Equity markets have continued to climb into August, catching a tailwind from stronger than expected US nonfarm payrolls (528K vs street 250K) and the first signs of softening in US consumer price inflation (8.5% vs street 8.7% and previous 9.1%).
Despite hawkish comments from Fed officials over the last week, yesterday’s slightly softer than expected consumer price inflation number in particular, appears to have stoked speculation that the Fed could be approaching a pause point in its tightening program as short-term treasury yields and the US Dollar sold off dramatically yesterday while stocks soared.
To this point, investors have been able to explain the recent rebound as a common seasonal bounce through summer earnings season or a bear market rally. The coming week may be when the rubber hits the road. Earnings season is winding down and historical seasonality is shifting from one of the strongest periods of the year to one of the weakest and most volatile times of the year which tends to run from Mid-August to Mid-October. In addition, the midterm election season is coming which has also historically added to volatility and uncertainty.
For the coming ten days, the retailing sector moves into the spotlight with retail sales numbers on the way from several countries including the US, Canada, China, the UK, and others. Also, major retailers in the US and Canada are scheduled to report earnings including Walmart, Canadian Tire, Home Depot, and Lowes. Inflation numbers also continue to roll out over the next week from Canada, the UK, and Europe, along with housing starts and other real estate related reports from the US and Canada.
In this edition of the Equity Leaders Weekly, we look at what the Sector Scopes and recent action in the S&P 500 Index are telling us about the health and prospects for the current market rally.
The Sector Scopes feature, found in the Markets – BPI tab of SIA Charts, provides a snapshot of the bullish percent (percentage of stocks in a sector on bullish technical signals), for 31 industry groups. Analysis of the relative positioning of the groups across a spectrum and of changes in positioning over time can tell us a lot about changes in investor sentiment. In mid July, the majority of sectors were piled up in the left third of the chart, indicating relative weakness and a downward trending market. Over the last month, the Sector Scopes have changed dramatically with most industry groups shifting over to the right side, indicating a significant improvement in investor bullishness. The concentration of groups in the four rightmost columns is indicative of an upward trending but potentially close to overbought market environment. Interest rate sensitive groups like Utilities and Real Estate made the largest rightward moves over the last month, but overall what is notable is that a wide variety of sectors have migrated to the right side, a sign of a broad-based rebound dominated by cyclical groups like Leisure and Transportation. Laggards on the left-hand side currently tend to be dominated by defensive groups like Telecommunications and Tobacco.
The broad US stock market continues to climb a wall of worry. Since June despite ongoing hawkish talk from the Fed, signs of Stagflation all over the place and the start of a technical recession in the US, the S&P 500 Index (SPX.I) has climbed 13% without even a 3-box correction. The S&P 500 has now moved up into a potentially significant technical area, and technical signs are mixed. Although US Equity has moved up in the SIA Charts Asset Class rankings lately, the main US benchmark index still has a bearish SMAX score of 5 indicating weakness relative to the asset classes. SPX.I recently completed a bullish Double Top pattern, an encouraging sign, but so far the breakout has only moved one row which suggests a lack of follow-through. This is a concern because back in April, the index broke out by one row and then reversed downward, a bearish Bull Trap reversal which is circled. In order to call off the risk of another bull trap, SPX.I needs to extend this breakout by at least two more rows, and close above 4,264 to create a high pole.Additional potential upside resistance on trend may appear near 4,310 based on a previous column high and 4,395 based on a horizontal count. In particular, take note of the April high near 4,665. Currently, the 2% chart is on a bullish Low Pole Warning, but it would take a close above that level for the 2% chart to go onto a double top. On the downside, as mentioned, a close below 4,055 would trigger a bearish bull trap signal. Support may then appear near 4,015 based on a 3-box reversal, the 4,000 round number, and then 3,900 based on previous column lows.
Disclaimer: SIACharts Inc. specifically represents that it does not give investment advice or advocate the purchase or sale of any security or investment whatsoever. This information has been prepared without regard to any particular investors investment objectives, financial situation, and needs. None of the information contained in this document constitutes an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. As such, advisors and their clients should not act on any recommendation (express or implied) or information in this report without obtaining specific advice in relation to their accounts and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. SIACharts Inc. nor its third party content providers make any representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein and shall not be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon. Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice.