BMO S&P 500 Index ETF USD* (ZSP.U.TO) Vs Invesco S&P 500 Equal Weight ETF (RSP) + iShares MSCI France Index Fund (EWQ)

It has been a very mixed week for world equity markets. Although some major US indices have continued to rally to all-time highs, including the S&P 500 and the NASDAQ, these highs have been marginal, suggesting upward momentum is slowing. Gains have been concentrated in a shrinking number of large cap stocks, mainly in the semiconductor sector. Meanwhile, small cap stocks have turned downward. Outside of the US, Mexico bounced back, Africa had a good week and China stabilized, but Canada fell slightly and Europe had a rough week with investors increasingly concerned about the political fallout from recent European Parliamentary elections.

Like equity investors, central bankers appear indecisive about where to go from here. June started with bankers looking dovish with the Bank of Canada and the European Central Bank cutting interest rates. In the last few days, however, the Federal Reserve Board and the Reserve Bank of Australia remained firmly Neutral with FOMC members even reducing their forecast for rate cuts this year from three to one. This morning the Bank of England also held rates steady and the MPC vote gave no indication of any additional dovish leanings.

Sector rotation over the last month continues to suggest that outside of Electronics and Semiconductors, capital has been shifting into a more defensive posture. Some of the strongest moves up within the SIA Charts Market Sectors report over the last month include Telecommunications Services and Tobacco, while Drugs, Computer Software, and Banks are among the fastest decliners. The Materials sector (Miners and Chemicals) have also struggled with metal prices under pressure, but on the Energy side, the prices of Crude Oil and Natural Gas have started to rebound from a recent correction.

Tomorrow is Quadruple Witching Day and then the next few days lead up to the end of the quarter and the first half of 2024. The earnings calendar is light with Nike and FedEx next week being the most notable reporters. Following tomorrow’s Flash Manufacturing and Service PMI reports, the economic calendar is dominated by housing market reports plus Canada inflation next Tuesday.

In this edition of Equity Leaders Weekly, we look at concentration in the US equity market and the ongoing selloff in Europe.

The S&P 500 is a market cap weighted index whereby the largest stocks have the largest impact on index moves. Comparing this approach with an equal weight index can provide investors with insights of whether a market move is broadly based on concentrated in a small number of stocks.

The chart shows that for most of the last three years, the BMO S&P 500 Index ETF USD* (ZSP.U.TO) and the Invesco S&P 500 Equal Weight Index ETF (RSP) have been fellow travelers, trending in similar directions and delivering similar performance.Starting in October, however, a gap in performance has opened up with the market cap weighted ETF outperforming, a sign that large caps have leading the way, which is not unusual in a strong bull market.Since April, however, the equal weighted ETF (RSP) has levelled off while the market cap weighted ETF (ZSP.U.TO) has continued to new highs. This divergence suggests that recent gains are concentrated in a small group of high weight, high market impact stocks, that the broader market has stopped climbing, and likely that a larger number of smaller impact stocks may already be in decline.

Overall this divergence suggests that while the S&P 500 Index appears strong, the sands beneath it may be starting to shift.



*Units of the Canadian Dollar version of the BMO S&P 500 Index ETF (ZSP.TO) are held in some portfolios managed by SIA Wealth Management.

Political uncertainty has rocked European markets in recent days. Incumbent parties took heavy losses in recent European Parliamentary elections leading he Prime Minister of Belgium to resign and French President Macron to call a snap national parliamentary election. Meanwhile an election campaign is underway in the UK as well with the incumbent conservatives trailing in the polls.

Amid a wave of political uncertainty and turmoil, investors have soured on some European equities. Although often overshadowed in the minds of North American investors by the UK and Germany, France has one of the largest economies and equity markets in Europe, and it has sold off sharply in the last few days, taking the dubious distinction of being the worst performing country among the major markets we track in the world over the last week.The iShares France Index Fund (EWQ) soared up off the October 2023 market bottom. Earlier this month, EWQ rallied to a new all-time high. It only broke out by one row, however, and then rolled down, which looks like a classic Bull Trap Top suggesting bulls may be exhausted. This week, EWQ has broken down further, completing a bearish Double Bottom pattern that signals bears have gained the upper hand and a new downtrend may be underway.



Previous lows for EWQ suggest potential support may appear near $36.25, or $35.22, followed by $34.50 based on a horizontal count. Initial resistance on a bounce appears near $39.30 based on a 3-box reversal.