Between the end of the quarter, the start of summer and holidays in the US and Canada, the last week has been one of the quietest for equity markets in a long time. The coming ten days, however, have the potential to be quite different, as we move into July earnings season which historically has seen equities bounce back from spring corrections.
The remainder of this week remains quiet for news which can be a good thing as confession season for companies has been extremely quiet suggesting most management teams are confident in their ability to meet or even beat their forecasts for the quarter. Next week, earnings season kicks off with results on the way from several of the largest US financial companies (banks and brokerages). All of the 23 major banks tested recently passed their annual stress test and have been allowed to resume paying dividends and buying back stock. Investors may also be looking to see if loan loss provisions are continuing to come down which would be a sign of a strengthening economy.
In economic news, for the US, inflation reports take center stage along with industrial production. China has a number of big numbers scheduled for next week including trade, Q2 GDP and retail sales. Three central banks are holding meetings as well, the Bank of Canada, the Bank of Japan and the Reserve Bank of New Zealand.
Commodities have been particularly active over the last week and may remain volatile into July. Natural gas has been on a tear with heat waves boosting summer cooling demand. Crude Oil has been bouncing around with investors unable to figure out the implications of OPEC + failing to agree on how to move forward once the current program for restoring supply ends later this month.
In this issue of Equity Leaders Weekly, we take our monthly look at the Sector Scopes feature, and at what recent gains for the semiconductor sector are telling us about investor sentiment.
The Sector Scopes feature in SIA Charts, found in the Markets – BPI section, provides a visual snapshot of the relative strength of 31 equity industry group based on their bullish percent (percentage of stocks in the group on bullish technical signals). We last mentioned the Sector Scopes in the June 10th edition of the Equity Leaders Weekly. At that time, the majority of sectors were piled up on the right-hand side of the table indicative of an upward trending and perhaps slightly overbought market. Over the last month, many sectors have drifted leftward so that the groups are now spread across the spectrum indicating that overbought conditions have eased and the market is in a more neutral stance. Sector action over the last month also provides more evidence that we have entered a period of rolling takedowns and rebounds. Several technology, communications and health care related sectors have moved rightward and currently have the highest bullish percent. On the other hand, several of the sectors which were leaders last month have shifted leftward to varying degrees, particularly metals, autos, transports, with energy and financials staging shallower corrections.
The semiconductor sector was one of the groups which led the market recovery up and out of the March 2020, but it’s performance in the first half of this year has been less than stellar. As capital rotated out of leading groups into catchup plays, investors started to meaningfully take profits out of chipmakers in February sparking a correction. The group spent February to June in consolidation mode, swinging up and down in a sideways range. Investors now appear to be rotating back into technology stocks and the semiconductor sector appears to be benefitting from this change. In the last few days, the iShares PHLX Semiconductor Index Fund (SOXX) has broken out to a new all time high completing bullish Double Top and Spread Double Top breakouts, signalling robust investor confidence and the start of a new upleg. Vertical and horizontal counts suggest potential upside resistance for SOXX near $496.15, near the $500.00 round number, then $521.50. Initial support appears near $427.40 based on a 3-box reversal.
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