An up and down week has been quite damaging for equity markets. Two spike rally attempts quickly ran out of gas, causing many indices to fail before reaching Low Pole Warnings and falter short of their previous breakdown points, all signs that point to a “sell the rally” mentality’ all signs of continuing distribution in a bear market.
Most damaging was the action on Tuesday and Wednesday where a Tuesday gain of 2.8% for the NASDAQ was quickly erased by a 4.4% Wednesday decline. Hawkish comments from Fed Chair Powell Tuesday afternoon including indications that the Fed is more interested in fighting inflation and could raise rates above neutrality with inflation to get it under control, appear to have contributed to the latest downturn.
This situation provided additional evidence that the “Fed Put” (where a falling stock market or weakening economy used to prompt the Fed to ease more quickly) may have turned into a “Fed Call” (where a strengthening stock market or economy could prompt a behind-the-curve Fed to tighten more aggressively).
Additional signs that investor sentiment has become more fearful include generals in the retail sector being dumped following disappointing earnings including a one-day plunge of over 25% by Target and a two-day drop of over 15% for Walmart. Retailers have been complaining about supply chain problems, rising costs and weakening demand for discretionary products, a classic squeeze on profit margins that could potentially derail earnings growth across multiple sectors and impact valuations.
Weakness has appeared across a number of groups this week, who are we kidding, pretty much everything except utilities as investor sentiment grows more cautious. Most notably, however, the price of lumber along with stocks in the homebuilding, construction and real estate sector have been weakening with interest rates rising and economic conditions weakening.
The earnings calendar for the coming week is dominated by big bank earnings in Canada, specialty retailers in US, and online retailers in China. The economic calendar remains focused on housing market data plus flash PMI reports on Tuesday.
In this issue of Equity Leaders Weekly, we look what breakdowns by transportation stocks and retail stocks are telling us about investor sentiment.
The transportation sector currently finds itself at the intersection of supply chains, demand for goods and rising fuel costs. With inflation pressures continuing to increase and the economic outlook becoming cloudier lately, the Dow Jones Transportation Average (DTX.I) has come under pressure over the last month. This week, the Average has broken down again, taking out 1,440 to complete a bearish Spread Triple Bottom pattern. The breakdown was confirmed yesterday when the Transports took out additional supports from last year, falling to its lowest level since March of 2021. Even more ominously, this breakdown by the Transports has been confirmed by a recent breakdown by the Dow Jones Industrial Average, a sign that the current bear market may be embarking on a new downleg. Next potential downside support for DTX.I may appear near 1,265 based on a horizontal count, and then near 1,200 based on a round number and a previous column low. Initial resistance appears near 1,425 based on a 3-box reversal. With a bearish SMAX score of 4, DTX.I is exhibiting weakness relative to the asset classes.
US retailers actually peaked back in November and have spent 2022 to date under distribution, retreating in a downward trend of lower highs and completing a series of bearish patterns. The sector tried to bounce back in the last week or so, but didn’t get very far, only able to stage a 3-box reversal. Yesterday, the downtrend accelerated once again with Target, Walmart and Lowes leading the way lower. Having failed to get anywhere near its previous breakdown point, the SPDR S&P Retail has turned downward once again, taking out $63.25 to complete another bearish Double Bottom breakdown and signal the start of a new downleg. The sector may be volatile in the coming days with several senior specialty retailers reporting results and both falling demand and rising costs potential areas of concern. Next potential downside support tests appear near $56.75 then $54.50 based on horizontal and vertical counts, then a long-term uptrend trend support line closer to $50.00. Initial rebound resistance appears near $65.85 based on a 3-box reversal, then the recent high near $68.55 and a previous breakdown point near $70.00. With a bearish SMAX score of 1, XRT is exhibiting weakness against the asset classes.
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