Equity markets have come under the most pressure they have been under since last winter, as investors who had been acting like deer caught in the headlights earlier this month decided to head for the exits as many of the lingering uncertainties of the last few months became more real. In Europe, accelerating increases in COVID case counts sparked an increase in fears of new lockdowns, and the lack of an EU-UK trade deal hasn’t helped either. In North America, investors have not only been concerned about COVID Wave Two, but also the lack of a US fiscal stimulus deal and next week’s US Presidential election. Generally positive, and in some cases quite strong, earnings reports have been ignored for the most part, suggesting that strong results had already been priced in and that investors are focusing more external forces at the moment.The next eight days brings a ton of potential market developments headlined by this evening’s Super Bowl of tech earnings (Apple, Alphabet, Amazon.com and Facebook), Manufacturing PMI reports next Monday, the US Election next Tuesday, the Fed’s next monetary policy decision next Thursday, and US nonfarm payrolls/Canada jobs next Friday, along with a flood of earnings reports as we move through the peak of earnings season.When looking at the potential impact of the US election, the primary concern for investors is that someone actually wins, as the uncertainty surrounding the contested election back in 2000 caused a short-term market selloff over the month or so until that situation was resolved. Secondly, investors may look to congressional results to see if there is a clean sweep for one party or the other or if there is a split decision that could keep gridlock in place. Third, investors may then consider how the differing policies related to taxation and spending could impact specific stocks and sectors. In this week’s issue of Equity Leaders Weekly, we look at broad market action in the US and Germany as an indicator of differences in investor focus and sentiment between North America and Europe.
The S&P 500 Index (SPX.I) staged a strong recovery between March and September, not only recovering ground lost in the February-March market crash but rallying to new all-time highs. Since peaking in early September near 3,600, the Index has gone into what appears to be a normal sideways phase with political and economic uncertainty providing a headwind, while monetary/fiscal support and positive corporate earnings provide a tailwind.With the Index holding above its recent breakout point near 3,260 and a symmetrical triangle of higher lows and lower highs forming, the S&P 500 currently appears to be in a normal consolidation phase within the context of a longer term uptrend. A move back above 3,425 would start a new X column which would face initial resistance near the 3,500 round number then previous highs in the 3,565 to 3,600 area. A breakdown below 3,225, however, would complete a bearish double bottom pattern, resolve the triangle to the downside and signal the start of a new downtrend with next potential support near 3,100 then 2,980 based on previous column highs/lows and the 3,000 round number.
Recent performance in the Franklin FTSE Germany ETF (FLGR) highlights that as bad as market conditions have been in the US, markets have been under even more pressure in Europe where the main worry among investors is the increasing number of COVID cases and the potential for new lockdowns. In particular, note the bearish SMAX score of 4, indicating weakness relative to the asset classes, compared with the bullish SMAX score of 7 for SPX.I. FLGR turned downward earlier this month and recently completed a bearish Spread Double Bottom pattern with a breakdown below $22.00, which signalled the start of a new downleg which remains underway. Initial downside support appears in the $20.00 to $20.20 area where a round number, horizontal count, and prior column lows cluster. Initial resistance appears near $21.50 based on a 3-box reversal, followed by $22.00.
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