Stock market action has settled down a bit over the last week. The recent shocks of the Ukraine war starting, commodity prices soaring and both North American central banks starting to raise this month have passed and new expectations appear to have been priced in by investors. Interestingly, Fed Chair Powell’s comments earlier this week about the Fed potentially accelerating rate hikes to combat inflation were taken in stride by equity investors even as they pushed the US 10-year treasury note yield up above 2.30% for the first time since 2018.
Some of the areas of the equity market which had become most depressed lately have started to show signs of life, including emerging markets, Chinese markets which were slammed on new lockdowns but quickly bounced back, continental European indices, small cap stocks, and North American technology sectors such as semiconductors and internet. Although this action looks encouraging, it is too soon to tell whether these were quick relief rallies easing deeply oversold conditions, or the start of more lasting recovery trends.
In commodity trading, recent corrections appear to have run their courses and broader upward trends appear to be resuming. This has been most apparent in WTI crude oil, where having corrected back toward $95.00/bbl recently from a peak near $130.00/bbl, the price has bounced back up above $115.00/bbl lately. Metals such as copper and grains like corn and rice, have also been on the rebound.
The coming week is relatively light for economic and corporate news scheduled with today’s flash PMI reports being the main event until ADP payrolls next Wednesday. It also is the last week of the month, the quarter and the fiscal year for many companies in the investment industry, so we could see some portfolio adjustments over the next few days as investors get ready for spring and the next earnings season.
In this issue of Equity Leaders Weekly, we look at what recent strength in Canadian stocks and a rebound in US small caps are telling us about investor sentiment.
Over the last few months, much of the weakness in equity markets came from a rotation away from the areas investors go to when they are feeling confident like growth/momentum plays, small caps or emerging markets and toward resource producers and defensive sectors.When trying to assess the strength of the recent rebound in equity markets it would be easy to look at the big bounce by the NASDAQ as a sign of renewed confidence but it’s important to remember that index can be dominated by a small number of mega cap stocks. The most intriguing part of the recent rebound is that the small cap Russell 2000 Index has been taking part, recently staging a rare bullish Quadruple Top breakout and completing a bullish Ascending Triangle. This indicates wider participation in the recent rebound and growing breadth which adds to the case for it potentially being sustainable for a while. There remain some blemishes, however, particularly a 1 SMAX score which indicates weakness relative to the asset classes. Some upside resistance may appear near 2,155 and 2,285 based on previous column highs and lows, but the most technically significant resistance point appears near 2,355 where the top of a previous trading channel aligns with a horizontal count from the Quadruple Top. Initial support appears near 2,000 where a round number and a 3-box reversal converge.
With its higher weighting to Energy, Materials and Financials compared with the Technology, Communications and Health Care sensitivity of the US, Canadian equities have benefitted from the recent shift by investors and have moved up in the SIA Charts Asset Class Rankings. After climbing through most of 2021, the S&P/TSX Composite Index had been trending sideways since November caught in a tug-of-war between strengthening commodity prices and a weakening global equity environment. Though this consolidation period, TSX.I continued to establish higher lows, indicating that underlying accumulation continued. This month, the resource side has gained the upper hand and TSX.I has launched into a new advance, completing bullish Triple Top and Spread Triple Top breakouts on its way to new all-time highs. Based on vertical and horizontal counts, potential upside resistance levels for TSX.I appear on trend near 24,245, 24,730 and 25,225. Initial support appears near 21,090 based on a 3-box reversal.
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