Equity Leaders Weekly

  S&P 100 Index (OEX.I) vs. Russell 2000 Index (RLS.I) & Dow Jones Transportation Average (DTX.I) + iShares US Energy ETF (IYE)

It has been another challenging week for equity markets around the world as they continue to drift sideways with neither the bulls nor the bears able to gain the upper hand for very long. There remain, some areas of concern for equities as we move into the summer.  

Despite US earnings season bolting out of the gate with a series of very strong reports from some of the largest US banks and industrial companies, their stocks not only failed to respond to the good news, in many cases, they turned downward as investors took profits against the news. This suggests that the advances of the last year have already priced in anticipation of strong results leaving some to wonder what it will take to reignite equities. 

Upward breadth has become primarily contained to large cap stocks in the technology and health care sectors. While the NASDAQ has continued to reach new highs, the small cap Russel 2000 and the Dow Transports have remained in full retreat lately. 

Although Fed Chair Powell remained dovish in his latest round of testimony, other central bankers have been suggesting the end of the liquidity party is approaching. This week both the Bank of Canada and the Reserve Bank of New Zealand ratcheted down asset purchases. 

Discord over oil supply within OPEC+, particularly between Saudi Arabia and the United Arab Emirates is dragging on, and the longer it has done so, the more investors have become concerned that the discipline which has supported prices in recent years could collapse raising the risk of a new supply war. Growing concerns about energy market stability have started to weigh on energy prices and energy stocks. 

Earnings season is scheduled to accelerate in the coming week and expand out into more sectors (railroads, restaurants, airlines and consumer products) with headliners including IBM on Monday, and Netflix on Tuesday.  The main economic news event this week is the monthly US retail sales report due tomorrow.  

In this issue of Equity Leaders Weekly, we look at what diverging index action in the US is telling us about investor sentiment and (either TYX.I (30) or CL.F), and at recent cracks in the energy sector.  

iShares US Energy ETF (IYE) 

Because expectations for the future of earnings are implicitly built on a combination of future commodity price and future production, price action in resource stocks (energy, metals, forest products, etc.) has often acted as a leading indicator of commodity prices.  Because of this, recent weakness in energy stocks appears troubling. An upward trend in the iShares US Energy ETF (IYE) which started back in October appears to have peaked in January. So far the ETF trend appears to have shifted from upward to sideways, as has been the case for a number of other industries in recent months. That being said, IYE is currently testing the bottom of its $27.35 to $30.25 trading range and is on a bearish Double Bottom point and figure signal. A bounce from here would suggest that consolidation continues, but a second breakdown would be technically devastating, completing a bearish spread triple bottom pattern and signaling the start of a new downtrend. On a breakdown, next potential support appears at the next previous low near the $25.00 round number, Initial rebound resistance appears near $28.75, a 3-box reversal and previous column high. A number of factors have combined to weigh on energy stocks lately with uncertainties which could persist through the coming months. First, OPEC+ members continue to battle over what to do about supply increases after the month, raising the prospect that supply discipline could end and another supply war could potentially start. Second, it remains unclear what impact the COVID delta variant may have on the global economy and resource demand. Third, natural gas could be volatile in the coming months as summer cooling season shifts into hurricane season and then toward winter heating season.

S&P 100 Index (OEX.I) versus Russell 2000 Index (RLS.I) and Dow Jones Transportation Average (DTX.I)

Recent action in the large-cap S&P 100 Index (OEX.I) relative to the small-cap Russell 2000 Index (RLS.I) has raised some red flags about market breadth and the sustainability of the current equity bull market. Near the end of the last bull market in late 2019 and early 2020, OEX.I surged upward while RLS.I levelled off indicating that gains were becoming concentrated in fewer and fewer big cap stocks while the broad market was looking exhausted. At that time, the Dow Transports (DTX.I) started to underperform even ahead of the Russell. In the early stages of the recovery which began in late March of 2020, the large cap stocks led the way back upward as they usually do, but the way that the small caps caught up and pulled ahead in late 2020 and early 2021 as a positive sign of expanding breadth. Recent trading suggests that the bull market which started a year ago is looking tired and vulnerable to a correction. Once again large cap stocks in OEX.I are surging upward while the small cap stocks in RLS.I have started to crumble, a sign of decreasing bullish breadth. Meanwhile, the Dow Transports (DTX.I) have turned decisively downward in recent weeks a possible bearish leading indicator.  

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