The last week has been a very mixed one for stock markets which plunged into the end of April, then rebounded into the first days of May. Gains accelerated late Wednesday after Fed Chair Powell indicated that rate hikes of 0.50% per meeting remain possible at upcoming meetings but further acceleration to 0.75% or more is not currently under consideration. The relief rally has already started to fade this morning, however, suggesting that it may have just been a bear market bounce easing oversold conditions as the reality of a hawkish Fed has not changed.
The Fed did announce its largest rate hike in over twenty years of 0.50%. and also that it intends to start reducing its balance sheet by $47.5 billion a month starting June 1 and increasing to $95B per month on September 1. So even if the pace of tightening may not accelerate, it appears that rate hikes and balance sheet reductions may continue for quite some time which could keep a broad headwind in front of indices and keep capital rotation between sectors and asset classes. This morning the 10-year US Treasury Note Yield is sitting just below 3.00%
Today is all about meetings with the Bank of England deciding on UK interest rates and OPEC+ deciding on production levels. Tomorrow brings US nonfarm payrolls and Canada employment reports with both job creation and wage inflation in focus. Next week the focus of economic news shifts to China and slows down until the US consumer price inflation report comes out next Wednesday.
Earnings season moves past the middle in the US over the coming week. The number of big companies drops off with Disney the biggest name, while the focus turns to small and mid caps. In Canada, senior Insurance, Retailers, Energy Producers and Miners are on the schedule.
In this issue of Equity Leaders Weekly, we look at recent strength in the price of natural gas and at what the Russell 2000 Index is telling us about market breadth and sentiment.
Investors look to the Russell 2000 (RLS.I) small cap index as an indicator of investor confidence and also of breadth, whether small caps are confirming or contradicting action in big caps. Yesterday afternoon, large cap stocks staged an explosive relief rally in the last hour or so following Fed Chair Powell’s press conference which boosted the S&P 500 and the NASDAQ 100 enough to flip into a column of Xs on 1% charts. RLS.I, however, did not bounce enough, however, suggesting that Wednesday’s rebound was concentrated in a few large cap stocks and at this point, appears more likely to be a bear market bounce, easing oversold conditions. The Russell 2000 remains in the bearish trend is has been in for several months. With a bearish SMAX score of 1, it continues to exhibit weakness relative to the asset classes. What has been most distressing about recent action in RLS.I is that in April, the technical picture had been brightening. In recent weeks, the shares have turned decisively downward, snapping an uptrend line, causing a bullish quadruple top pattern to fail, and completing a series of bearish breakdowns, completing a Double Bottom and two Spread Double Bottoms. Vertical and horizontal counts plus a retest of a long-term trend line suggest potential support in the 1,715 to 1,765 zone. Initial resistance appears near 1,950 based on a 3-box reversal and a retest of a recent breakdown point.
Since the start of the war in Ukraine and the introduction of sanctions against Russia, investors and the business press have been focused mainly on swings in the price of oil and of gasoline. Meanwhile, the natural gas (NG.F) market has also been thrown into turmoil. Several European countries, most notably Germany, have been scrambling to find new supply to reduce their dependency on Russian gas for keeping their citizens warm in the winter. While the price of crude oil has been choppy in recent weeks, the price of natural gas has continued to soar, recently climbing to levels last seen in the 2000s. Last year, natural gas broke out of a decade-plus base and this month, it has broken out again, completing a bullish Spread Double Top pattern and kicking off a new upleg. Next potential upside resistance appears near the $10.00/mmbtu round number, followed by $16.80 where a previous column low converges with vertical and horizontal counts. Initial support appears near $6.20 based on a retest of a recent breakout point and a 3-box reversal. With a perfect SMAX score of 10, Natural Gas is exhibiting strength across the asset classes.
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