BMO MSCI Emerging Markets ETF (ZEM.TO) & iShares S&P/TSX Capped Information Technology ETF (XIT.TO)

Equity markets, particularly in the US have extended their recent gains to new all-time highs but it’s increasingly starting to feel like bulls are grasping at straws to keep the party going. This week marginal plays like meme stocks came roaring back to life for two trading days based on a social media post then just as quickly started to fall back to Earth.

Meanwhile, traders used a slight improvement in consumer price inflation that contradicted a rise in producer price inflation to run the market on speculation that the Fed could cut interest rates soon despite all the ongoing commentary from Fed officials, including Chair Powell, that inflation has not been subdued and interest rates may still remain higher for longer.



Lost in this shuffle has been that Stagflation is looking increasingly real with disappointing numbers coming from the manufacturing, retailing and homebuilding sectors just over the last 24 hours. If the Fed does cut rates this year, it may be more likely because of a faltering economy than victory over inflation.

Outside of North America, China sensitive markets continue to rally ahead of tomorrow’s Chinese retail sales and industrial production reports. In addition to equities, Copper has soared this week, leading gains on the commodity side.

Sector action has been generally positive with all eleven major industry groups in the green over the last week and the last month. The two strongest groups over the last month have been Utilities and Consumer Staples, suggesting some rotation back into defensive and interest rate sensitive sectors. Energy has been the weakest sector of late, trading flat over the last month.

Earnings season is now getting close to the end. Nvidia* next Wednesday and retailers dominate the calendar with Walmart reporting results today. Home Depot started things off with disappointing sales. Later this month Canadian banks report results as well.

The economic calendar features a steady stream of Fed speakers as we head toward the June interest rate decision. The Reserve Bank of New Zealand is the only notable central bank holding a meeting in the coming week. Economic data is dominated by housing numbers and Flash PMI reports.

In this edition of Equity Leaders Weekly, we look at China sensitive markets and recent weakness in the Technology sector.

*Nvidia is held in portfolios managed by SIA Wealth Management.

We last mentioned the BMO MSCI Emerging Markets ETF (ZEM.TO) in the March 28th edition of the Equity Leaders Weekly. At this time, it had just completed a bullish Spread Triple Top breakout and was trading near $20.00. Since then, the rally has snapped a downtrend line and extended into a bullish High Pole, continuing an upswing within a long-term uptrend that started back in February.A combination of China’s improving economy and climbing commodity prices has sparked renewed interest in emerging markets. Many emerging markets benefit from exporting to China or from resource production, particularly in the Asia Pacific and Latin America regions.Potential upside resistance may appear at previous highs near $23.35 then $24.80, or $25.80 which is based on a horizontal count. Initial support appears near $19.55 where a 3-box reversal and a retest of a previous breakout point converge.

As the current bull market has progressed, we have seen increasing rotation away from some of the groups that led initially such as Technology and Communications, first into cyclical sectors like Industrials, then resource sectors like Energy and Materials, and more recently into defensive groups like Utilities and Consumer Staples.

Cracks in Technology can most clearly be seen in the emerging downtrend of the Canadian technology sector, which has less exposure to Artificial Intelligence compared to the US and more exposure to consumer spending.The iShares S&P/TSX Capped Information Technology Index ETF (XIT.TO) peaked back in February. Following an initial correction, the ETF attempted a comeback in March that failed at a lower high. Since then, distribution has been more apparent with the ETF entering into a new downtrend of lower highs and staging a series of bearish pattern breakdowns including a Double Bottom, a Spread Double Bottom and a Triple Bottom. In addition, the SMAX score for XIT.TO has dropped to a bearish 5 out of 10, a sign the sector is exhibiting weakness relative to the asset classes.

Next potential downside support appears near $47.25 where a vertical count and a previous breakout point converge, then $44.50 where prior support and a horizontal count converge. Initial resistance appears near $41.70 where a 3-box reversal and a recent breakdown point converge.