iShares MSCI USA Equal Weighted ETF (EUSA) & BMO Equal Weight Banks Index ETF (ZEB.TO)

It has been another good week for bullish equity investors as the global bull market continued a broad based rally in terms of geographies, market cap tiers and sectors. The majority of notable developed and emerging markets around the world posted gains although China continues to struggle on a one-month basis.

For the second week in a row, 29 of the 31 market sectors that SIA Charts tracks posted gains. Groups with the relatively strongest advances included a rebound for Financials, continued gains for Technology groups (Software, Semiconductors, Social Media, Video Games), Real Estate (benefitting from falling US treasury yields), and cyclical groups in the Industrials (Manufacturing, Aerospace and Construction) and Consumer Discretionary (including Autos and Leisure). Materials also showed signs of improvement, particularly the Steel and Forest Products sectors which are more sensitive to the North American economy.



Earnings season is off to a positive start with big banks and other companies from the Airline and Oilfield Service sector beating expectations, and in some cases raising guidance. Reaction to results from Financials has been positive but expectations were lower there with the sector still recovering from its winter selloff. Recent declines in Netflix and Tesla despite earnings beats suggest that expectations may be significantly higher for other sectors and some investors having entered positions on anticipation of results, may be looking for any reason to exit on news.

Reporting really ramps up in the coming days with senior companies across a number of sectors scheduled to report results in the coming days including Autos, Credit Cards, Airlines, Aerospace, Social Media, Semiconductors, Railroads, Manufacturing, and others. Headliners for the coming week in the US include: American Express tomorrow, Microsoft, Alphabet, Visa, GE and GM on Tuesday, Meta Platforms and Boeing on Wednesday and Intel, Amazon.com, Mastercard, Ford and McDonalds next Thursday.

Earnings season also gets underway in Canada this week with results on the way from the railroads along with senior companies in the Energy, Mining, Retail and Communications sectors. Headliners include Canadian National and First Quantum Tuesday, Rogers, CGI, Loblaws and Agnico-Eagle on Wednesday, and CP Rail plus Cenovus on Thursday.

Easing inflation pressures taking the pressure off of central banks to raise interest rates has helped to shore up support for stocks and bonds as treasury yields have continued to ease. Yesterday, for example, the FTSE rallied after UK inflation reports showed a significant easing of inflation pressures.

The Fed meets on Wednesday that will provide investors an opportunity to see how the US central bank responds to recent declines in the growth rate of Consumer and Producer prices. Investors may also look to the statement for indications of how long the Fed may remain on hold and if it is still considering additional rate hikes later this year.

Although earnings and central banks take over the spotlight in the coming week there are still a few economic indicators of note. Flash Manufacturing and PMI reports come out on Monday and the first read of US Q2 GDP comes out next Thursday.

In this edition of Equity Leaders Weekly, we look at the US market on an equal-weight basis as a sign of increasing breadth and at improved sentiment toward the financial service sector.

Two more bullish signs have emerged this week indicating increased bull market breadth, a sign of a potentially sustainable rally. First the Dow Jones Industrial Average broke out to its highest level since April of 2022, completing a bullish Spread Double Top pattern and confirming a recent breakout by the Dow Jones Transportation Average.

While the Dow Industrials are seen as a value average indicating sector breadth, it is still comprised of 30 mega cap stocks. Even more importantly are signs that a wider range of large and mid cap stocks are starting to move higher.

iShares MSCA USA Equal Weighted ETF (EUSA) not only tracks the MSCI USA Index which consists of 627 large and mid-cap stock that represent 85% of the US market capitalization, it does so on an equal weight basis. Equal Weight Indexes (proprietary versions of which for markets and sectors are available on the SIA Charts platform), reduce the impact of mega cap high index weight stocks and in so doing require wider participation to form a trend.

For example, note how EUSA peaked in November of 2021, 4-8 weeks ahead of the January 2022 peak for the S&P 500. This indicated that toward the end of the last bull market, gains were concentrated in a smaller number of big weight stocks.

Following an initial rally in late 2022, EUSA spent the first half of this year trending sideways, consolidating previous gains and digesting the March banking crisis selloff. EUSA snapped out of its previous downtrend in February. This month, EUSA has broken out to the upside, completing bullish Double Top and Spread Double Top breakouts, signaling that a broad based upleg appears to be getting underway in US equity markets.

Potential upside resistance may appear near $87.25 based on a horizontal count, the November 2021 peak near $89.00, and $92.60 based on a vertical count. Initial support appears near $78.15 based on a 3-box reversal.

Sentiment toward the financial services sector, which was rocked last winter when some US regional banks got into financial trouble, continues to improve. First, over the course of the spring flareups subsided and bad news slowed. Second, in late June, 31 major US banks all passed their annual stress tests. Third, into July, major US national and regional banks have been reporting better than expected results, indicating that the positive impact of a strong US economy has outweighed higher interest rates to date.

Positive earnings reports have sparked rallies in US Banks, Brokerages and Insurance Companies this week and in the coming days, the major Credit Card lenders are scheduled to report results. Canadian banks have also started to attract renewed interest. Although Canada’s big banks don’t report results until the end of next month, several of them have sizeable US traditional regional banking, investment banking, wealth management and trading operations.

The BMO Equal Weight Banks Index ETF (ZEB.TO) started 2023 off strong but then stumbled a bit in March alongside, but to a lesser extent than, US banks. ZEB.TO held above $32.10 through the spring, successfully testing that support level three times. This month, ZEB.TO has started to climb once again, completing bullish Double Top and Spread Double Top patterns.Previous highs suggest potential upside resistance may appear near $36.90 to $40.40 on trend, along with $38.80 which is based on a horizontal count. Initial support appears near $33.10 based on a 3-box reversal.