Copper Continuous Contract (HG.F) & Russell 2000 Index (RLS.I)

Equity markets around the world have staged a big relief rally over the last week. China has led the way with gains of around 5% as it continues to rebound from depressed levels, followed by Europe where markets are up 2-4% on average. North America has had more of a pause than a bounce with Canada and Mexico gaining around 1.5%, but the US is pretty much flat. This bounce may be short lived, however, as US markets started to backslide yesterday and index futures are down this morning as well.

Investors have also seen no news from the Middle East as good news for the moment, sparking corrections in markets that has recently gained on war fears such as Gold and Crude Oil. Focus has turned this week to earnings season where the reaction to news has been very mixed. A number of high profile stocks, particularly in the Technology sector have staged large corrections, including Meta Platforms* this morning. On the other hand a number of companies in the cyclical Industrials and Consumer Discretionary sectors, along with some Financials, have been rallying on earnings news, indicating significant sector rotation may be underway and a positive sign for market breadth.

All eleven primary industries are up in the last week with Utilities and Financials staging the strongest gains. Some of the lagging groups include Materials, Technology and Industrials. We are now in the heart of earnings season and results have been flooding out across a number of sectors. Big Tech reports continue tonight headlined by Microsoft* and Alphabet followed by Big Oil tomorrow, headlined by ExxonMobil, Chevron and Imperial Oil. Big US names reporting next week include Apple, Amazon.com, Eli Lilly*. Mastercard, Coca-Cola, and McDonalds. Canadian earnings season also continued this week with results on the way from big name energy companies, telcos, miners and insurance companies. Headliners include Canadian Natural Resources*, Cenovus Energy, TC Energy, BCE, Telus, Great West Lifeco and Thomson Reuters.

The next ten days are also potentially very active for economic and monetary news. The main event is next Wednesday’s Fed decision where investors may be watching for hints on whether the Fed in prepared to slam the door on a potential June interest rate cut or not with “higher for longer” still the party line at most major central banks. Today US Q1 GDP is out and the turn of the month brings a number of other reports include US ADP and nonfarm payrolls, Core PCE inflation, Manufacturing and Service PMI, construction spending and more. In this edition of Equity Leaders Weekly, we look at what the resurgence in the price of copper is telling us about the world economy and what small caps are saying about market sentiment. *Microsoft, Meta Platforms and Canadian Natural Resources are held in portfolios managed by SIA Wealth Management.

With its wide variety of applications in industrial and consumer products, Copper (HG.F) is widely seen as being one of the markets most sensitive to swings in the global economy. In recent years, due to its high demand for resources, business conditions in China have become a significant driver of Copper demand.In the March 14th edition of Equity Leaders Weekly, we highlighted that Copper was breaking out of a base over $4.00/lb. Since then, it has soared 9.9% toward $4.50/lb. Along the way it has mowed down the resistance levels we identified back in March to trade at its highest level since the summer of 2022.Copper’s resurgence has been in tandem with an improvement in sentiment toward China, a large source of demand for base metals. Resource demand has also benefitted from a robust economy in other parts of the world as well, particularly the United States. Large recent gains in the price of copper, other base metals and energy prices may also, however, stoke the fires of inflation, particularly in the industrial side, which may keep the pressure on central banks to keep interest rates at higher levels. For now the rally in copper has also been a driving force behind renewed interest in metal producers.

Building on last month’s breakout, Copper has launched into a full-blown recovery rally, building a big bullish High Pole without even a 3-box correction as of yet, a sign of strong underlying support from investors. Approaching the $4.50 round number, next potential upside resistance tests after that appear near $4.67, $4.77, and $4.96 all based on previous column highs. Initial support appears near $4.32 based on a 3-box reversal.

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.

Small cap stocks started the year off strong, soaring from the bottom to the top of a 1670 to 2000 trading range, then breakout out and posting further gains, which was seen as a sign of confirmation for an equity bull market in large cap stocks. This month, however, small caps and other areas of the market which usually benefit from higher risk appetite such as technology/momentum names, and cryptocurrencies, have all started to retreat, a sign that enthusiasm and risk appetite are starting to slip.While large cap equity indices have rolled into O columns but have not dropped back enough to generate bearish signals, the Russel 2000 has broken down outright, not only completing a bearish Double Bottom pattern, but also falling back under the 2000 level which reverses polarity to become initial resistance along with 2030 based on a 3-box reversal. It didn’t help that the previous rally was contained by the two-year peak near 2130.Next downside support appears near 1,890 which has flipped back and forth between support and resistance several times over the last two years, followed by 1765 where a 45-degree support line and a horizontal count converge.