Welcome to the spring doldrums. With earnings season over and investors getting ready for summer, it has been a relatively quiet week for equity indices, particularly in the US where the major indices continue to trend sideways digesting the gains made earlier in the year, leaving the fast money focused on small cap Reddit plays. In Canada, the S&P/TSX is hanging around the 20,000 round number having achieved that momentous level last week. With the exception of crude oil, which continues to climb on anticipation of increasing demand, commodities have also levelled off particularly, copper and grains, while lumber appears to be finding support following a correction. Even gold and silver which had been rebounding have levelled off. Energy stocks have continued to attract renewed interest, particularly the service sectors with the PHLX Oil Service Sector (OSX.I) breaking out to the upside this week The main focus for the coming week of trading is on the Fed decision, statement and member projections scheduled for 2:00 pm EDT on Wednesday the 16th. US data prior to that moment particularly consumer prices today and retail sales plus producer prices on Tuesday may be viewed by investors through the lens of whether the data increases or decreases pressure on the US central bank to start winding down its asset purchase program, a decision it has been trying to postpone despite signs of a recovering economy and rising inflation. In this issue of Equity Leaders Weekly, we take a our monthly look at the Sector Scopes Report, and the importance of recent movements in the US 10-year treasury note yield.
In recent months, swings in the US 10-year treasury note yield (TNX.I) one of the benchmark traded interest rate contracts in the US, has been seen by investors as a gauge of future interest rate expectations and of how much pressure the Fed may be under at a given time to cut back on its stimulus program. Back in the winter, when vaccinations in the US started to ramp up and the economy prepared to reopen, TNX.I jumped up from the below the 1.00% emergency zone where it had been stuck since the first wave of the COVID pandemic as the economy was shut down and central banks hit the panic button rolling out emergency stimulus in early 2020, up toward 1.75%.This winter spike rattled investors, particularly at the margins, into thinking that the combination of an improving economy and rising inflation could put pressure on the Fed to start winding down its emergency stimulus and reduce some of the fast & easy money sloshing around in the system. This became a particular concern in late March when the end of an emergency capital program for banks led to margin calls that caused problems for some institutional investors. In recent weeks, Fed members, particularly Chair Powell have presented a united chorus toward easing concerns that stimulus may be about to end, indicating they intend to support the recovery and that they see rising inflation as transitory (mainly commodities bouncing back from depressed levels last year). Taking its lead from the Fed on inflation, TNX.I has been drifting back downward. Yesterday it staged a major breakdown, falling below 1.50%, and completing a bearish Double Bottom pattern. The reaction to today’s US consumer price inflation report may indicate whether this is a head fake or the start of a more lasting downward trend. Should it quickly rebound, the 10-year yield may continue to bounce around between 1.50% and 1.75% for a while without upsetting investors. An extended decline below 1.50%, however, could be seen in two ways, for traders, it could be a sign that the easy money party continues, and it could be a while before last call, but for investors it could be a sign that the recovery momentum may be slowing which could impact earnings expectations, equity valuations and risk sentiment. On the other hand, an upturn that pushed back up through 1.75% could reignite fears of monetary tightening. As with CADUSD in the low $0.8000s, TNX.I appears to have found its sweet spot between 1.50% and 1.75%, the question is whether it can stay there. When evaluating next week’s Fed news, investors may look to the statement and forecasts for any changes in language or predictions about the economy or interest rate levels.
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 groups based on their bullish percent (percentage of stocks in the group on bullish technical signals). We last mentioned the Sector Scopes in the May 20th edition of the Equity Leaders Weekly. At that time, sectors were quite evenly spread across the spectrum, indicating a neutral market. Today, the sectors have collected in the right-hand side of the table with bullish percent readings of over 50%. What is most interesting about this movement is that the sectors which were over on the right-hand last month are still there, such as Energy, Banks and Real Estate. The main difference has been a pickup in sectors which had been struggling such as Electronics & Semiconductors, Internet, and Specialty Retail. This suggests that pressure on sectors which had been struggling under the weight of valuation concerns and profit-taking has eased, indicating that in the historically weaker time of the year for stocks which runs from May to October, we may be more likely to see indices grind sideways range bound with lower volatility rather than a steep selloff and rebound on higher volatility.
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