Investors in North America have returned to work following the Labor Day end to summer holidays just in time for indices to retreat for two consecutive days. News flow has been light this week so last week’s disappointing US nonfarm payrolls may be weighing on sentiment.
It is important for investors to remember that September has historically been the weakest month of the year for equities with limited corporate news between earnings seasons leaving investors to place more of an emphasis on economic numbers. There is also some political uncertainty with election campaigns underway in Canada and Germany and the US still haggling over spending with the potential for a government shutdown later this year if a deal cant be reached.
The US Dollar has been climbing this week while equities have been falling which suggests that investors may be taking a more defensive stance as we move deeper into the most volatile time of the year which runs from mid-August through late October. Some commodity markets have been under pressure including grains and copper, while energy contract trading continues to be distorted by the impact of Hurricane Ida on production and inventories.
The coming week is pretty quiet for economic and corporate news. The European Central Bank meets today which investors may look to for hints on whether tapering is on the table for this year or not. Next week’s calendar is dominated by inflation, retail sales and industrial production reports from Canada, the US and China.
In this issue of Equity Leaders Weekly, we look out monthly look at Sector Scopes and at what trading action in the alternative energy sector is telling us about investor sentiment and rolling takedowns.
The Sector Scopes feature which can be found in the Markets-BPI tab in SIA Charts, provides us with a snapshot of the bullish percent (percent of stocks in a group on a bullish technical signal), for 31 industry sectors. Not only does this give us a snapshot of which areas are in favor at a point in time, comparing results across different dates gives us insight into how capital flows within the market over time. Currently, the groups are fairly well distributed across the spectrum with a bit of a concentration in the center-right area. This is indicative of a well balanced and not overbought bull market. Interest rate sensitive groups dominate the right-hand side (high bullish percent), including banks, insurance, real estate and utilities. Conglomerates and autos are lagging on the left-hand side, the latter impacted by chip shortages disrupting delivery schedules. Leisure and energy have moved Two sectors which have staged significant rightward moves, indicating bearishness has shifted to bullishness over the last month.
As an emerging alternative group, the wind energy sector can be seen as a reflection of investors’ appetite for risk. In 2020, the sector soared starting in May, consolidated in September and then finished the year incredibly strong, staging a big High Pole advance through to the end of the year. That rally peaked in January and after a few weeks of distribution, the bottom fell out in February, making this one of the first sectors to retreat in the series of rolling takedowns and rebounds we have seen across industry groups over the last six months. GWE.I bottomed out in May and spent the summer building a base for recovery. This month, it appears that accumulation has resumed with the index completing a bullish Triple Top breakout. Initial upside resistance appears at a downtrend line near $281.20 followed by $295.50 where a horizontal count and a previous column low converge, then the $300.00 round number and a previous column high near $307.50. Initial support appears near $264.90 based on a 3-box reversal.
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