The calendar turning from July to August finds equity markets continuing to climb and market gains broadening out. The focus of earnings season has shifted from large cap companies to a larger number of small and mid cap companies. For the most part, investors continue to respond positively to results which on balance have been down sharply from a year ago, which was widely to be expected, but generally, results have not been as bad as had been feared.The new month has brought a flurry of economic announcements which on balance have indicated a recovering world economy. US ADP payrolls were mixed with a miss on the headline number more than offset by an 2.0M upward revision to the previous month. The most interesting news this week is that several new order reports have jumped sharply and come in well above expectations. These include: US June factory orders (6.2% over month vs street 5.0), German June factory orders (27.9% over month vs street 10.1%) and the new orders component of the US ISM Manufacturing PMI (61.5 vs street 46.8) and Non-Manufacturing PMI (67.7 vs street 64.7) reports. A number of reports are due in the coming days including US nonfarm payrolls, China’s trade balance, and Canadian employment. While gold’s rally above US$2,000/ounce has captured the spotlight this week, equity indices in North America have also continued to climb and perhaps more importantly, breadth has continued to expand, a sign of growing investor confidence. These moves may partly be related to ongoing efforts to increase fiscal stimulus in the US which may help to support the economy but also could lead to more asset purchases and a devaluation of the US Dollar. In this week’s issue of Equity Leaders Weekly, we take a look at the implications of recent declines in USDCAD, and at the Dow Jones Transportation Average as an indicator of market breadth.
Back in the winter, the transportation sector fell off a cliff as airlines were hit particularly hard by lockdowns and restrictions on personal/business travel. The transport sector also lagged in the early stages of the recovery, but it has been catching up lately. Following in initial recovery rally in May-June, the Dow Transports staged a correction, but support came in near 875 well above its previous breakout point. In recent weeks, the Dow Transports have been under accumulation, completing two bullish Double Top patterns in July. This month, the index has broken out to the upside again, regaining the 1,000 round number and completing a bullish Spread Double Top, signalling the start of a new upleg. Next potential upside resistance appears in the 1,055 to 1,080 range which contains previous column highs and lows plus vertical and horizontal counts. Initial support appears near the 1,000 round number based on a 3-box reversal.
This chart, which tracks the rise and fall of the US Dollar relative to the Canadian Dollar, shows that the big spike upward from near $1.3100 toward $1.4600 earlier this year has almost been completely reversed. Back in the winter, investors stampeded into the US Dollar, looking for a safe haven for capital through the market crunch. As the world economy has started to reopen and investor confidence has improved, capital has been moving back out to other markets and the US Dollar has drifted back down relative to other currencies including the Canadian Dollar, Gold and the Euro. As a resource-exporting country, the Canadian Dollar has also benefitted from a recovery in the demand for resources and commodity prices, including crude oil, silver, copper and lumber. Canada’s economy has been strengthening of late, boosted by monetary and fiscal stimulus with July Manufacturing PMI climbing back up above 50 into expansion territory and coming in above expectations (52.9 vs street 44.1).USDCAD recently broke down below $1.3400, completing a bearish Double Bottom pattern and snapping an uptrend line, confirming the start of a new downleg and a new downward trend. Next potential support appears in the $1.3000 to $1.3100 range where a round number, prior column lows and a horizontal count cluster, followed by $1.2800 based on a vertical count. Initial resistance appears near $1.3600 based on a 3-box reversal.
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