Canadian Market

SIA Weekly: Energy Equities vs. SPX

by SIACharts.com

US stock markets have started to rebound this week driven by a combination of factors. These include a positive response to the news that Warren Buffet upped his position in Apple last quarter; gains in energy stocks along with oil prices; successful technical support tests of the 200-day averages for the Dow Industrials and S&P 500; and finally, a move into the later stages of earnings season with the focus shifting away from the index moving big caps down the ladder into the mid and small cap companies where the impact of results is more contained. So far, these factors have combined to indicate a halt to declines, but US indices remain range bound and well short of their previous highs. .

As expected, President Trump walked away from the Iran Nuclear Deal this week. However, he gave investors, consumers and corporations six months notice to prepare for new sanctions that would potentially reduce Iranian supply to world markets rather than imposing immediate restrictions that could have been disruptive. This move has ignited another rally for oil and gas prices which carried on through to energy stocks and currencies sensitive to Oil including the Canadian Dollar and Mexican Peso.

With the combination of a strong US economy and rising energy prices pushing up inflation and interest rate expectations, the 10-year US treasury yield continues to flirt with 3.00%, while the US Dollar has turned decisively upward.

In this issue of week’s Equity Leaders Weekly we investigate the implications of a rising US Dollar for investors and what the tailwind provided from rising commodity prices has meant for Canadian junior oil stocks.

US Dollar Index Continuous Contract (DX2.F)

One of many factors that supported the bull market from stocks through 2017 and early 2018 was a falling US Dollar. A falling dollar historically has represented a tailwind for the US economy and US stocks, makes US exports cheaper in other currencies, making it cheaper for foreigners to visit the US and boosting the US Dollar earnings of the international subsidiaries of US multinationals.

As interest rates have been rising, the US Dollar has started to turn around as well. The US Dollar Index bottomed out back in February above 88.27 when the 30-year treasury yield broke out over 3.00%. Currently, with the 10-year treasury threatening to break out over 3.00%, the US Dollar Index has broken out of a downtrend, clearing 92.32. Next upside tests for the Dollar appear near 95.13 and 97.53.

A rising US Dollar has the potential to put a headwind in front of the US economy, US corporate earnings and US share prices, potentially limiting their upside in US Dollar terms. A rising greenback could put pressure on other currencies, particularly gold which as a store of value tends to trade in the opposite direction of the US Dollar over time. A higher US Dollar may also drag on commodities that are priced in US Dollars, all else being equal.

A US Dollar advance also has significant potential implications for investors outside the US. A rising US Dollar increases the returns or reduces the losses of US assets in terms of other currencies. It also reduces the returns of international assets when converted to US Dollars.

For Canadian investors a rising US Dollar may increase the Canadian Dollar adjusted returns of US stocks and bonds relative to Canadian investments. The shares and earnings of Canadian resource companies and others who generate revenues in US Dollars but pay the bulk of their expenses in Canadian Dollars could potentially benefit from a higher US Dollar.

iShares US Energy ETF (IYE) versus S&P 500 Index (SPX.I)

The oil price has been on a roll lately propelled upward by anticipation of strong demand and the potential for reduced supply from Iran due to sanctions potentially offsetting US oil production growth. With WTI climbing back above $70 and Brent trading above $75, energy stocks are starting to attract renewed attention from investors.

The chart compares the price performance of the US Energy sector compared with the S&P 500, which is used as the US benchmark index by major institutions. For most of the time since 2014, the chart has been trending downward, indicating that the Energy group has been underperforming the overall market. This trend, however, now appears to be reversing and Energy gaining in relative strength.

Energy stocks made an initial rebound attempt in 2016 and another recovery appears to be getting underway. The relative performance of Energy has turned upward in the last two months, taking out a prior low, then breaking out of a downtrend and completing two bullish patterns, a spread double top followed by a higher double top. Energy stocks may remain under accumulation on anticipation of higher earnings and dividends going forward as long as the underlying uptrend in oil prices continues.

For a more in-depth analysis on the relative strength of the equity markets, bonds, commodities, currencies, etc. or for more information on SIACharts.com, you can contact our sales and customer support at 1-877-668-1332 or at siateam@siacharts.com.

SIACharts.com specifically represents that it does not give investment advice or advocate the purchase or sale of any security or investment. None of the information contained in this website or document constitutes an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. Neither SIACharts.com (FundCharts Inc.) nor its third party content providers shall be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon.

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