Crude Oil Continuous Contract (CL.F) & S&P/TSX Composite Index (TSX.I)

After rallying through much of January, stock markets started to fade over the last week or so giving back much of their gains from earlier in the month. The NASDAQ for example, lost 2.2% yesterday and 2.0% over the last week but still managed to eke out a monthly gain of about 1.0%. Around the world, most major country indices were more or less flat (between -1.0% and +1.0%) but China markets were hammered again, falling 4.1%-4.3%. China weakness did not, however, extend through to commodities as Crude Oil and Copper both posted moderate gains over the last week.

Of the major US indices, the mega cap S&P 100 had the best performance, up 2.3%, while the small cap Russell 2000 had the worst performance, down 3.2%. In addition to small caps, cryptocurrencies retreated into month end, while gold started to rebound suggesting that investors’ appetite for risk has decreased.

Sector performance was mixed over the past week with Utilities and Energy having the most positive performance with gains of 1.3%-2.0%. Information Technology had the worst week with a loss of 1.7%. All eleven major sectors posted losses in January with Consumer Discretionary, Consumer Staples, Real Estate and Materials among the worst performers.

Part of the slowdown in upward momentum appears to have come from a growing realization that even though central banks are likely done raising interest rates for this cycle, they are not ready to start cutting rates or slow the process of normalizing their balance sheets any time soon. The Fed took a “neutral hold” stance at yesterday’s meeting that was hawkish relative to investor expectations and on multiple occasions between the statement and the Powell press conference crushed any hope for a March US interest rate cut. The Bank of England meets today followed by the Reserve Bank of Australia on Tuesday.

The reaction to earnings reports this quarter continues to reflect the old saying “buy on rumour, sell on news”. The market rally of the last three months built up high expectations for earnings into market valuations. While most companies have been able to beat analyst expectations on earnings, which were generally ratcheted down over the last three months creating a low bar to beat, disappointing sales, guidance, or other metrics has sparked a series of stock selloffs on profit-taking. Some of the biggest examples of post earnings selloffs in recent days include Alphabet (GOOG), UPS (UPS), and Intel (INTC). On the other hand, beaten down Boeing (BA) bounced back following its earnings release.

Today after the close, three of the “Magnificent Seven” stocks report results, Apple (AAPL), Amazon.com (AMZN), and Meta Platforms (META). Tomorrow, results from Big Oil start to roll out with Exxon Mobil (XOM), Chevron (CVX) and Imperial Oil (IMO) reporting. The heart of earnings season continues next week on both sides of the border with headliners including McDonalds (MCD) and Caterpillar (CAT)* on Monday, Ford (F) and Dupont (DD) on Tuesday, and Disney (DIS) plus Sun Life (SLF) on Wednesday. Results are due from a wide variety of market cap levels with Energy and Insurance among the more prolific groups.

The start of the new month brings a flurry of economic reports. Yesterday both US ADP payrolls and Chicago PMI were disappointing. Today brings Manufacturing PMI surveys from around the world, plus US construction spending. Tomorrow US Nonfarm Payrolls and wage inflation cap off a busy week for news. Next week, economic news slows down with the main event being Service PMI reports on Monday, shifting the spotlight fully over to earnings reports.

In this edition of Equity Leaders Weekly, we look at recent rallies in the price of Crude Oil and the S&P/TSX Composite Index.

*Shares of Caterpillar are held in portfolios of SIA Wealth Management.

Slowly but surely, it looks like a downtrend in Crude Oil which started out in the spring of 2022 has bottomed out and that oil has turned the corner and started to recover. A late summer rally snapped oil out of a downtrend but that fizzled out late last year as concerns about a slowing global economy and potentially weakening demand led to the price falling back.

Since the start of this year, a combination of continuing supply management at OPEC+, particularly Saudi Arabia, a growing conflict in the Middle East impacting shipping, and China announcing stimulus measures has shored up the oil market and Crude has started to bounce back once again.

In December, CL.F successfully retested its summer lows above $66.85, indicating that a significant floor has emerged in the mid to high $60s. Since then, oil has climbed back up toward $75.00 and has completed a bullish Double Top breakout. A new uptrend of higher lows has also started to emerge.

Initial upside resistance appears at previous highs near $84.80 then $95.50. Initial support appears near $70.95 based on a 3-box reversal.

When looking at benchmark indices for different countries it’s important to recognize that an index doesn’t just reflect the country’s economy in general, it also reflects the importance of different sectors within the economy which can vary widely between countries.

For example, major US indices tend to be dominated by the Technology sector followed by, at a distance, Health Care, Consumer Discretionary, Communications and Financials. In Canada, Financials are the largest sector by far, followed by, at a distance, by Energy, Materials, and Industrials, with Health Care and Technology being much smaller in Canada both in terms of weight in the index and number of companies involved.

With Financials struggling and Technology soaring through most of 2023, it comes as no surprise that the S&P/TSX Composite Index struggled through much of last year, relative to its US counterparts. In recent months, Financials and Energy in particular, have started to pick up which has helped TSX.I to rally.

Helped in early 2022 by an Energy market rally, TSX.I peaked in April of 2022, three months after its US peers started into a bear market. TSX.I bottomed out in the fall of 2022 at the same time as the US and participated in the same initial rally up off the bottom. The S&P/TSX recovery stalled out last February and the Canadian market spent most of last year stuck in a sideways trend.

Since November, TSX.I has been rallying, initially boosted by a rally in the interest sensitive groups like Financials and Utilities and more recently by rebounds in Energy and Materials. Back in November, TSX.I staged a bullish Double Top breakout and has not looked back, staging a bullish Spread Triple Top breakout, and then rallying to its highest level since May of 2022 without even a 3-box correction along the way.

Previous column highs suggest initial resistance may emerge near 21,730 or 22.170, followed by 22,610 based on a horizontal count. Initial support appears near 20,265 based on a 3-box reversal.