Sector Scopes December 2022 Review & BMO Aggregate Bond index ETF* (ZAG.TO)

A week ago, equities staged a big rally in response to hints from Fed Chair Powell that the US central bank may slow the pace of interest rate increases. Since then, however, stocks have been steadily retreating, suggesting that may have been another bear market rally.

Economic data on both sides of the border, particularly last Friday’s employment numbers have been running better than expected suggesting that while central banks may slow the pace of tightening, between continued inflation pressures and a steady economy, they may not be in a hurry to start cutting rates. Even declines in US traded interest rates (like the 10-year treasury note yield) and the US Dollar, where previous gains had been headwinds for stocks, have been unable to keep last week’s equity party going.

We may get more clarity over the coming week about what central banks are thinking with the Federal Reserve Board, European Central Bank, Bank of England and Swiss National Bank all holding meetings next Wednesday-Thursday. In addition to the Fed decision, investors may look to the statement, member projections on the future path of interest rates and the press conference for insights. With all the focus on interest rates, Quantitative Tightening continues to run in the background. Yesterday, the Bank of Canada raised its benchmark rate by 0.50% as expected, but sent mixed signals in its statement, indicating it is “considering whether the policy interest rate needs to rise further”, while at the same time saying “inflation is still too high”. Meanwhile overseas economies continue to struggle with commodities and China-sensitive markets particularly vulnerable over the last week as investors weigh the prospects for reopening from COVID lockdowns against the economic disruption and damage that has already been done. Energy markets have had a particularly rough week, while metals have done better, particularly Gold.

The coming week is also busy for economic reports. Highlights include US producer prices tomorrow, US consumer prices on Tuesday and then a flurry of reports next Thursday including Flash PMI numbers from around the world and US retail sales.

In this edition of the Equity Leaders Weekly, we take our monthly look at sector scopes and at the impact of the recent trend change in traded interest rates on bonds.

The Sector Scopes feature, found in the Markets – BPI tab of SIA Charts, provides a snapshot of the bullish percent (percentage of stocks in a sector on bullish technical signals), for 31 industry groups. Analysis of the relative positioning of the groups across a spectrum and of changes in positioning over time can tell us a lot about changes in investor sentiment.

On November the 30th, the majority of sectors were piled up in the three rightmost columns (high bullish percent), indicating a bullish but potentially overbought market. Over the last week, the largest group of sectors has shifted leftward slightly. Since the majority of sectors remain on the right hand side of the chart, it appears that while we have seen a pullback in the last week, so far this appears to have been a normal correction within a broader upward trend, and that overbought conditions have started to ease.

Over the last week, Energy and Banks have shown the most relative weakness while Computer Software and Internet have also struggled.

Defensive sectors like Tobacco, Conglomerates, and Utilities have held their ground on the right side, indicating relative strength. Metals & Mining has also remained near the right side, benefitting from recent gains in metal prices.

Canadian bond prices, which tend to trend in the opposite direction of interest rates, steadily declined from a peak in January of 2021, through to a Bear Trap bottom in October of 2022. In recent weeks, the trend has changed with the BMO Aggregate Bond Index ETF (ZAG.TO) staging a bullish Double Top breakout that has extended into a bullish High Pole. This month, ZAG.TO has broken through its August peak to complete a bullish Spread Double Top pattern and signal the start of a new uptrend.

ZAG.TO may benefit from a slowing or pause in the Bank of Canada’s interest rate tightening program which based on yesterday’s statement, appears to be in the later innings. With treasury yields coming down elsewhere and three central banks meeting next week including the Fed, bond markets and currencies may be active in the coming days as investors and central bankers start to position themselves for 2023.

Based on previous column highs and lows, upside resistance may appear near $14.25 or $14.85 on trend followed by the $15.00-$15.10 area where a round number and a horizontal count converge. Initial support appears near $13.65 based on a 3-box reversal.

* Units of BMO Aggregate Bond Index ETF are held in some portfolios managed by SIA Wealth Management.