The arrival of earnings season seems to have been a mixed blessing so far. After selling off Thursday and Friday, US indices rebounded Monday and Tuesday before turning downward again yesterday. Overall, results have generally been down from a year ago, but not as bad as had been feared and in some cases, significantly better than expected. Guidance has generally not been terrible either, although there have been some dark clouds like Microsoft announcing layoffs and Apple asking some of its suppliers to cut production.
On the bullish side for equities, decent results so far have helped to support share prices, stopping the free fall they had been in late last week and helping sectors and indices to stage moderate bounces of 3-5%, enough to flip many charts into positive columns but not enough to trigger bullish signals or call off recent bearish signals on point and figure charts.
On the bearish side for equities, positive results have also suggested that business conditions are not as bad out there as had been feared, and with inflation still running hot, the odds of central banks pivoting from hawkish to dovish have decreased once again and treasury yields have been on the rise again (more on this below), and the US Dollar has been rallying.
This coming week, the Bank of Canada meets on Wednesday and the European Central Bank meets on Thursday with interest rate increases expected, and investors looking for more commentary on how committed they are to keep tightening. It is otherwise a bit lighter for economic news with the main events being flash PMI reports and US Q3 GDP.
We are now moving into the heart of earnings season with a steady stream of numbers due from mega cap market leaders and industry bellweathers. Results broaden out from US banks into a wider variety of sectors including Big Tech, Big Pharma, Big Auto, Big Oil, plus credit card companies, base metal and some gold miners, forest products producers, and social media companies.
Upcoming US earnings headliners include: Microsoft, Alphabet, Twitter, Visa and GM on Tuesday, followed by Boeing and Meta Wednesday and Apple, Merck, Amazon.com, Intel, McDonalds Caterpillar and others next Thursday. Canadian headliners include CN on Tuesday, CP Rail, Agnico-Eagle, West Fraser Timber and others on Wednesday, plus Shopify, Teck, Cameco, Canfor and Yamana Gold next Thursday.
In this edition of the Equity Leaders Weekly, we look at rising US treasury yields and conduct our monthly review of Sector Scopes.
Since we last mentioned the CBOE 30-year Interest Rate in the September 15th edition of the Equity Leaders Weekly, the long-term treasury bond yield has climbed from just below 3.50% to just above 4.00%, completing a bullish Spread Double Top breakout, to add to the previous Spread Triple Top signal and extend the current bullish High Pole that started with the snapping of a multi-decade downtrend. Yesterday, TYX.I pushed through its 2013 high near 4.08% to reach levels last seen in 2011 and confirm that the current uptrend continues. Next potential resistance is near the big 5.00% round number which aligns with previous column highs dating back to 2008. Recent gains in treasury yields can be attributed to a growing sense that central banks may not only be forced to continue increasing interest rates but that rates may have to remain higher for longer and that a dovish pivot may be a long way off. Also, it appears that even if the central banks back off and provide support, it may only be temporary. The Bank of England’s dovish pivot in late September, for example, turned out to be very short lived. The emergency QE program ended last Friday after only two weeks, and the Bank of England plans to launch its Quantitative Tightening (selling bonds) on November 1st after a delay of only one-month.Rising US treasury yields have been an absolute headwind for stocks and bonds this year and a relative tailwind for US Cash and the US Dollar. This trend may continue as long as inflation continues to run hot with no signs of serious cracking and economic indicators like employment, and corporate earnings continue to suggest an economy that is bent but not broken.
The Sector Scopes feature, found in the Markets – BPI tab of SIA Charts, provides a snapshot of the bullish percent (percentage of stocks in a sector on bullish technical signals), for 31 industry groups. Analysis of the relative positioning of the groups across a spectrum and of changes in positioning over time can tell us a lot about changes in investor sentiment. The September selloff was very broad based to the point that by the end of the month, nearly all of the groups had piled up in the leftmost column, a sign of a deeply oversold bear market. In the last two weeks, there has been some improvement in some groups. Although the majority of groups remain spread across the left-hand side, a sign of neutral to bearish conditions, recent relief rallies have eased oversold conditions. On a relative basis, resource sectors (Metals & Mining and Energy) have been among the strongest performers lately along with a smattering of different groups from other industries like Insurance, Leisure, Software and Construction, some of which may have received a bigger boost in October after being hit harder in September. The left hand side (relative underperformers) is dominated by interest sensitive groups like Utilities and Real Estate, which is not surprising considering recent rises in treasury yields. Technology/Communications sectors like Electronics & Semiconductors, Internet and Computer Software have also been relatively weaker in terms of bullish percent which means that these sectors having gone down, have stayed down.
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