The last week has been relatively quiet for stock markets around the world, but that could change as the business, economic and political calendars for 2021 all start to ramp up in earnest over the coming days, particularly after Monday’s US holiday. Earnings season kicks off Friday with results from three of the biggest US banks (Citigroup, JPMorgan, Wells Fargo) and continues next week with regional banks, investment banks and other senior financials joining in. With the financial sector having exposure to so many parts of the economy, investors may look to them for insights into economic conditions. Next week results also start to come in from senior oilfield service companies, railroads, airlines, technology, and manufacturing companies. It’s also a week for potential political changes. President Trump’s term of office ends on Wednesday with the inauguration of President-Elect Biden. Starting with today’s Biden speech, investors should start to get an indication of the incoming administration’s priorities in terms of fighting COVID (vaccines/lockdowns/other measures), and in dealing with the economic impact of COVID (continuing or additional fiscal stimulus). The coming days may also bring more indications from central banks about their monetary support plans for this year. Fed Chair Powell speaks today and then next week the Bank of Canada, Peoples Bank of China, European Central Bank and Bank of Japan are all holding regularly scheduled meetings. In this week’s issue of Equity Leaders Weekly, we focus on recent trends in the Financials and Energy sectors heading into earnings season.
The energy sector spent the second half of 2020 stuck in consolidation mode reeling from a roller coaster crash and bounce in the first half of the year. The recent rally and breakout in crude oil prices, particularly WTI regaining the $50.00/bbl level, has carried over into energy stocks which have been attracting renewed interest heading into earnings season. Results start next week with the US drillers, from whom investors may look to for signs of whether prices have recovered enough to restart exploration activity heading into the historically busier winter season. Focus then turns to results from the integrateds, large producers and then moving along into the middle tier and small cap companies over the next several weeks. In addition to results, investors may look to management teams for insight into market conditions and exploration development plans (particularly increases or decreases in budgets). The BMO Equal Weight Oil & Gas Index ETF (ZEO.TO) had a choppy second half to 2020, getting whipped around in the $22.00 to $32.00 range. In recent weeks, signals of accumulation have become clearer with the ETF snapping out of a long-term downtrend completing a bullish Double Top breakout and blasting through its June high near $32.15 in recent weeks. Next potential upside resistance appears near $34.80 then $38.10 based on horizontal counts. Initial support appears near $30.90 based on a 3-box reversal.
Through lending to consumers/businesses/governments, investment banking, insurance, trading, wealth management, credit cards and other services, the financials sector is sensitive to nearly every aspect of the economy, financial market conditions and interest rates. Heading into this quarter’s round of earnings reports the economy has continued to recover, but cracks have started to appear. Because of this, changes in loan loss provisions may be particularly significant as further decreases would indicate an improving economy, but renewed increases would suggest that the latest wave of lockdowns could negatively impact business conditions. Stocks and commodities have been climbing in recent months which could boost trading and wealth management results. Traded interest rates in the US have started to rise which could help to improve profit margins on lending (spreads) moving forward. Sentiment toward the Financials sector has improved significantly since the last quarterly earnings season back in October. Through the summer and early autumn, the iShares US Financials ETF (IYF) was stuck in a sideways trend. In November, the sector came under renewed accumulation with IYF completing a bullish Triple Top breakout followed by a bullish Spread Double Top breakout which signalled the start of a new uptrend. Since then, the sector has been steadily climbing, with IYF taking a run at its previous peak near $70.20 without even a 3-box correction along the way. Next potential resistance on a breakout appears near the $75.00 round number then the $77.60 to $78.40 area where vertical and horizontal counts converge. Initial support appears near $66.20 based on a 3-box reversal.
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