BMO Equal Weight Banks Index ETF (ZEB.TO) & SPDR S&P Retail ETF (XRT)

Stocks have dropped off sharply in the last week as a correction accelerated and deepened. The main catalyst for the reversal has been a growing sense that central banks may not be as close to pausing their interest rate tightening programs as previously thought, exacerbated by trading around a North American long weekend and last Friday’s monthly options expiry.

Amid a number of hawkish comments from FOMC members, the US 10-year treasury note yield continued its recent climb, this time from near 3.80% toward 3.95%. This increased the tailwind behind the US Dollar which then put pressure on stocks, commodities and non-US currencies. In addition, the Reserve Bank of New Zealand, who has been leading the hawkish trend among central banks, raised its benchmark rate another 0.50% to 4.75% and indicated that is does not see its fight against inflation as being over even though price pressures have eased somewhat. February has flown by and month-end is only 3 trading days away after today. In terms of economic news, inflation remains a focus with US Core PCE inflation, the Fed’s favorite measure due tomorrow. Next week, US durable goods orders are due on Tuesday followed by Manufacturing PMI numbers from around the world as the calendar flips to March on Wednesday.

Bank earnings week in Canada kicks off tomorrow (yes, a rare Friday report) with CIBC putting out numbers with all of the other major banks reporting results between Tuesday and Thursday of next week. Earnings reports from US retailers have been mixed so far but a lot more are on the way, headlined next week by Target on Tuesday and Lowes on Wednesday. A number of alternative energy companies are reporting as well including First Solar and Rivian.

In this edition of the Equity Leaders Weekly, we take a look at recent action in the Canadian Banking and US Retailing sectors heading into their respective earnings seasons.

Just as the January market rally was quite broad based, the February market correction has been fairly broad based with the exception that for the most part, Financials have held up well relative to most other sectors.

Canadian Banks, represented by the BMO Equal Weight Banks Index ETF (ZEB.TO), completed a bullish Double Top breakout earlier this month, which has extended into a bullish High Pole without even so much as a 3% correction. ZEB.TO has also snapped out of a downtrend. Initial upside resistance appears in the $39.50 to $40.00 area where a horizontal count and a round number converge. Initial support appears near $35.50 based on a 3-box reversal.

Other groups in the financials sector which have not seen 3-row corrections into O columns yet include US Insurance (IAK) and US Brokerages (IAI). When looking at Canadian bank results this time around, investors may focus on commentary related to the health of the Canadian economy, the banking environment and interest rates. Considering the December selloff and January rebound, investment divisions could potentially see mixed results, but perhaps not as distorting as some of the quarters last year.

After a rough year in 2022, US retail stocks, represented by the SPDR S&P Retail ETF (XRT), started off 2023 with a nice January rally, and apparently with good reason as retail sales for January came in extremely strong when reported last week (3.0% vs street 1.8% and December -1.1%).This month, however, XRT has been backsliding and turned decisively downward last week, staging a bearish Double Bottom breakdown after investors responded more to disappointing guidance from Walmart and Home Depot than better than expected earnings from those companies. On the other hand, furniture retailer La-Z-Boy soared yesterday in response to a positive earnings report.

Even though XRT has staged a correction heading into retailer earnings season, so far its underlying upward trend remains intact and the ETF price has held above the recent breakout point near $66.40 with more support possible near $63.15. Initial resistance on a possible rebound appears near $71.15 based on a 3-box reversal, then $74.05.

As more reports roll out, investors may look for trends such as whether consumer spending, is more focused on staples, discretionary, or discount items and whether the overall outlook for spending is as potentially murky as has been suggested by company managements to date.