Equity markets around the world have gone into retreat over the last week, not only confirming that the rally which started the year has ground to a halt, but also that a moderate seasonal correction may be under way. Earnings season has pretty much come to an end, and finished on a disappointing note with soft results from several US retailers and mixed numbers from Canadian banks.
Investors also have received a reminder this week that the potential for high momentum in the technology sector can cut both ways. In the last couple of weeks, investors have recognized that the potential impact of growing tensions over trade between the US and China may have a significant impact on trade and sales of technology, not just raw materials and manufactured goods, putting pressure on semiconductor and communications equipment stocks sensitive to trade with China. The impact may not only come from specific sales restrictions but also a potential general increase in demand should Chinaās economy weaken further.
An increasingly cloudy outlook for the world economy appears to have encouraged investors to move capital from stocks into bonds, driving down US treasury yields and suggesting that the risk of a recession has increased. Investors should note, however, that back in December when equity markets took a nosedive, politicians stepped in to support the market, easing trade tensions and backing away from hawkish monetary policy. In other words, current trading appears to be a normal seasonal consolidation following a big rally that could run into or through the summer depending on how long it takes to get trade talks back on track.
In this issue of Equity Leaders Weekly, we take a look at an emerging consolidation trend in the S&P 500 and what the Sector Scopes feature in SIA Charts is currently telling us about capital flows between equity market industry groups.
S&P 500 Index (SPX.I)
US indices, such as the S&P 500 (SPX.I), started off 2019 very strong but their upward momentum has stalled of late. SPX.I recovered nearly all of its late 2018 losses but didnāt have enough left in the tank to push through to meaningful new highs. As a result, SPX.I stalled out near its previous peak around 2,950. In recent weeks, the index has been giving back some of its gains, dropping back toward 2,800.
So far, this appears to be a normal seasonal correction within an emerging sideways trend (between approximately 2,550 and 2,950) with the index holding well above potential support levels near 2,620 and 2,560. In addition, a bullish SMAX score of 7 indicates that SPX.I continues to exhibit strength relative to the asset classes even through the current pullback. The first attempt to move out of this range back in December was quickly erased, but the next breakout from this range (over 2,950 or under 2,550) could signal the start of a significant new trend that could prevail for some time. Until that occurs, we could see shorter-term trading swings in both directions as occurred through much of 2018.
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Sector Scopes
Sector Scopes, which is found in the Markets section of SIA Charts, highlights the bullish percent (percentage of stocks in a group on bullish point and figure charting signals) for 31 industry groups provides a visual snapshot of which groups are in or out of favor at a point in time. Comparing the Sector Scopes on different days highlights changes in capital flows over time.
At the end of April, the groups were concentrated on the right-hand side of the page indicating the market was a bit frothy, suggesting the potential for a pause or moderate correction. Over the course of May there has been a significant leftward shift so that currently the groups are spread across the spectrum neither extremely overbought nor extremely oversold.
While there was a general leftward shift among groups (bullish percent declined as stocks retreated), groups exposed to the growing risk of a trade war between the US and China were hit particularly hard, including Electronics & Semiconductors, Computer Hardware, and Metals & Mining.
With uncertainty among investors increasing over the course of May, fear gauges like gold and the VIX have been on the rebound and capital has been moving back into defensive havens, particularly US bonds which has pushed prices up and yields down. Because of this, it comes as no surprise that the groups which have remained on the right-hand side of the chart are mainly in the interest rate sensitive and defensive areas such as Insurance, Utilities, Real Estate and Food.
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