Equity Leaders Weekly

 S&P 100 Index (OEX.I) & Gold Continuous Contract (GC.F)

The next ten days have the potential to be particularly significant for world equity markets. The first half of 2022 was a rough one for stocks around the world, most notably, the S&P 500 turning in its worst first half performance since 1970. Considering that July has historically been a positive rebound month for stocks on a seasonal basis one might think that the first half weakness would have set the stage for a significant bounce but so far this month, indices around the world have continued to struggle.

High inflation pressuring central banks to continue or even accelerate interest rate hikes has kept a headwind in front of equities. Yesterday, the Bank of Canada stepped on the brakes even more than had been widely expected, announcing a 1.00% increase to 2.50% which was more than the 0.7% increase the street had expected, and a big step up from the 0.50% hike it made at its previous meeting. Meanwhile, the US announced a bigger increase in consumer price inflation than had been expected (9.1% vs street 8.6% and previous 8.3%). 

The coming days bring a number of key economic announcements that may bring more colour on stagflation and the pressure on central banks to keep tightening. Retail sales and inflation reports continue to roll out, this week from the US and China and then next week from Canada and the UK. Housing market data also starts to roll out next week. 

Corporate news also starts to really ramp up once again. Earnings season kicks off today and tomorrow with results from several big US banks, than broadens out next week to include results from a number of US sectors including Energy Services/Drilling, Credit Cards, Railroads, Mining & Metals, Telecommunications, Streaming, and Social Media.    

With falling oil and metal prices suggesting that a recession could be on the horizon that may impact resource demand, investors may look to corporate reports not only for results relative to expectations, but also to guidance. From the banks investors may look for commentary related to credit conditions, loan losses, and the general business environment. From the railroads, investors may look for comments related to whether supply chain disruptions are ongoing or clearing and what demand conditions are looking like. 

In this edition of the Equity Leaders weekly, we look at action in US large cap stocks heading into earnings season and what recent moves in the price of gold are telling us about the US Dollar and investor sentiment. 

S&P 100 Index (OEX.I)

As is usually the case, the early days of earnings season are dominated by reports from large cap companies, several of which are members of the S&P 100 Index. As a result, investors looking for insight into how investors are responding to the initial wave of earnings reports may be able to get an idea from action in the S&P 100 Index (OEX.I). Considering how much stocks have sold off already heading into this quarter’s earnings season, it would seem that expectations are already fairly low. Key questions include: Have stocks have fallen enough relative to reality, overshot to the downside, or still have more room to drop? Are investors ready to step up and support stocks that beat expectations and could stocks that miss or have weaker guidance still be punished? If stocks respond to good news, that would be encouraging, but what if they fail to respond meaningfully to good news? Are investors heading into earnings season looking for reasons to buy or looking for reasons to sell?Since completing a Bull Trap peak back in January near 2,200, the S&P 100 Index has been under distribution, dropping back toward 1,700 through a series of bearish pattern completions and with lower highs indicating distribution. Last month, a selloff was contained at a previous breakout point near 1,665 and since then, the shares have bounced back toward 1,800. Currently OEX.I is at a potentially key turning point. A close above 1,805 would complete a bullish double top pattern and signal the start of a new upleg with next potential resistance near 1,875 based on a measured move and previous column high. A failure to break out could be seen as trouble, particularly if the index starts to take out support near 1,715 based on a 3-box reversal, or the recent low near 1,665. A breakdown there would signal the start of a new downleg with next potential support in the 1,490 to 1,525 zone around the 1,500 round number where a 45-degree support line and previous column highs/lows cluster. 

Gold Continuous Contract (GC.F)

Gold has historically acted as a store of value in times of market stress and as a hedge against inflation. Looking at how the Gold continuous contract (GC.F) has acted in the last two months, however, one may be tempted to ask what has gone wrong.The answer is that the Gold contract is priced in US Dollars, which has been the strongest major currency in the world in recent months, with gold and the Canadian Dollar second and third. The greenback has been soaring lately, getting a tailwind from rising US interest rates and capital seeking a haven in US cash that has been so overwhelming that even gold has been unable to keep up. That being said, gold has outperformed a number of other currencies in recent months including the Euro, Yen, Pound, and especially Bitcoin, in the process resuming its role as the king of alternative currencies.With the Euro stabilizing around par and the USDCAD encountering resistance near $1.3000, keeping an eye on the price of gold may give investors an idea of whether the US Dollar rally has peaked or is continuing.    Back in the winter, gold staged a big rally back up above $2,000/oz but faltered just short of its peak near $2,075. What had looked like a symmetrical triangle forming failed in April on a bearish Double Bottom breakdown below $1,900. Since then, gold has been consistently declining in a bearish Low Pole without even a 3-box bounce (3%) along the way. Currently, gold is testing support near $1,720. Holding that level would be encouraging with initial resistance possible near $1,808 based on a 3-box reversal. A breakdown below $1,720, however would complete a bearish spread triple bottom pattern that would signal the start of a new downleg which could potentially retest $1,670, a key long-term support/resistance level that coincides with a long-term 45-degree uptrend support line. 

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