Equity Leaders Weekly

 iShares US Energy (IYE) & Gold Continuous Contract (GC.F)

It has been an odd week for world markets, disrupted by Asia Pacific and North American holidays. Although several major North American indices have managed to nudge their way to new all-time highs, there doesn’t appear to be much of a tailwind behind them, perhaps because earnings and economic news flow has subsided for the time being.Instead, the focus this week has been on commodities and currencies. A deep freeze and winter storm reached deep enough into Texas to disrupt power, energy production and energy distribution enough to spark big rallies in natural gas, heating oil and gasoline and attract renewed interest to energy stocks. Metals have had a mixed week with economically sensitive metals like platinum and copper climbing, but precious metals coming under pressure. The coming week brings the last hurrah of the current earnings season with Canadian banks and US retailers set to report results. US retailer results, which kick of with Walmart today and continue with Home Depot and Macy’s reporting next Tuesday, could be quite interesting. Reeling from a combination of soft holiday seasons and fast money moving back out of Reddit driven retail plays, retail stocks have been struggling lately. A very strong January for US retail sales (5.3% vs street 1.0%) could, however, potentially help to salvage the quarter for several store chains. Canadian bank earnings week runs between Tuesday and Thursday of next week with all of the Big 6 scheduled to report results. Investors may look to the banks for insights into how winter lockdowns have impacted the Canadian economy and also at changes to loan loss provision for signs of whether the banks see the impact of lockdowns as temporary or longer lasting.   In this week’s issue of Equity Leaders Weekly, we look current strength in US Energy stocks and at the factors influencing recent weakness in Gold.

iShares US Energy ETF (IYE) 

Boosted by rising commodity prices, decreasing fears that lockdowns could cause another crash in demand, growing confidence that OPEC+ can keep a lid on global supply, and increasing expectations that demand can improve as economies reopen, the US energy sector has been under renewed accumulation since last October. Following an initial recovery rally, the iShares US Energy ETF has remained under accumulation, breaking out of a downtrend in December, then completing a series of bullish Double Top breakouts into this year. Recently, the units surpassed their June 2020 peak price near $24.25 to confirm the start of a new uptrend and are currently bumping up against the $25.00 round number. Next potential upside resistance for IYE appears in the $30.00 to $31.50 zone where a round number, vertical and horizontal counts, and the January 2020 peak all cluster together. Initial support appears near $22.85 based on a 3-box reversal. With a bullish SMAX score of 6, IYE is exhibiting strength against the asset classes. 

Gold Continuous Contract (GC.F)

It seems like longer, but it was only six months ago that gold broke through $2,000/oz and seemed to be heading to the moon. How times have changed. Gold has now been in a slump for several weeks based on a combination of several factors. Some of the tailwinds that propelled gold upward in 2020 have reversed course and become headwinds in 2021. The financial market panic of 2020 has been replaced by confidence with investors driving major indices to new highs even in the face of a second round of lockdowns this winter.  Likewise, the massive amounts of new monetary stimulus which eroded the value of paper money have subsided this year with North American central banks reluctant to increase stimulus. Gold has failed to respond to rising commodity prices, which historically have boosted inflation expectations and interest in the yellow metal as an inflation hedge. The failure of gold to capitalize on rising commodities suggests that either investors think the gains could be short-lived (particularly in the case of seasonal/storm driven pops in natural gas and gasoline), or that there remains enough slack in the system to keep inflation contained for some time. Meanwhile, new headwinds for gold have emerged. Bitcoin and other cryptocurrencies have soared, and may be siphoning what demand there is out there for non-paper, alternative currencies away from gold and silver. Finally gold’s nemesis, the US Dollar, appears to have bottomed out and has started to bounce back since the start of this year, at least partially supported by rising traded US interest rates with the 10-year Treasury note yield rising toward 1.30%. Gold staged a major breakdown yesterday, falling below $1,770/oz to complete a bearish Double Bottom pattern and signal the start of a new downleg. With a bearish SMAX score of 3, gold has already been exhibiting weakness relative to the asset classes. Next potential downside support for gold appears near  $1,670, based on a vertical count plus previous column highs/lows, and then $1,620 based on a horizontal count. Initial potential rebound resistance appears near $1.845.  

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