SPDR S&P Retail ETF (XRT) & Lumber Continuous Contract (LB.F) 

It has been another week of mixed action for equities and commodities. Stock markets in North America, Germany, and Japan retreated for much of the last week, then bounced back yesterday. Indices in the UK and Hong Kong have remained under pressure. The one constant through this action has a been a decrease in investors’ appetite for risk and a conservative shift in sentiment, particularly seen in sharp declines for cryptocurrencies like Bitcoin, and meme stocks such as Gamestop and AMC Theaters over the last few days.

The main event for this week, the Fed decision, was quite momentous. Six weeks after launching its tapering program, the US central bank doubled the pace of cutbacks to $30B per month from $15B which now puts it on tract to end asset purchases by March instead of June. The dot plot indicated that the majority of members are now expecting 2-3 rate hikes next year implying, at a rate of one rate hike per quarter, that US interest rate hikes could potentially start in June.

Speculation around this hawkish shift by the Fed would explain the declines of recent days. On the Fed announcement, US indices bounced back strongly but remained below the peaks of previous days. This suggests either a short-covering bounce, or that some investors had been sitting on their hands waiting for the Fed decision before going bargain hunting. Today’s action should give a better indication of whether this bounce is sustainable and if we may get a Santa Claus Rally this year or not.

Central bank week continues today with the European Central Bank, Bank of England, Bank of Japan and Swiss National Bank all announcing decisions and outlooks over the next 24 hours. The Bank of England has been under particular pressure of late to make a hawkish move of some sort. Today also brings flash PMI numbers.

Commodities have been particularly volatile in the last week as investors weigh the implications of the Omicron COVID wave on resource demand. Energy contracts started the week sharply down but crude oil and gasoline have stabilized in the last couple of days. Metals such as copper and platinum remain under heavy pressure. Lumber, on the other hand, has been soaring as Canadian housing starts came in far above expectations, indicating strong demand.

After this week, news flow goes quiet for two weeks around the holidays and through to the end of the year. US markets are closed on the 24th, while Canadian markets are closed on the 27th and 28th.

In this issue of Equity Leaders Weekly, we look at recent action in the price of Lumber, and at how the retail sector has been reflecting changes in investor sentiment.

In many ways, the retail sector has been an embodiment of broader market sentiment and market forces throughout 2021. Like the market, the sector started the year off very strong, then levelled off into a sideways trading range over the spring and summer. As investors turned bullish in October, the SPDR S&P Retail ETF (XRT) broke out to the upside as did the broad Russell 2000 Index (RLS.I) and briefly cleared $100.00.

This wave of investor enthusiasm turned out to be fragile and the breakout turned out to be false. Although retailer earnings season started out positive, as results rolled in, sentiment against the sector soured as the sector found itself at the epicenter of uncertainty related to supply chain issues, rising material and transport costs and the potential impact of the COVID Omicron wave on operations (new lockdowns?) and consumer spending.

A weaker than expected US retail sales report for November (0.3% vs street 0.8% and previous 1.8%) along with a mixed Black Friday weekend (better than 2020 but still worse than 2019) hasn’t helped matters and reminded investors the sector still faces significant challenges through its key holiday selling season.

Like the overall market, XRT currently finds itself at a potentially key turning point retesting its October low. A bounce here would suggest that weakness has been washed out and that yesterday’s market bounce could turn into a Santa Claus rally. Initial rebound resistance could appear near $93.35, then the top of the current range near $98.15.

On the other hand, a breakdown below $88.80 could potentially be a devastating turn of events. The failure of support and completion of a pending spread double bottom pattern would signal the start of a new downleg with next potential support near $84.50 or $78.85 based on previous column lows.

In the November 18th edition of the Equity Leaders Weekly, we highlighted strength in the US homebuilding sector. Since then, homebuilders have been one of the few bright areas in a difficult market environment. Demand for new homes in North America has remained strong as yesterday Canada reported very strong housing starts for (301K vs street 234K). Lumber has had its ups and downs over the last year. This recent resurgence in demand from home construction and renovation, combined with supply chain disruptions has sparked a big rebound in lumber lately.

The price of lumber (LB.F) has been on a roller coaster ride for over a year now. Between December of 2020 and May of 2021, lumber soared from near $500 to a peak near $1,650. The price subsequently crashed over the summer, giving back all of its previous gains and tumbling all the way back toward $450.

In recent weeks, lumber has started to rise once again, rallying up off of $640, blasting through $780 to complete a bullish Spread Double Top pattern and not looking back at all on its way back up through $1,000 an on toward $1,140. Next potential upside resistance appears at a downtrend line near $1,230, then a previous column high near $1,330. Initial support appears near $1,030 based on a 3-box reversal, then the $1,000 round number.

Investors should note that while Canadian homebuilders are not publicly listed, several Canadian forest products companies have picked up a tailwind from rising lumber prices and have been climbing up the rankings in the SIA S&P/TSX Composite Index Report.