Sector Scopes Update March 2024 & S&P/TSX Composite Index (TSX.I)

Trading in equities and bonds had been choppy over the last week as investors waded through a number of central bank and other developments then exploded to the upside yesterday afternoon and overnight, sending the S&P 500 up above 5,200 to a new all-time high.

The big Fed meeting turned out to be a neutral nothingburger with no change to interest rates, no change to the member forecast of 3 rate cuts this year, no change to the neutral tone with inflation still not subdued, and no change to Quantitative Tightening. The Fed did raise its 2024 US GDP growth forecast to 2.1% from 1.4% and raised its interest rate forecasts for 2025 and beyond, but the market action indicates traders viewed the current stance as bullish for stocks. Treasury yields, meanwhile, declined following the Fed move even though the US central bank reduced its rate cut expectations for future years. This morning, the Swiss National Bank announced a surprise 0.25% interest rate cut to 1.50%, offsetting the Jank of Japan’s interest rate increase earlier in the week. The Bank of England stayed the course on interest rates. Flash PMI reports rolling out from around the world this morning have been mixed. Tomorrow brings retail sales reports for Canada and the UK. One-week returns for countries around the world have mostly landed in a range between -2.0% and +2.0% with Japan and the US among the leaders, while Hong Kong and Australia have been among the laggards. We may see continued volatility tomorrow as it is Quadruple Witching Day when many Options and Futures expire at the same time.

Despite yesterday’s gains, there are some issues simmering away beneath the surface investors should note. Although eight of the eleven main industry groups are up over the last week, Information Technology, which has been driving the bus since this current market advance started in October is still down over the last week. The strongest groups have been Energy and Materials which were boosted by rising Crude Oil, Copper and Gold prices, which can be seen as a sign that inflation may not go away as quickly as the central banks would like.

Next week has a very busy and compressed schedule for economic news. Due to the upcoming Good Friday holiday, Thursday the 27th is the last business and trading day of the week, month and quarter. Ahead of that a number of reports are on the way including a US GDP update, more housing data, durable goods orders, Chicago PMI and Core PCE inflation. The earnings calendar, in contrast, is very light after today with Nike and FedEx reporting after the close.

In this edition of Equity Leaders Weekly, we look at what the Sector Scopes are telling us about investor sentiment and capital flows within equity markets and at recent gains in the S&P/TSX Composite Index.

The Sector Scopes feature in SIA Charts, 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 also how capital flows and investor sentiment change over time.

Recent movements in the Sector Scopes suggest a significant transition may be underway. While major indices have rallied to approach or reach new all-time highs, the Sector Scopes have shifted leftward from being piled up in the rightmost columns to being spread more evenly across the spectrum.

This picture is indicative of a neutral market while at the same time the deteriorating Bullish Percent for many groups suggests that more stocks across a number of groups have shifted to bearish patterns and that the bullish moves in indices are likely concentrated in a small and falling number of stocks. In other words, bullish market breadth appears to be weakening.

Also troubling is that sectors which had previously been helping to drive the market rally like Computer Software, Internet, and Electronics and Semiconductors have had significant leftward shifts indicating that capital has started to flow outward from them into other groups who have shifted rightward including Energy, Metals & Mining, Banks, and Utilities.

With the three largest equity industry sectors in Canada, Banks, Energy and Mining, all attracting renewed interest from investors and capital inflows at the same time, the S&P/TSX Composite Index has caught fire in recent months. Benefitting from rising Gold, Crude Oil and Copper prices, and falling treasury yields, the prospects for the Canadian economy and the Canadian equity market appear to have improved significantly of late.

Since peaking nearly two years ago, TSX.I traded downward to sideways through most of 2022 and nearly all of 2023. Accumulation resumed in December and has been consistent without even a 3-box correction on a 1% chart since then. Over the last three months, TSX.I has snapped out of a downtrend, completed bullish Double Top, Spread Double Top and Spread Triple Top breakouts and rallied to retest its April 2022 peak, while putting up its strongest column of Xs since the summer of 2021.

A close above 22,170 would confirm a breakout to new all-time highs for TSX.I and signal the start of a new upleg. Should that occur, next potential upside resistance tests may appear near 22,610, then 23,300 based on horizontal counts. Initial support appears near 21,090 based on a 3-box reversal.