ETF Country Heat Map May 2024 & Dow Jones Transportation Average (DJT.I)

Investors received a reminder this week that although the high profile, sexy Technology sector often takes a leadership role in the markets and market related conversation, at key turning points it can be a lagging indicator as a late-stage sector. As recently as Tuesday, the NASDAQ Composite was up 1.1% on the week and hitting new all-time highs, but most major indices around the world were heading the other way, trading flat to down 4%. The Dow Industrials, for example, lost 2.5% and the S&P/TSX Composite Index lost 0.9%. Yesterday and overnight, selling pressure against stocks has broadened and intensified. All eleven industry groups, including Information Technology, lost ground in the last week. Real Estate, Financials, and Health Care, fell the most, while Technology and Communications slipped the least. At SIA Charts, industry performance and relative strength is based on sector Equal Weight Indices. The NASDAQ Composite Index, on the other hand, is market cap weighted, so its relative outperformance was likely due to a small number of large cap stocks still climbing (particularly Nvidia* which rallied on the back of a positive earnings report and pending stock split).

So far the retreat across world equity markets looks like a common pullback or correction after a big rally and could be due to a combination of factors. First, equity markets have been running up hard for seven months now and may be due for a rest. Second, earnings season is over so news from companies has slowed and what has come out has been mixed. Third, we are moving out of the seasonally stronger and into the seasonally weaker or more volatile time of the year. With corporate news slowing, investors have turned their attention back to the world economy and monetary policy and the outlook appears ominous. Signs of Stagflation continue to grow with inflation indicators from around the world consistently indicating that price pressures are starting to build again, weakening the case for interest rate cuts. Meanwhile, economic indicators have been pointing toward a weakening economy, particularly in the housing and manufacturing sectors. There has been a steady stream of Fed speakers continuing to sing off the song sheet of “higher rates for longer” in recent days. Next week, the rubber starts to hit the road with the Bank of Canada meeting on Wednesday and the European Central Bank meeting next Thursday. Decisions, hints, and comments from these big central banks may foreshadow whether we may see any rate cuts anywhere this summer or if dovishness has been postponed. Meanwhile, the turn of the month brings a number of key economic and inflation reports, starting with US Core PCE inflation (the Fed’s favorite measure) and Chicago PMI tomorrow. Manufacturing PMI kicks off the new month on Monday, followed by Service PMI and ADP payrolls on Wednesday and wrapping up with US Nonfarm Payrolls and Canada jobs next Friday. In addition to headline numbers investors may look to the inflation components of the PMI and employment reports to get a sense of which way the winds are blowing for monetary policy. Heading into these reports, treasury yields have been creeping upward, putting downward pressure on bonds. In this edition of Equity Leaders Weekly, we look at the geographic breadth of the current market slide and at what the underperfomance of Transportation stocks is telling us about the health of the market. * Shares of Nvidia are held in portfolios managed by SIA Wealth Management.

The ETF Country Heat Map feature, which can be found in the Markets – Indices section of SIA Charts platform, provides subscribers with visual representation of the relative performance of many different countries around the world. This not only can help investors to identify which countries are outperforming or underperforming at a point in time, but by looking over different time periods, subscribers can see how capital flows change and evolve over time.On the right at the top is the one-month heat map, which reflects how the majority of country equity markets rallied in May. Over the entire month, China staged a big recovery rebound which also helped to boost commodity prices sensitive to Chinese demand, particularly Copper. Taiwan also has had a good month, boosted by its sensitivity to the Semiconductor sector. The weakest markets over the whole month, on the other hand, are countries with particularly high exposure to the Energy sector including Saudi Arabia, Mexico, Indonesia and Brazil.The one-week chart at the bottom, meanwhile, shows that the strong upward momentum exhibited through much of May has started to fade. A broad, global pullback has started particularly on resource exporting countries, adding mining-sensitive countries like Australia, South Africa, and Canada to the mix. Developed countries appear to have dropped less for the most part relative to emerging markets.

Going back over a century to the writings of Charles Dow, Dow Theory postulates that trends in the Dow Industrials (the producers of goods and services) and the Dow Transports (companies that move goods and people around) should confirm each other. Based on that when one fails to confirm the other or diverges, it could be a sign of a pending turning point for the overall market.Earlier this month, multiple US indices rallied to new all-time highs including the Dow Industrials, the S&P 100, S&P 500 and the NASDAQ Composite. One major index which did not hit a new high and in fact did not even come close to a new high was the Dow Jones Transportation Average. Under Dow Theory this is a major non-confirmation that suggests that recent bull market may be nearing exhaustion.Not only have the Dow Transports not confirmed other indices’ breakouts, Transportation stocks are starting to head in the opposite direction. The airline sector in particular has been struggling, (American Airlines cut guidance and fired a key executive yesterday), along with courier companies and railroads.Yesterday, DJT.I completed a bearish Triple Bottom pattern with a breakdown below 14,830, which confirmed the failure of a recent breakout and signaled the start of a new down leg within a broader downtrend which started in August of 2023.Potential downside support tests appear near the 14,000 round number, then 13,830 based on a vertical count, then 13,425 and 13,030 based on horizontal counts. Initial resistance appears near the 15,000 round number, then 14,435 based on a 3-box reversal.