Equity Leaders Weekly

 NASDAQ Composite Index (NASD.I) & iShares US Real Estate ETF (IYR)

It has been another rough week for equity markets. A rebound attempt by US indices in the last hour on Friday and then on Monday while Canada was closed quickly fizzled out on Tuesday and distribution has resumed from another lower high. 

Investors continued to flee for the exits at any sign of trouble. A profit warning from Snap sent Social Media stocks plummeting on Tuesday, and 10% plus single day losses for select retailers following earnings reports has continued into this week. 

Signs have emerged to suggest that China sensitive markets, including stocks and some commodities, may be finally stabilizing amid reports that it’s economy could start to reopen next month. Meanwhile, capital continues to rotate into more defensive positions including US Bonds (which has helped to keep the 10-year US treasury note yield under 3.00%), and defensive equity market sectors such as Utilities. Canadian banks, meanwhile, have been reporting stronger than expected earnings so far with more results from the big banks due over the next couple of days.    

A number of other sectors have remained under pressure this week including transportation, aerospace, technology and real estate. Declines in real estate stocks and soft housing market numbers suggest that rising interest rates have started to take their toll on the interest-sensitive housing market. 

With earnings season ending and the turn of the month coming, focus may shift back to monetary policy and economic conditions. Inflation has still been running hot through recent reports keeping pressure on central banks to take action. The Reserve Bank of New Zealand, who has been a lead domino lately, just raised its benchmark rate by 0.50% for a second meeting in a row, suggesting that the Bank of Canada may need to follow suit when it meets on Wednesday. Upcoming economic announcements including Manufacturing and Service PMI reports plus US employment and housing numbers may all be viewed through the lens of what does this all mean for inflation and monetary policy.   

In this issue of Equity Leaders Weekly, we look at sector rotation action in the technology/communications and real estate groups. 

NASDAQ Composite Index (NASD.I)

Recent weakness in technology and communications sectors can be seen most clearly in the NASDAQ Composite Index (NASD.I) where those groups have a higher weighting relative to other major indexes. NASD.I peaked back in November and then really started to trend downward in January. A last gasp attempt by the bulls failed in April when a spread triple top breakout failed at only one row, a Bearish Bull Trap peak that marked the end of a rally. Since then, NASD.I has been under steady distribution, staging a series of bearish Double Bottom breakdowns with the bulls putting up little fight. The last two feeble rebound attempts failed at lower highs after only 4% bounces, never coming even close to triggering low pole warnings or retesting previous breakdown points. The last rally attempt failed this week with a new Double Bottom signaling the start of another downleg.  With a bearish SMAX score of 0, NASD.I is exhibiting weakness across the asset classes. Next potential downside support for NASD.I appears in the 10,575 to 10,790 area where a horizontal count converges with previous column highs/lows, then the 10,000 round number. Initial rebound resistance appears near 11,800 based on a 3-box reversal. 

iShares US Real Estate ETF (IYR) 

With recent US housing market data showing the impact of rising interest rates on the interest-sensitive Real Estate sector starting to bite, real estate stocks have come under increased pressure in recent weeks. Recently both US existing home sales (-2.4% over month vs street -0.7%) and US new home sales (-16.6% over month vs street -3.4%) showed much sharper contractions in April than investors were expecting. US pending home sales are out today and then next week, announcements shift to house prices, particularly the US S&P/CaseSchiller house price report due on Tuesday (street 20.8% over year vs previous 20.2%). Investors should also note that the real estate sector in Canada could also be active this week around the Bank of Canada’s interest rate decision and statement.  The iShares US Real Estate ETF (IYR) peaked back in January and following an initial downturn, bounced back strongly in March and into April before peaking at a lower high. Since then, IYR has been steadily falling without even a 3-box bounce until yesterday, completing a bearish Double Bottom pattern that has extended into a bearish Low Pole. With a bearish SMAX score of 2, IYR is exhibiting weakness relative to the asset classes.  Initial support appears near $93.50 based on a 3-box reversal and a retest of the recnt low. Next potential downside support appears near $89.85, then $88.05 based on previous column highs, while next potential resistance appears near $99.75 and $102.25, around the $100.00 round number, based on previous column lows. 

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