The equity market correction which unfolded in some high momentum stocks in the early part of September appears to have run its course for now. The worst of the damage appears to have been contained to selected high momentum stocks, mainly in technology and communications, which had become particularly overbought technically by early September.With broad stock market measures stabilizing several sectors have regained their footing this week, underlying market breadth continues to improve for equities and commodities as global economic recovery expectations continue to improve and fear of catastrophe continues to fade. This week, central banks in the US, UK and Japan confirmed ongoing support with Fed members hinting expectations for low rates to continue into 2023. Meanwhile, the Fed upgraded its 2020 US GDP forecast to -3.7% from -6.5% in June and 2020 unemployment rate forecast to 7.6% from 9.3% in June.Energy markets have been volatile this week, battered by the temporary impact of hurricanes in the Gulf of Mexico on production, speculation surrounding today’s OPEC meeting on production levels (general expectations swirl around tighter enforcement of existing quotas rather than changes except to make room for Libya returning to production with a blockade being lifted), and ongoing questions about the future of energy demand. Scheduled news flow, both economic and corporate, is light for the coming week as is common near the end of the quarter between earnings seasons. Because of this, external factors such as the US election campaign, pandemic/vaccine developments, and energy market news could potentially influence sentiment in the coming days. In this week’s issue of Equity Leaders Weekly, we look at what the sector scopes charts are telling us about investor sentiment toward broad markets and specific sectors and also at the impact of low interest rates on the residential real estate sector.
The Sector Scopes feature in SIA Charts, which can be found in the Markets-BPI area, provides us with a graphic snapshot of investor sentiment and capital flows at a specific point in time. Comparing snapshots from different days also enables us to see how sentiment changes evolved over time.The Sector Scopes measure the bullish percent (% of stocks in a group on a bullish point and figure charting signal) for 31 industry groups, with the highest (strongest but potentially overbought) on the right and the lowest (weakest but potentially oversold) on the left. At right are the charts for September 16th (top) and September 2nd (bottom). Two weeks ago, most of the sectors were piled up on the right-hand side, indicating an increasingly overbought market with a growing risk of correction. Looking at the top chart, the majority of the sectors have now pulled back into the middle and no sectors are in the rightmost column, indicating that overbought conditions have eased for now and more balanced market conditions have emerged. Energy, however, has remained particularly weak, shifting to the leftmost column. Some of the previous stronger performing groups that eased back and shifted leftward over the last two weeks include Communications, Autos and Leisure. The three strongest sectors currently are Metals & Mining, Manufacturing and Transportation.
The few economic reports that are scheduled for the coming week center mainly around the residential real estate market such has home prices, housing starts and existing home sales. Although the broad economy has struggled this year, fiscal support programs, monetary stimulus (both low interest rates and increased money supply) and changing migration patterns have sparked a resurgence on housing demand in many parts of North America.In previous editions of the Daily Stock Report and Equity Leaders Weekly, we have looked at the recent strength in homebuilding stocks, and now we are also seeing renewed interest in residential real estate stocks. The iShares Residential Real Estate Capped ETF (REZ) which holds residential, healthcare and storage ETF has broken out to the upside this month, snapping a downtrend line and completing bullish Double Top and Spread Double Top patterns on its way above $64.00. Initial upside resistance for REZ appears at its June peak near $67.65, followed by $72.50 where two horizontal counts converge. Initial support appears near $61.85 based on a 3-box reversal.
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