Monthly Sector Scopes Update - July 2024  & iShares U.S. Real Estate ETF (IYR)

There’s no shortage of activity this summer as markets continue to present opportunities across the broad universe, including mid and small-cap stocks. The season is also rich with exciting news, as big earnings reports are in full swing. Mid-week, a notable market rally, driven by significant gains in the NASDAQ and a sharp increase in Nvidia, seemed to be fading as global markets turned choppy. Overseas, the Nikkei and Hang Seng declined, while European indices such as the CAC, DAX, and FTSE also fell. However, the situation reversed dramatically after the Bank of Japan raised its benchmark interest rate to 0.15%, boosting global markets. Asia-Pacific indices surged, and European markets saw gains as well. Middle East tensions intensified with Israeli strikes in Lebanon and Iran, causing a 3.5% jump in US Crude Oil prices amid a fifth consecutive week of declining US inventories reported by API. Despite these rising political tensions, commodity actions suggest that investors are anticipating a slowing global economy and decreased resource demand. In currency markets, Gold saw a marginal increase, while Bitcoin and Ether experienced mixed movements. The US Dollar remained flat throughout the week as the Fed made its interest rate decision, confirming no immediate rate cut but hinting at a potential reduction in September. The Yen surged, pushing USDJPY to 150, and the Aussie Dollar also gained. Despite the geopolitical turmoil, US Crude Oil continued to rise, up another 0.6% today as tensions in the Middle East persist and US inventories decline. Conversely, Copper has started to drop, falling 1.25% so far today, indicating traders remain concerned about the economy and the outlook for resource demand. This is an opportune moment to review the SIA Sector Scopes, which can illustrate shifts in sentiment at a sectoral level. We will then examine the US Real Estate sector as a beneficiary of these changes in sector sentiment.

The Sector Scopes feature in SIA Charts, found in the Markets – BPI section, provides investors with a visual snapshot of the Bullish Percent (percentage of stocks in the sector on a bullish signal) for 31 industry groups. This offers insight into which sectors are attracting capital and how those capital flows and investor sentiment change over time.Over the past month, sectors have been steadily shifting rightward on the spectrum, a sign of increasing market strength and a stronger bullish percent across a broad range of groups. This indicates a rising but not overbought market. It also suggests that Market Breadth is increasing, as many sectors are attracting capital and driving the overall indices.Looking at the relative placement of these 31 groups tells an interesting story. On the very left-hand side, you see Electronics and Semiconductors, suggesting that high-flying chip makers are experiencing some selling pressure and, consequently, capital outflows. In all of our SIA Models, we have already removed a popular chipmaker, Nvidia, as a position generating healthy gains for the model performance. On the right-hand side, we see more interest rate-sensitive sectors such as Real Estate, Banks, and Telecommunications attracting capital inflows. This may indicate that the markets anticipate the end of the interest rate tightening cycle and a shift to an interest rate easing cycle is imminent in the US. Canada has already started to cut its rates. Some of these sectors on the right-hand side are prime beneficiaries of an interest rate easing cycle.

Real Estate has been under pressure ever since interest rates began to rise in early 2022. However, in late 2023, the shift to a slightly more dovish central bank outlook triggered a trend reversal. As mentioned earlier, Real Estate is a prime beneficiary of the end of rate hikes.Looking at the attached point and figure chart on a 1% scale, we see that the US real estate sector, represented here by the iShares U.S. Real Estate ETF (IYR), was under distribution for nearly two years. While the majority of the losses occurred in 2022, the final downdraft, which took the ETF to a new low, happened during the October-November 2023 selloff. The shares finally bottomed out in December of last year. At that time, IYR reversed trend, and the accumulation phase began in earnest when it cleared the long-term downtrend line at $81.52. Since then, a small pullback occurred from February to June of this year, but the bulls regained control this month when the market received further clarity on the interest rate path going forward. The shares have cleared two prior resistance levels at the August 2023 high of $87.40 and another prior resistance line at $91.86.The next area of upcoming resistance can be found at $97.51, and above that, at $103.51, then the high prior to the interest rate tightening cycle in early 2022, at a price of $108.79. To the downside, support is at its 3-box reversal, $90.95, and below that, $87.40. With a SMAX score of 9 out of 10, IYR is exhibiting near-term strength against the asset classes.