Equity Leaders Weekly

 Copper Continuous Contract (HG.F) & S&P/TSX Composite Index (TSX.I)

Today is the last day of the month and quarter, giving us at the Equity Leaders a chance to reflect before summer. The first half of 2022 has been rough for equity markets around the world with the NASDAQ down 28.55% year to day, the S&P 500 down 19.88%, and the S&P/TSX down 10.10%.

Stagflation, a period of high inflation and low economic growth, has been the big story of 2022 so far, forcing central banks to tighten monetary policy increasingly aggressively, including interest rate hikes and Quantitative Tightening, which has sent treasury yields soaring, and both stocks and bonds falling. The top performing asset class has been commodities, led by a 45.96% year to date gain for crude oil which has underpinned expectations for higher inflation and tighter monetary policy. 

In the last week, however, the focus of investors has started to turn to the possibility of the inflation spike and higher borrowing costs leading into a recession. Recently released regional manufacturing reports out of the US showed significant slowing, and US Q1 GDP was revised downward into an even deeper decline. The prospect of a slowing global economy impacting demand for resources has sparked selloffs in a number of commodity contracts particularly grains, meats, metals, and softs including a 9.8% plunge in the price of cotton.   

Recession talk helped stocks to bounce for a couple of days as investors speculated central banks could slow down tightening, but these rebounds topped out at lower highs and stocks resumed their downward course. Perhaps sober second thought has recognized that while a slowing economy could cool inflation eventually, the more immediate risks include the potential for earnings shortfalls, and guidance reductions. We are still between earnings seasons, but with the quarter ending, confession season starts, it will be interesting to see how many companies put out profit warnings this time with the risk of sales (slowing economy) or profit (rising inflation) shortfalls increasing. 

The coming week is shortened by holidays in Canada on Friday and the US on Monday. The turn of the month brings a number of key economic reports, particularly Manufacturing PMI numbers on Friday and Service PMI reports next Tuesday. Investors may look to the headline numbers for signs of whether the world economy is tipping into recession or not, and to the inflation components to see if price pressures are rising, falling, or stabilizing. Other economic reports of note include US PCE inflation today, a measure the Fed likes to look at, and US construction spending tomorrow. 

In this edition of the Equity Leaders weekly, we look at the implications of the recent breakdowns in the price of copper and at recent weakness in Canadian equities. 

Copper Continuous Contract (HG.F)

As a metal with a wide variety of uses across a number of industries, Dr. Copper is widely considered to be the commodity market that is most sensitive to global economic conditions. Trading action in copper over the last year reminds us of the old saying “markets go up like an escalator, and down like an elevator”. After soaring upward from March of 2020 to March of 2021, copper settled into a steady uptrend of higher lows which carried onward and upward through to March of 2022, when it peaked near the $5.00/lb round number. Copper’s longer-term uptrend started to crumble in April-May in a series of Spread Double Top breakdowns. It has become even clearer that copper has reversed course and started a new downtrend with its breakdown below $4.00 which took out support dating back over a year. Copper’s rapid descent suggests that investors may be getting more fearful about the global economy and particularly the potential for weakening demand, a situation which could have wider implications for monetary policy (which could impact bond prices) and corporate earnings (which could impact stock prices).Copper is currently on a bearish Double Bottom pattern and has a bearish SMAX score of 2, indicating weakness relative to the asset classes. Next potential downside support for copper appears in the $4.350 to $3.54 area where a previous column low converges with vertical and horizontal counts, then a long-term uptrend line near $3.08. Initial resistance on a bounce appears near $3.91 based on a 3-box reversal. 

S&P/TSX Composite Index (TSX.I) 

With its higher weighting to resource sectors (Energy and Materials) relative to its US peers, the S&P/TSX Composite Index (TSX.I) held up relatively well through the first few months of 2022. In April, the Index peaked in a classic Bull Trap where it broke out to a new all-time high by one row, faltered near 22,000, and then turned downward. In recent weeks, TSX.I has been under distribution, establishing a new downtrend with a lower high and completing a series of bearish Double Bottom and Spread Double Bottom breakdowns. Currently TSX.I is on a bearish Low Pole and with a bearish SMAX score of 3 has been exhibiting weakness relative to the asset classes. Based on horizontal counts and previous column highs and lows, next potential downside support on trend appears near 17,805 and then 17,285.  Initial resistance on a bounce appears near 19.671 based on a common 3-box reversal. 

Disclaimer: SIACharts Inc. specifically represents that it does not give investment advice or advocate the purchase or sale of any security or investment whatsoever. This information has been prepared without regard to any particular investors investment objectives, financial situation, and needs. None of the information contained in this document constitutes an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. As such, advisors and their clients should not act on any recommendation (express or implied) or information in this report without obtaining specific advice in relation to their accounts and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. SIACharts Inc. nor its third party content providers make any representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein and shall not be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon. Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice.