Equity Leaders Weekly

 Russell 2000 Index (RLS.I) & Natural Gas Continuous Contract (NG.F)

The month-long bear market bounce in equity markets which started back in mid-July, appears to have run out of gas a week ago. Since the S&P 500 faltered just short of its 200-day moving average last week, major equity indices around the world have been backsliding. At the same time, traded interest rates like the US 10-year and 30-year treasury note yields have been on the rise, sparking another rally in the US Dollar and sending the Euro below par for the first time in over twenty years. 

There are a number of factors that appear to be behind the equity market pullback. First, earnings season is over and being late summer, corporate news has slowed. The earnings reports which have been coming out lately have been disappointing overall. In particular, Canadian banks have been reporting disappointing numbers this week, dragged down by falling capital markets revenues and rising loan loss provisions. In the US, some retailers like Macys and Nordstrom have been cutting guidance, and marking down goods as inventories pile up. 

Second, in addition to anecdotal reports from companies about a struggling economy, economic data this week has also been disappointing, particularly flash PMI reports for August from the US, UK, Japan, Australia, France and Germany, all of which signalled at least parts of their economies have started to contract. Overall, this suggests a weakening environment for corporate earnings. 

Third, the fear of the Fed appears to be making a comeback. Recent Fed minutes and continuing commentary from Fed officials has thrown cold water on speculation that the Fed could pivot and cut rates next year, instead indicating that not only is the US central bank likely to continue raising rates in its battle to beat back inflation, it appears willing to risk a recession in order to get inflation under control. 

We may find out more on monetary policy trends in the US and elsewhere later this week. On Friday Fed Chair Powell is scheduled to speak at the annual Jackson Hole Symposium and we may hear from leaders of other central banks as well. Recent equity and bond market action suggests that investors are expecting Powell’s comments to either stay the course or come off as potentially more hawkish.

Although we are now in the dog days of summer and entering what has historically been the weakest and most volatile time of the year for equity markets (through to mid-October), there are a number of potentially significant announcements due over the next ten days heading toward the Labour Day Weekend. This week, in addition to Jackson Hole comments, Core PCE inflation numbers, the Fed’s favorite measure, are due, along with more Canadian bank earnings. 

Next week, the turn of the month into September brings a number of key economic reports including monthly Manufacturing PMI numbers from around the world, US construction spending, auto sales and employment numbers are on the calendar as well. 

In this edition of the Equity Leaders Weekly, we look at what the small cap Russell 2000 Index is telling us about investor sentiment, plus the longer term context of the recent rally in natural gas prices. 

Russell 2000 Index (RLS.I)

The small cap Russell 2000 index can provide investors with significant insight into the strength and breadth of market trends. Investors willingness (or lack of willingness) to invest in smaller companies can be seen as an indication of the level of enthusiasm for risk taking in the market. Trends in the Russell relative to larger cap indices like the S&P 100, meanwhile, can indicate whether a market trend is receiving wide participation or if it is concentrated in a small number of names.  In tandem with the large cap benchmarks, the Russell 2000 has staged a strong rebound since late July, when it bottomed out in a bear trap bottom near 1,680, but signs of exhaustion have started to emerge lately. The recent High Pole that emerged out of Double Top and Spread Double Top breakouts had run for 17 rows or about 17% without a correction before one started recently with a pullback of 4 rows so far. The upswing ran out of gas at a 45-degree downtrend line, and short of previous resistance near 2,170. As the shares have started to turn downward, the 2000 round number failed to hold and RLS.I would need to close back up above that level to call off current weakness and suggest the rebound has resumed. Meanwhile, potential support in a downswing appears at previous column lows near 1,890 and 1,780. A close below 1,836 would trigger a bearish high pole warning.  

Natural Gas Continuous Contract (NG.F)

This 25-year, 6% chart highlights the significance of the recent rally in natural gas (NG.F) prices. Following a 2009 crash, natural gas spent a decade in the doldrums trending sideways between $1.50 and $5.50/mmbtu. Natural gas started to break out of this range a year ago and then after an initial correction bottomed out at a higher low near $5.25 over the winter, it has started to trend decisively upward. Earlier this month, NG.F broke out over $9.35, completing a bullish Triple Top pattern and signaling the start of a new upleg. Ongoing tensions between Europe and Russia over natural gas supply, sanctions and the war in Ukraine may keep natural gas in the spotlight in the months to come, particularly as winter and home heating season approaches. Currently natural gas is encountering some resistance near $10.00 but a breakout there would confirm the start of a new upleg with next potential resistance in the $14.59 to $16.80 zone where several previous column highs/lows and vertical/horizontal counts cluster around the $15.00 round number. Initial support in a pullback, however, appears near $7.40 based on a 3-box reversal and then $7.00 based on the first previous column low.   

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