Sector Scopes February 2024 Update & BMO Equal Weight Banks Index ETF (ZEB.TO)

The last few days have been mixed for world equity markets. After underperforming for much of the last year, Chinese markets have finally started to rebound a bit after getting help from a Chinese interest rate cut and other stimulus measures. Canada, Australia, and many European countries have also had a good week, posting gains of 2-4%.

On the other hand, while the S&P has continued to trade near the 5000, US indices have been pretty much flat, and the NASDAQ is actually down slightly over the last week. This suggests that the engine which has been pulling equities higher may be running out of steam.

Particularly troubling is that starting last Friday and continuing after traders returned from the long weekend, US markets have been backsliding in the absence of new news to support the rally now that earnings season is pretty much over.

Sector performance has been fairly balanced with six groups posting gains, led by Energy, and five groups posting declines, particularly Technology. Year to date, only three out of eleven groups are in the green, Health Care, Industrials and Technology. The other eight groups are down year to date with Materials, Real Estate, Consumer Discretionary and Consumer Staples turning in the relatively weakest performances.

We are now moving into the last week of February, with an extra day this month for Leap Year. The main economic events are flash PMI reports today, and Manufacturing PMI reports next Friday. In between there are a number of US housing market numbers and GDP updates for the US and Canada.

On the earnings side, the main event is earnings week for Canadian Banks for the quarter which ended January 31st. On the traditional banking side of their businesses, investors may focus in on economic commentary for indications of whether Canada is in a recession or bouncing around zero, and the current state of the US economy for those with sizeable stateside operations. It was a very strong quarter for stock markets, which could have a positive impact on capital markets and wealth management divisions.

In this edition of Equity Leaders Weekly, we take our monthly look at Sector Scopes and at recent trends in the Canadian banking sector ahead of next week’s earnings reports.

The Sector Scopes feature in SIACharts, found in the Markets – BPI section, provides investors with a visual snapshot of the Bullish Percent (percentage of stocks in the sector on a bullish signal) for 31 industry groups. This provides insight into which sectors are attracting capital, and which are not at a given point in time and how capital flows and investor sentiment change over time.

Over the last month, the majority of sectors have congregated in the centre-right part of the chart, which is indicative of a neutral to moderately bullish market. Energy has had a very strong month, moving from the far left to the far right of the graph, indicating a significant increase in bullish percent for that group. Retailers have moved closer to the right side. Although Metals & Mining is still in the left-hand side, it has moved rightward, suggesting that potentially oversold conditions have eased.

Groups moving leftward this month (falling Bullish Percent) have been led by Computer Software and Internet. Utilities and Tobacco are currently the weakest, leftmost groups.

The Canadian banking sector, represented by the BMO Equal Weight Banks Index ETF (ZEB.TO) has seen its ups and downs over the last year. The sector peaked about a two years ago, then sold off between February and July of 2022. Between the summer of 2022 and the summer of 2023, the sector trended sideways. While the sector did fall back with other financials as some US regional banks ran aground a year ago, the decline for Canadian banks was less severe than their US counterparts.

Over the summer, the sector trended sideways then broke down in September as treasury yields rose into the fall. The rapid retreat of treasury yields ignited a rally in many interest rate sensitive groups, including Financials sparking a big rally in ZEB.TO that carried through to January and enabled the ETF to briefly climb above its February 2023 high.

With central banks, including the Bank of Canada, generally less dovish than investors had hoped they would be, treasury yields have started to rebound and interest sensitive stocks, including banks, have stalled.

ZEB.TO is currently on a 4-box correction, but it remains above initial support at its August 2023 high near $33.75. Next support appears near $32.10, as a close below that would trigger a high pole warning. Previous lows suggest additional support possible near $31.15. Initial resistance on a bounce appears near $35.50 based on a 3-box reversal, followed by previous lows and highs near $36.55 and then $39.20.