Equity Leaders Weekly

 Lumber Continuous Contract (LB.F) &Gasoline Continuous Contract (RB.F)

September has historically been one of the weakest months of the year for equity markets and this month has started with equities hitting some turbulence coming out of a strong August. Between the close on Wednesday September 2, and the close on Tuesday September 8, three trading days, the NASDAQ Composite fell 10.0%, the S&P 500 fell 6.9% and the S&P/TSX Composite slipped 3.5%. Tesla Motors plunged 26.1% over those three days, giving back a big chunk of its 74.1% August gain.On one hand, the recent pullback could be seen as a healthy and perhaps overdue correction in an equity bull market. Action in commodity markets, however, appears more troublesome. In last week’s issue of Equity Leaders Weekly, we noted that a bull market in commodities was seeing increasing breadth. In the last week, however, several of the more economically sensitive commodities have turned sharply downward, suggesting that investors may be starting to become more concerned about the health of the global economy and the outlook for resource demand if the reopening recovery sputters. Some of the more significant commodity price declines over the same three-day period include WTI crude oil down 11.4%, and lumber down 12.4%. Copper held steady while grains have continued to rebound. The rest of the week remains light for both earnings and economic news. Next week, retail sales and industrial production reports for the US and China, plus a Fed meeting top the agenda. In this week’s issue of Equity Leaders Weekly, we look at the implications for market sentiment from a recent downturn in the prices of Lumber and Gasoline.  

Lumber Continuous Contract (LB.F)

Between April and August, the price of lumber staged a massive rally, more than tripling from a low near $262.50 to a high just short of $800.00. In recent weeks, lumber has started to turn back downward, slipping back under $600.00. The SMAX score for LB.F has dropped into bearish territory falling to 4. A breakdown below $591.00 would complete a bearish Double Bottom and signal the start of a new downtrend with next potential support at the previous column low near $504.50, close to the $500.00 round number. Recent weakness in the lumber price suggests that investors may be becoming concerned that the reopening recovery may not be as strong or as sustainable as expected. While recent housing starts figures for the US and Canada were stronger than expected, the broader US construction spending reports have been disappointing lately. Equity market sectors which appear sensitive to swings in the price of lumber include Canadian forest products and US homebuilding plus construction companies on both sides of the border. 

Gasoline Continuous Contract (RB.F)

The price of gasoline had been trending upward into the summer but peaked near $1.35/gallon back in August and has turned decisively downward. Since the start of September, gasoline has completed a bearish Triple Bottom followed by a bearish Spread Double Bottom, both signaling the start of a new downtrend. With a bearish SMAX score of 2, HG. F is showing weakness relative to the asset classes. Some of this downturn could be due to seasonal demand factors as summer driving season ended on Labour Day Monday. The selloff may also be reflecting a weaker outlook for commuting demand with office re-openings being pushed back, and continued travel restrictions cutting into demand from airlines.  Next potential downside support for gasoline appears near $1.00/gallon where a round number and a horizonal count converge, followed by a previous breakout point near $0.95. Initial upside resistance appears near the $1.13 and $1.18 breakdown points and then $1.22 based on a 3-box reversal. 

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