September, historically the weakest month of the year for equities, has arrived with US investors still in a good mood following last week’s comments from Fed Chair Powell who didn’t say anything in his big Jackson Hole speech about tapering stimulus leaving investors to assume that the easy money party may continue for a while yet.
Mixed signals on US inflation in recent days (Core PCE inflation high, ISM prices paid below expectations) and yesterday’s soft ADP payrolls report may also be seen as taking some of the pressure off the Fed to make a move at least for a few weeks. This Friday’s US nonfarm payrolls report and next Friday’s US consumer and producer price inflation reports may confirm or change this assessment.
In commodity action, the disruptions caused by Hurricane Ida and continuing hot weather have boosted natural gas prices (and oil to a lesser extent). Natural gas may remain choppy between moving into shoulder season for temperatures but remaining in storm season. Meanwhile, other commodities such as grains and lumber have been struggling, adding to the case for moderating inflation.
The upcoming Labor Day long weekend in North America brings to a close the summer holiday and driving season. Next week the economic and earnings calendars are light but it’s a big week for central bank meetings with the Reserve Bank of Australia on Tuesday, the Bank of Canada on Wednesday and the European Central Bank of Thursday. Of the three, the ECB may attract the most attention from investors looking for hints of whether the central bank is planning to start tapering its asset purchases later this year.
In this issue of Equity Leaders Weekly, we look at breadth and concentration issues in the current US market rally and at what gains in the US utilities sector is telling us about investor sentiment.
The last few days have seen US large cap indices shrug off recent weakness and advance to new all-time highs. While this usually would sound positive, there is always a question heading into this time of year of whether this is a buying climax or a sustainable advance. A quick look at market breadth raises some cause for concern as we move deeper into what has historically been the weakest and most volatile time of the year for stocks which runs from mid-August to mid-October (last year it ran from early September to early November ahead of the US election). While the large-cap S&P 100 has gained 9.4% over the last three months, reaching new all-time highs, US small caps (represented by the Russell 2000 index) and international indices (shown by the S&P/TSX Composite, the Dax and the Hang Seng) are all under water for the last three months. This suggests that recent equity gains have been concentrated in a small number of mega cap stocks a bearish warning that markets have a case of bad breadth. Divergences of this type usually work themselves out in one of two ways, either the outperforming market goes sideways for a while enabling the other markets catch up (leader pulls the others up), or the outperforming markets stages a correction to move back in line with its peers (others drag the leader down).
Changes in the relative strength among sectors in the US market also give us some insights into investor sentiment heading into September. With Powell and the Fed still dovish, it comes as no surprise that interest sensitive groups (Financials, Real Estate Utilities) have strengthened in the last few days. That being said, it is interesting that it’s the most defensive of these three groups, Utilities, which has been particularly strong, especially since the defensive Consumer Staples group has also been picking up steam on both sides of the border. This suggests that while the headline indices have been getting a lot of attention lately, underlying sector rotation suggests a defensive shift in investor sentiment. The Dow Jones Utilities Average (DUX.I), had been stuck in a rut for the last few months, trending sideways since peaking back in May. Starting in July, after a successful retest of old resistance as new support near 870, the index resumed its upward course. This week, the Dow Utilities have broken out over 935, completing a bullish Spread Double Top pattern and confirming the start of a new advance. Initial resistance may appear at the February 2020 peak near 965, followed by the 1,000 round number and then 1,012 based on a horizontal count. Initial support appears near 907 based on a 3-box reversal. With a bullish SMAX score of 9, DUX.I is exhibiting strength against the asset classes.
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