Equity Leaders Weekly

Equity Leaders Weekly - August 13, 2020 SPDR S&P Retail ETF & NASDAQ Biotech Index

Upward momentum in stock markets around the world has continued and broadened over the last week. With earnings season moving into its later innings and economic news taking a normal mid-month pause, investors have been responding more to external events, particularly in the area of vaccine development where progress has suggested that the march toward reopening economies may be sustainable. Although sectors such as US technology continue to play a leading role, more stocks have joined the upward parade. Several indices around the world have staged bullish Golden Crosses of the 50-day above the 200-day average including the S&P 500, Dow Industrials, S&P/TSX, Dax and Nikkei, with the Dow Transports and Russell 2000 pending. Sectors which had been lagging in the recovery such as transports, along with improving sentiment toward small cap stocks suggests a broadening market advance. Another sign of improving equity investor sentiment has been the sudden downturn in the prices of Gold and Silver as vaccine progress sparked an outflow of capital back into risk markets from defensive havens. We aren’t out of the woods yet, however, and more stimulus may still be needed so at the moment, the precious metal pullback appears to be more of a trading correction than a decisive downturn.  In this week’s issue of Equity Leaders Weekly, we take a look at what trading in US retail stocks tells us about expectations for the upcoming round of retailer earnings, and at what could be causing recent weakness in the Biotechnology sector.    

SPDR S&P Retail ETF (XRT)

As lockdowns have wound down and stores have steadily reopened, the retail sector has roared back to life.  In the SIA Charts Market Sectors Report, the SIA Specialty Retail Equal Weight Index has climbed from 14th place to 5th over the last three months, while the SIA Retail Equal Weight Index has moved up from 23rd place to 12th over the same time frame.  This coming week brings earnings reports from a number of retailers covering the period from May to July, which started with many retailers in near or full lockdown and finished with many stores having reopened. Some things that investors may be watching for this time around include comments on sales momentum, was there a burst of pent-up demand and then things levelled off or has sales recovery momentum continued to increase. It also will be interesting to see what level of confidence managements have about the coming quarter and if any dare to issue guidance. The SPDR S&P Retail ETF has been consistently climbing since it bottomed out back in March and with a perfect SMAX score of 10, has been exhibiting strength across the asset classes. Last month, SRT completed a bullish Double Top pattern and topped its February 2020 high, and this week, the ETF is testing its 2018 peak near $51.20. This action suggests that investor expectations may be significantly higher heading into this sector earnings season than they were back in May. Having cleared $50.00, next potential upside resistance for XRT appears near $58.50 where vertical and horizontal counts converge. Initial support appears near $47.00 based on a 3-box reversal.  

NASDAQ Biotech Index (NBI.I)

 Considering that the COVID-19 pandemic has kept the health care sector in the spotlight for much of 2020 and market volatility it comes as no surprise that the sector has done well overall this year. In recent weeks, however, the Biotechnology group has turned downward and has started to underperform other parts of health care. This retreat reminds investors that not all areas of health care have benefitted equally from the COVID-19 pandemic. While spending on vaccine/treatment development, and also on COVID related devices such as test kits and masks has exploded, it appears to have sucked the oxygen away from other areas. Pharmacies have indicated changes in spending patterns and it appears that with fewer people going to see their doctors unless its an emergency or they have COVID symptoms, fewer prescriptions are being written and the demand for other drugs has dropped off. The NASDAQ Biotech Index (NBI.I) has fallen about 9% from its July peak. By retracing more than 50% of its previous breakout X column, a bearish High Pole Warning has been triggered. The index has also slipped back under its June high which has been an initial support point. Next potential downside support appears at previous support/resistance near the 4,000 round number. Initial resistance appears near 4345 based on a 3-box reversal.        

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