It has been a mixed week for technical action across asset classes. The signs of stabilization in equity markets that had emerged last week have evaporated this week with signs emerging of a deepening and broadening correction. With coronavirus case counts on the rise again, increasing talk of renewed lockdowns in parts of Europe, and the US election now only six weeks away, political and economic uncertainty have been weighing on an increasing number of sectors. On Wednesday, positive earnings news out of Nike failed to have a positive impact beyond its sector, suggesting that bears may be gaining the upper hand. Action in commodity markets has been very mixed. Crude oil and natural gas saw some volatility around storms but remain stuck in sideways trends. Copper showed signs of a possible correction after a rally while lumber showed signs of a bounce after a retreat. Grains continue to attract interest. A significant shift in money flow appears to be starting with currency markets with the US Dollar Index turning back upward, snapping out of a six-month downtrend and breaking out of a base. On the flip side of this, Gold has broken down, falling back under $1,900/oz and other precious metals have come under pressure, particularly silver and platinum. The US Dollar also has been breaking out against other paper currencies including the Canadian, Australian and New Zealand Dollars, the Euro and the British Pound. A rising US Dollar may help to give US equities a boost relative to International and Canadian equities. The coming week is the last for the month and quarter. Scheduled news flow, both corporate and economic, is looking to be pretty light overall. Because of this external, anecdotal political, social or medical development may have a larger impact than usual. In this week’s issue of Equity Leaders Weekly, we look at what deteriorating technicals in the sector scopes charts and the US Regional Banks are telling us about investor sentiment.
We usually look at the Sector Scopes on a monthly basis, but a tipping point appears to have been reached in the last week which makes a revisit imperative.As a reminder, 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 across the market at specific points in time and changes 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 group, with the highest (strongest but potentially overbought) on the right and the lowest (weakest but potentially oversold) on the left. A week ago (bottom) the majority of the sectors were on the right hand side of the graph, but this week, they bulk of the sectors has shifted to the left hand side of the graph, marking a decisive, bearish change in investor sentiment. Last week, energy was alone at the left end of the scale but it has now been joined by a number of other groups including metals, banks, internet, autos, aerospace and real estate. The defensive consumer non-durables (staples) sector is the only group remaining on the right hand side.
Through their lending to individuals and business across the country and across a wide variety of sectors, looking at banks can provide investors with insights into the health of the economy. Large national banks, however, also tend to have large brokerage/wealth management operations which make them sensitive to swings in financial markets, while regional banks, tend to have smaller investment divisions relative to their core banking operations. The iShares US Regional Banks ETF (IAT) had been trending upward since March but peaked in June and then peaked at a lower high in August, indicating weakening bullish sentiment. This month, IAT turned decisively downward, first completing a bearish Spread Triple Bottom and a bearish Descending Triangle with a break below $32.80, then it snapped an uptrend line falling below $31.20. With a bearish SMAX score of 3, IAT is exhibiting weakness relative to the asset classes. Next potential downside support for IAT appears near $30.25 and $29.40 based on previous column lows, then $28.80 based on a horizontal count. Initial rebound resistance appears near $32.45 based on a 3-box reversal.
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