BMO MSCI Emerging Markets Index ETF (ZEM.TO) & BMO Equal Weight US Banks Index ETF (ZBK.TO) 

Between tomorrow’s holiday, a lack of market-moving news and investors rebalancing and repositioning their portfolios for month and quarter end, it has been a relatively quiet week for trading in North American equities. International trading has been more active with several markets in Europe, Latin America, and Africa on the rise. On the other hand, Chinese markets have gone into retreat once again and have also been dragging on China-sensitive commodities, leading to moderate corrections in Crude Oil and Copper.

Although the overall market has been quiet, there have been some areas of activity that suggest investors confidence and appetite for risk remain positive. Traders have been flocking to new issues this week with new social media stocks Reddit and Trump Media soaring on their market debuts. Other areas that have tended to attract risk seeking capital including emerging markets and small caps have also been outperforming this week.

All eleven major industry groups are up over the last week to varying degrees. The three strongest groups this week have been Health Care, Materials, and Industrials. Consumer Staples and Communication Services have been the relatively weakest groups.

After the holiday, we kick off a new month and quarter with the usual flurry of Manufacturing PMI, Service PMI, payrolls (ADP, nonfarm, and Canada), and wage inflation numbers. It’s still quiet for earnings but confession season gets off underway. Last quarter there were few profit warnings but a lot of layoff announcements.

In this edition of Equity Leaders Weekly, we look at emerging markets and bank stocks as signs of investor confidence and sector rotation.

Emerging markets, by definition, have historically been seen by investors as being potentially more volatile than developed markets. Because of this, investor demand (or lack of demand) for emerging markets equities has been seen as a barometer of investor appetite for or aversion to risk.

In recent years, emerging markets have also become more sensitive to China’s economy. Not only Chinee equities themselves, but the fact that many emerging equity markets are concentrated in economies sensitive to trade with China, or countries which produce resources where the price is heavily influenced by China’s demand for commodities.

For over ten years, the BMO MSCI Emerging Markets ETF (ZEM.TO) has been generally trending upward as shown by the rising trend of higher lows. Coming off a big rally in 2021, ZEM.TO crumbled in 2022 as lockdowns seized up Chinas economy. Just as China struggled through 2023 so did emerging markets.

Recently, however, with China equities bouncing back and key commodities such as Copper and Crude Oil breaking out to the upside, emerging markets have started to attract renewed interest. ZEM.TO recently completed a bullish Spread Triple Top breakout to signal the start of a new advance.

Previous column highs suggest potential upside resistance may emerge near $23.40 or $24.80, followed by the $25.00 round number and $25.80 based on a horizontal count. Initial support appears in the $17.35 to $18.05 area where a 3-box reversal, 45-degree uptrend line and previous column lows cluster.

It has been a year since the US banking sector plunged as several regional banks ran into financial difficulties. As the months have passed, investor confidence that the problems have been contained has improved. Most significantly, the one-year anniversary and expiration of some support programs from the Fed has passed without incident.

Banks, along with other interest-rate sensitive groups, started to recover in earnest back in November, but unlike Utilities and Real Estate, which rolled over when treasury yields started to bounce back, Banks have continued to climb. This suggests that investors have recognized that with the economy resilient and interest rates staying higher for longer, conditions remain supportive for the banks to make money through their core lending businesses.

Earnings season for US banks is now only 2-3 weeks away and heading toward those announcements, the sector remains under accumulation and US bank stocks continue to rise in SIA Charts relative strength rankings tables.

Building on a December Double Top breakout, ZBK.TO continues to extend a bullish High Pole, recently snapping a 45-degree downtrend line to confirm ongoing accumulation. Next potential resistance on trend appears near $31.50 or $38.90 based on previous column highs or $34.75 based on a horizontal count. Initial support appears near $26.85 based on a 3-box reversal.