NASDAQ Composite Index (NASD.I) & S&P/TSX Composite Index (TSX.I)

An autumn of discontent has taken hold in world markets. Fuelled by concerns that central banks may have to keep interest rates higher for longer, or even potentially raise interest rates further, as the Reserve Bank of Australia suggested on Tuesday, treasury yields have continued to climb. The US 30-Year Bond Yield peeked up above 5.00% this week, while the 10-year German Bund Yield approached 3.00%.

Rising traded interest rates, and a continuing rally in the US Dollar increased the headwinds facing multiple asset classes this week. Bonds, Gold and non-US currencies continued their selloff, along with metals and grains. Even in energy markets, Crude Oil and Gasoline started into trading corrections as investors started to consider the potential impact on demand of a tightening environment.

This was the week that a number of equity markets and sectors which have been teetering for weeks finally saw support give way and broke down. Equity retreats were widespread across geographies, risk levels (both developed and emerging markets) and market cap levels (both large and small cap indices broke down). In terms of sectors, it would be easier to list the sectors that didn’t break down or stage a downturn. Overall, however, interest sensitive groups (Financials, Real Estate, Utilities) were hit the hardest once again, followed by Cyclicals (Industrials and Consumer Discretionary) and Materials.

Economic data so far this week has been mixed again but yesterday’s soft US ADP payrolls has raised questions about what we may get from tomorrow’s US nonfarm payrolls and Canada jobs reports. In addition to the headline numbers, investors may continue to keep a close eye on wage inflation numbers to see if the stickier parts of inflation are holding up or easing. Next week brings more US inflation data.

Confession season has been pretty quiet so far but next week, earnings season begins with Pepsico reporting on Tuesday and Delta Air Lines next Thursday. The main kickoff comes on Friday the 13th (ominous…) with big banks (JPMorgan Chase, Citigroup and Wells Fargo), Blackrock, and UnitedHealth all reporting results,

In this edition of Equity Leaders Weekly, we look at how concurrent breakdowns by the NASDAQ Composite and the TSX Composite Indexes indicate that a broad-based market selloff may be getting underway across a wide range of sectors.

The NASDAQ Composite Index (NASD.I), with its higher concentration in “growth” companies and higher beta sectors like Technology and Communications can be seen by investors as a proxy for how aggressive or confident investors are feeling at a point in time. For much of this year, the NASDAQ has been trending upward, and has particularly benefitted from strong investor interest in companies with exposure to Artificial Intelligence.

A spring and summer rally in the NASDAQ ran into resistance in August short of spring 2021 highs and in recent weeks, it appears that enthusiasm and appetite for risk at the margins has faded and distribution has resumed. This week, NASD.I has staged a bearish Double Bottom breakdown suggesting that investors have become more cautious and a new downtrend has started.

Next potential support for NASD.I appears in the 12,275 to 12,525 area where a horizontal count converges with a cluster of previous column highs and lows. Initial resistance on a bounce appears near 13,700 based on a 3-box reversal.

With its higher concentration in Financials, Materials, Energy and Industrials relative to its US peers, the S&P/TSX Composite Index (TSX.I) can be seen by investors as a “value” or resource sensitive index.

Through 2023 to date, TSX.I has been trending sideways, caught in a tug-of-war between strength in resource groups, particularly Energy, and weakness in interest sensitive groups, particularly Banks, Utilities and Real Estate.

With recent retreats in the prices of Gold, Copper, Platinum and Lumber dragging on the Materials sector, other cyclical groups like Industrials and Consumer Discretionary struggling, and interest sensitive areas continuing to sell off in the face of increasing treasury yields, the TSX Composite has broken down this week. The completion of a bearish Spread Triple Bottom pattern has confirmed the snapping of an uptrend line, a previous Double Bottom breakdown and the start of a new downtrend.

Next potential support appears at the 2022 lows near 18,165, followed by 17,115 which is based on a horizontal count. Initial rebound resistance appears near 19,870 based on a 3-box reversal.