature, defensive, value stocks.

The Dow Utilities have been trending downward since peaking in September of 2022. Last fall, the index started to rebound as treasury yields fell but by the end of the year it had stalled out near downtrend resistance.

With treasury yields bouncing back, the Dow Utilities have turned downward once again, completing a bearish Double Bottom breakdown and taking out an uptrend line. Previous lows suggest the potential fur support near 797.25 or 781.55. Initial rebound resistance appears near 871.95 based on a 3-box reversal and a retest of a recent breakdown point.