The heart of earnings season has brought a flood of corporate reports some of which were good (better than expected growth), some of which were bad (although in many cases not as bad as feared) and some of which were ugly. Looking at results and the market reaction in aggregate, some changes in equity leadership and new trends appear to be emerging. Many of the sectors which led the spring recovery have levelled off and staged moderate corrections recently, particularly software, internet and biotechnology. The only tech related group which has continued to climb has been Semiconductors. Meanwhile, a number of commodities and currencies have rallied in the last week boosted by a combination of investors anticipating a global economic recovery can boost resource demand, and a falling US Dollar which is favorable for markets priced in US Dollars. Industrial commodities climbing on the recovery aspect include Lumber, Copper, and crude oil. Gold has rallied to new all-time highs this week, boosted by its role as a hard currency in a time when asset purchases are devaluing paper money. Silver and platinum have soared recently on a combination of both factors. With investors apparently taking profits out of previous equity leaders, capital has been getting redeployed into other areas of the market, increasing breadth. Some of the sectors which have been attracting increased lately include Materials (in tandem with rising commodity prices), Homebuilders, Consumer Goods, Consumer Services, Medical Devices, Industrials and Retailers. There also has been sign of pickup in mid and small cap indices, and international markets including Germany, Switzerland, and emerging markets, led by India and Taiwan. Although this shift, has caused some indices to level off for now, increasing breadth (gains in a wide variety of stocks, cap levels and sectors rather than concentration in a few large names) can be seen as a bullish sign of a more sustainable market recovery. In this week’s issue of Equity Leaders Weekly, we look at the recent breakout of Gold breakout and gains in the Russell 2000 Index
Although major central banks, such as the Fed, ECB, Bank of Canada, and Bank of Japan did not introduce any new money at their meetings this month, they all indicated support for continuing their current asset purchase programs with the potential to add additional support if needed. With European and American leaders looking to extend and expand their fiscal support programs. The prospect that central banks may need to extend their asset purchase programs to support fiscal spending (someone needs to supply governments with the money they plan to borrow) has put pressure on paper currencies, particularly the world’s premiere paper currency the US Dollar, and has put a tailwind behind gold, the world’s premiere hard currency. This week, gold broke through previous resistance near $1,910/oz to a new all-time high, confirming its upward trend continues. Next potential upside resistance tests appear near the $2,000 round number followed by $2,150 based on a horizontal count and $2,325 based on a vertical count. Initial support appears near $1,800 based on a 3-box reversal.
Like many other indices, the small cap Russell 2000 has been steadily recovering since bottoming out back in March. Its recovery has been at a slower pace, however, with an SMAX score of 2 indicating that small cap stocks in the Russell 2000 have been exhibiting weakness to the asset classes. This recent trend of underperformance may be changing. This week, RLS.I broke out over 1,475, completing a bullish Triple Top pattern and signalling the start of a new advance. Upside resistance may emerge on trend near the 1,500 round number, the previous high near 1,535, 1,580 based on a horizontal count, or 1,615 based on column highs. Initial support appears near 1,418 based on a 3-box reversal. Small cap stocks appear to be benefitting from capital rotation and growing breadth within equities based on profit-taking in previous leaders and bargain hunting in previous laggards. Investors should also note as we move deeper into earnings season, the focus of reporting shifts to mid and small cap companies and it’s possible that investors may be starting to anticipate the potential for upside surprises in small cap results (not as bad as feared) after seeing the results from a growing number of large cap companies.
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