Russell 2000 Index (RLS.I) & Natural Gas Continuous Contract (NG.F)

Investor sentiment has turned negative across the board this week. Of the 30 countries and regions we monitor at the Equity Leaders Weekly, 29 are down and one is flat. Ten of the eleven major industry groups are down, led by selloffs in Information Technology and Consumer Discretionary. Only defensive Utilities managed to eek out a small gain.

Until yesterday, when the NASDAQ lost 3.6% and the S&P 500 fell 2.5%, US indices had been close to flat on the week but there had been significant broadening and rotation away from the concentrated large cap and technology driven market to broader participation, including small cap stocks.

Yesterday, the Bank of Canada cut its benchmark interest rate for the second meeting in a row, blaming a softening North American economy and GDP growth being unable to keep up with population growth. This may set the stage for a Fed rate cut this summer, but these comments combined with recent soft economic numbers, including a downturn in US flash Manufacturing PMI and other survey data this week, suggests that rate cuts may be a more a sign of a weakening environment for corporate earnings than victory over inflation. The Fed meets on Wednesday. Market and media chatter suggests that there may not be a US interest rate cut this quickly, but traders may look to the Fed for hints on whether a September rate cut is on the table or not.

Earnings reports have increased this week both in terms of number and of sector participation.

Yesterday’s market selloff was sparked by disappointing results from Tesla, while investors dug all through Alphabet’s quarterly numbers to find something to be disappointed about since top line sales and earnings beat expectations. This suggests that as we move deeper into earnings season, investors continue to look more for excuses to take profits and head for the door than for reasons to step up and buy equities.

We are now moving into the peak ten days of earnings season, particularly in the US. Over the rest of this week and all of next, numbers continue to roll out from Big Industry, Big Tech, Big Pharma, Big Oil and…well you get the idea. Headliners include Apple*, Amazon.com, Exxon Mobil, Microsoft*, Meta Platforms, Merck, McDonalds, MasterCard, and many others. Canadian headliners include Canadian Pacific, Canadian Natural Resources, Cenovus Energy, BCE, Bombardier*, Imperial Oil*, Enbridge, Thomson Reuters*, and many others.

It's also a busy time for economic numbers, starting with US Q1 GDP today and continuing through next week with Manufacturing PMI reports all building up to next Wednesday’s Fed decision and next Friday’s US nonfarm payrolls report.

*Shares of Apple, Microsoft, Bombardier, Imperial Oil, and Thomson Reuters are held in portfolios managed by SIA Wealth Management.

In this edition of Equity Leaders Weekly, we look at Russell 2000 Index (RLS.I) to ascertain some support and resistance level for the current small cap rally as well as provide an update on the Natural Gas Continuous Contract (NG.F) chart.

Russell 2000 Index (RLS.I)

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.In the first half of 2024 the equity market increase was that much of the gains were concentrated in a small number of large cap stocks in a few sectors, mainly technology, communications and industrials. Most recently the equity market strength broadened out and participation increased dramatically with the small and mid cap troops finally following the large cap generals higher. Furthermore, it indicates early signs that money flow seems to be moving from the Large Cap into the Small Cap space. This may be attributed to the markets believing that the Fed will have to start cutting interest rates soon triggering the next expansionary cycle. Typically, small caps generally perform well at the beginning of an expansionary cycle as opposed to a late cycle as the Russell 2000 index has risen over 10% in the past month alone while the S&P 500 down 0.38% in the same time frame.

In the attached Point and Figure chart on a 2% scale, we see an interesting pattern develop. A steady pattern of higher highs and higher lows has materialized, and the price broke above 2158.00. What is most interesting is that the Russell 2000 scored five straight days of gains greater than 1%, marking its longest winning streak since April 2020 outperforming the S&P 500 by about 9% during this stretch. The next resistance level is at 2383.44, then above that, 2479.73. Support is at its 3-box reversal of 2034.24. Further support can be found at 1879.33 and below that, 1702.16.With a bullish SMAX score of 8 out of 10, RLS.I is showing strength against all the asset classes.

Natural Gas (NG.F) trading tends to follow a relatively consistent seasonal trading patterns driven by seasonal swings in supply and demand. Demand tends to have a big spike in the winter for use in home heating and a smaller spike in the summer for home cooling. Meanwhile the potential for disruptions to supply during hurricane season can have short term impacts on the price as well.

Unlike Crude Oil, Natural Gas is continuing to move in a

long-term downtrend. Last winter we experienced the first El Niño in seven years leading to a very unusual warm winter in many parts of North America contributing to the downtrend in natural gas prices with a new low established last winter in February.

In looking at the attached point and figure chart on a 2% scale, you can see this low established back in February as the warm winter caused a decrease in demand for the past winter’s home heating usage. A rally materialized in May of this year as the markets may have anticipated an increase in demand for summer home cooling but as you can see the rally stalled earlier this month almost bumping its head at the long-term downtrend line a $3.18 with the negative trend remaining in its longer term downswing.

Currently, NG.F is testing support at $2.06. If it does not manage to hold here, further support can not be found until $1.67, and below that, $1.53. To the upside, resistance can be found at its 3-box reversal of $2.39 and, above that, $2.94 and then $3.30 when it bumped its head during its recent short rally earlier this summer.With a bearish SMAX score of 0 out of 10, NG.F is exhibiting absolutely no strength against the asset classes.

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