SIA Weekly: A Look at U.S. Regional Banks and Gold

Although the two days of panic trading encountered last week has subsided somewhat, broad indices, sectors and stocks have remained more volatile as earnings have started to roll out. The VIX, which we discussed in last weekā€™s issue of the Equity Leaders Weekly, has remained above 15.00 where it broke out last week, confirming increased fear and uncertainty among investors. Meanwhile, gold has broken out of the doldrums, signalling that capital has started to move out of risk markets and into defensive havens.

Action in individual stocks following earnings reports is also telling. Generally speaking, gains to date on positive reports have been small and fleeting while reports found disappointing or lacking, have been followed by significant declines. The most significant post-earnings action to date has been in Netflix (NFLX) where stellar EPS and subscriber growth sparked a 9.2% pop on the open, but over the course of the trading day, big early gains were whittled back to a 5.2% higher close. Worse for Netflix, the shares were unable to break out over $380, leaving them trapped in a $320-$380 channel. Overall, the market reaction to the news suggests that at this stage of earnings season, investors appears to be looking for reasons to take money off the table and that ā€œsell the rallyā€ has taken over from ā€œbuy the dipā€.

In this issue of Equity Leaders Weekly, we take a look at Goldā€™s big turnaround and upside breakout. We also look at the potential implications of a breakdown in US Regional Banks for interest rates, the stock market and the US economy.

Gold Continuous Contract (GC.F)

Gold spent the middle months of 2018 in the doghouse. Despite tons of noise out there about trade wars and upheavals in overseas stock markets, gold steadily sold off through the summer as investors piled into US stocks, the US Dollar (goldā€™s number one enemy) advanced, and complacency ruled North American markets.

Things have changed a lot in recent weeks. The US stock market has been unable to ignore increased volatility and a bear market in other parts of the world, starting a correction of its own. With investors increasingly recognizing that US stocks are no longer the safest haven for capital in an uncertain world, money has started to move back into more traditional parking spots such as Gold. In addition to its role as a haven in uncertain times, gold has also resumed its role as an inflation hedge with oil prices and inflation expectations rising.

Goldā€™s big plunge down from near $1,360/oz terminated with support coming in near $1,180/oz. In recent weeks, gold retook the $1,200 level then broke out over $1,220 to complete a bullish Double Top and signals the start of a new upswing. Since then, gold has continued to recover, advancing on $1,235. Next potential resistance appears near $1,245 where a horizontal count and previous low converge, followed by $1,262 and $1,275. Initial support appears near $1,207 then the $1,200 round number.

iShares U.S. Regional Banks ETF (IAT)

Two of the major themes running through equity market moves this year have been the reaction to rising US interest rates and differing attitudes toward companies focused on the US domestic economy versus multinational corporations. One of the points of friction where these two themes collide with each other is US regional banks, a group that is interest rate sensitive, and not only domestically focused, but particularly sensitive to economic conditions in the regions they operate as their operations tend to be more centred around traditional banking.

In the Sector Scopes section of last weekā€™s Equity Leaders Weekly, we noted that with US treasury yields breaking out to the upside, interest sensitive groups were starting to come under pressure as would be expected. To date, interest rates have been climbing up out of historic lows and reflective of an improving economy getting up on its feet again and off life support. US economic data remained strong through the summer, indicating a robust economy which helped to attract interest to US domestically focused stocks over US multinationals who were more exposed to trade tensions, the rising US dollar and overseas economic/stock market risks.

One of the big questions looking forward, however, is at what point could rising US interest rates start to hinder the economy or stocks. Up until recently, there had been no impact, but a few cracks have started to appear. First, US construction stocks plunged in September as shown in the Sector Scopes and a nosedive in the iShares US Home Construction ETF (ITB). Donā€™t forget that in the last cycle a decade ago, interest-sensitive homebuilders peaked a year or two before the financial crisis exploded on to the front pages.

This week, a second significant crack has appeared, with the Regional Banks ETF (IAT) selling off and completing a bearish Triple Bottom pattern. This breakdown appears particularly troublesome coming in a week when most of the big US regional banks are reporting earnings. The chart shows that having breached $48.00 support, next potential support appears near $41.00 then the $34.00 to $35.50 area. On the other hand, initial resistance may appear near $50.00 then $53.00. In other words, the sector has broken down and the technical downside looks larger than the upside at the moment. These declines suggest that more of the interest sensitive groups within the Financials, Real Estate and Utilities sectors could be vulnerable in the near term.

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