World markets continue to churn through the heart of earnings season digesting corporate results and economic news. Moving into August, the focus has turned from large cap stocks toward mid-caps and small-caps, particularly in the week ahead, with US retailers not expected to report until mid-month.
Some of the fear and turmoil which had gripped markets early last week has subsided for the moment. Although the potential for Chinese regulatory action re-emerged, particularly in the video game sector, that quickly subsided. Covid Delta wave also remains an ongoing risk, but has been shifted to the back burner for now. Similarly, cryptocurrencies have rebounded from last week’s rout.
Some US indices have managed to eke out new highs in the last week, but overall, market action suggests that investor sentiment remains somewhat cautious. While not panicking, investors don’t appear overly enthusiastic, continuing to greet strong earnings results with lukewarm reactions. It appears that the summer of sideways with its quick rotations and short moves with limited follow-through in any direction, may persist for some time yet.
In addition to the continuing flood of earnings reports, the coming week is also a busy one for economic news. The latter part of this week brings trade data for the US, Canada and China with the main events being the US nonfarm payrolls and Canadian employment reports on Friday. Next week brings US inflation numbers.
In this issue of Equity Leaders Weekly, we take a look at how capital has started to return to sectors traditionally aligned with overall economic growth, revisiting the homebuilding (Consumer Discretionary) and steel (Materials) sectors.
Trading action in the homebuilders sector over the last few months provides an excellent example of our recent comments about being in a period of rolling takedowns and rebounds. After soaring from January to April, the ISE Homebuilders Index (RUF.I) sold off in the spring, a downturn which we discussed in the June 17th edition of Equity Leaders Weekly. Last month, the homebuilding sector bottomed out with the selloff contained by support at a previous low near $41.25. Since then, RUF.I has been bouncing back. A recent breakout over $45.50 completed a bullish Double Top, which called off the previous bearish patterns and signaled the start of a new upswing. Currently, upside resistance appears at previous column highs near $48.85, then $50.85 where a breakout would be needed to end the current sideways consolidation phase and confirm the start of a new advance. Initial support appears near $45.55 based on a 3-box reversal. With a perfect SMAX score of 10, compared with a bearish 5 on June 17th, RUF.I is exhibiting strength across the asset classes.
When we last looked at steelmakers in the April 8th issue of Equity Leaders Weekly, the sector ETF had just broken out to the upside. That particular upleg ran into May and then the sector turned down into a correction along with other Materials and commodity related sectors of the market. Successful tests of $58.50 support by the VanEck Vectors Steel Index ETF (SLX), established a new higher floor. Moving into August, the ETF has bounced back, completing bullish Double Top and Spread Double Top breakouts to indicate that the spring downtrend has evolved into a sideways trend. At this point, it would take a breakout over the May peak near $67.90 to complete the current consolidation phase and signal the start of a new upward trend. Next potential resistance after that appears near $70.65 based on a horizontal count. With a perfect SMAX score of 10, SLX is exhibiting strength relative to the asset classes.
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