BMO Equal Weight Utilities Index ETF (ZUT.TO) & Crude Oil Continuous Contract (CL.F)

This has been a week of significant shifts in capital flows among and between asset classes that may in time, mark a potential turning point for world markets.

Equities have had an up and down week, selling off to start June then bouncing back enough for the S&P 500 to reach a new all-time high yesterday. Much of the gains have been seen in the S&P 500 and the NASDAQ which are particularly dominated by large cap technology names, especially Nvidia*, which has soared from near $925 toward $1,225 in the two weeks since it reported earnings. Mid and small cap indexes like the S&P 400 and the Russell 2000 have not participated in the latest bounce raising questions about breadth.

Part of the recent pullback in equities was driven by a big downward correction in commodity prices which saw crude oil fall within a range and copper give back some if its recent big rally. While some of this may be related to the usual ups and downs of trading, questions about the health of the world economy and the potential negative impact on resource demand may also be playing a role. This selloff extended into resource stocks, particularly energy producers and miners and also played into a big performance divide where developed country stock markets bounced back but emerging, often resource based markets like Mexico, Argentina and South Africa posted the largest declines.

Signs of a slowing economy, falling commodity prices, and easing inflation pressures (for now) enabled the Bank of Canada and the European Central Bank to announce their first interest rate cuts in several years this week, both by 0.25%.

The first tangible signs that tide may be turning from hawkish-neutral to somewhat dovish has pushed down interest rates and sparked rallies in bonds along with interest rate sensitive equity market sectors including utilities and real estate. This shift in sentiment around interest rates could accelerate or lose momentum this week depending on what the Fed has to say when it meets on Wednesday. Officials at the US central bank have taken a neutral to hawkish stance on monetary policy in recent weeks, generally saying inflation remains problematic and they are not ready to cut interest rates yet.

Investors may look to the member forecasts on the Fed Funds for this year and next for signs of if, when, and how many rate cuts are expected for this year. Any change in tune at the Fed, who had previously forecast 2-3 rate cuts this year may have profound impact on investor sentiment heading into the summer. If the Fed does break ranks and remain hawkish, that may also have implications for trading in the US Dollar relative to other currencies.

Ahead of the Fed decision there are a number of economic reports which may indicate how much pressure the Fed is under to make a move, including Nonfarm Payrolls and wage inflation tomorrow and US Consumer prices on Wednesday morning. Earnings season is over but there are still a few notable reports trickling out including Gamestop and Oracle on Tuesday, Broadcom* and Dollarama* on Wednesday and Adobe next Thursday.

In this edition of Equity Leaders Weekly, we look at the utilities sectors as a sign of changing sentiment and at the recent correction in the price of crude oil.

* Shares of Nvidia, Broadcom, and Dollarama are held in portfolios managed by SIA Wealth Management.

Utilities, a sector consisting mainly of mature, defensive, dividend-paying, “value” stocks tends to attract attention from investors during times when interest rates are falling or expected to fall, or when investors sentiment is becoming more cautious. In the growth/momentum environment of the last two years, Utilities have struggled relative to the overall market, but this appears to be changing.

Since the major central banks started to pivot from hawkish to neutral-dovish dovish last fall, the BMO Equal Weight Utilities Index ETF (ZUT.TO) has stabilized and started to rebound. A slide in the price of ZUT.TO was contained by a long-term uptrend line, and recent trading suggests that it may be starting to bounce back and resume its long-term uptrend.

This week’s breakout over $20.50 has completed a bullish Double Top pattern, signaling the start of a new upswing. Upside resistance may emerge near $22.65, where a downtrend line and previous highs converge, then the $25.00 to $26.00 zone where a round number, the 2022 peak and a horizontal count cluster. Initial support appears near $18.985 based on a 3-box reversal.

Back in 2022, around the start of the Ukraine War, the price of crude oil (CL.F) staged a big rally, and then gave nearly all of it back. Over the last 18 months, since the end of 2022, oil has settled back into a sideways trading range, approximately between $65.00 and $95.00.

Within this broad range, a symmetrical consolidation triangle of higher lows and lower highs has been forming. The recent drop in the oil price so far appears to be a common pullback within these sideways patterns. The excuses seen for the recent decline, a potential long term decrease in OPEC+ supply restrictions, and a one-week bounce in US oil inventories which have been choppy for several months now, also seem to lend more to a correction than a big selloff.

With a bearish SMAX score of 4, CL.F has been exhibiting weakness against the asset classes. Bearish signals for crude oil would appear on a close below $70.95, which would snap an uptrend line and complete a pending double bottom, or the channel bottom near $66.85. On the other hand, a bounce may initially encounter resistance in the $79.90 to $81.50 area between a 3-box reversal and previous column highs, then downtrend resistance near $84.80.