Northern Exposure

by JC Parets  -  June 10, 2019

Kawhi Leonard and the Toronto Raptors need two wins to clinch the first NBA Championship for a non-U.S.-based franchise. I know my friend Howard Lindzon is stoked.

With a lot of eyes on “We the North,” I thought it a good idea to update some analysis my colleague Tom Bruni shared in early May with our institutional clients. Tom went through the major Canadian index and its top sectors, assessing how to approach Canadian equities.

Here’s what he had to say:

As we can see, there are more uptrends than downtrends from a structural perspective. Tactically, however, most of these are not at levels where we want to be initiating new positions or have a lot of conviction. After strong moves since December, they need some consolidation to digest those gains and set up for a sustained move higher.

 Another thing to note is that the more defensive areas of the market, like REITs and staples, have the clearest structural uptrends of the group. They make up a smaller portion of the market, but I think it’s still an interesting signal about market participants’ risk-appetite and outlook for interest rates.

 Additionally, energy and materials account for roughly 30% of the index and remain a headwind, so, without rotation into those names, I think it’ll be tough for the TSX Composite to break out to the upside.

 They don’t need to be leaders, they just need to stop going down.

 The time to be aggressive was in early January. Here, patience is best as we wait for a fat pitch.

Looks like Tom was right.

Let’s take a fresh look at where we’re at now and see if anything’s actionable up north…

First, let’s start with the S&P/Toronto Stock Exchange Composite Index. The S&P/TSX confirmed a failed breakout and bearish momentum divergence, as we expected, but it’s been able to find its footing above the middle of its range (15,680). And momentum stayed out of oversold conditions.

These are two positives worth noting; they could set us up for the third test of those 2018 highs.

Meanwhile, at the sector level, whipsaws continue, with the tech sub-index confirming a failed breakout and bearish momentum divergence. This makes it hard to define our risk on the long side, particularly since it’s so far from our risk management level at 89 and nearing our objective of 107.

We’ve had plenty of opportunities to get long this space since December. This is not one of them.

On the short side, the only sector that really continues to work is energy. Others, like materials, gold-related stocks, and base metals, saw buyers step in at support and spark a sharp counter-trend rally.

The same can be said for the Equal-Weight Global Base Metals Index. Buyers stepped in where they had to.

Even strong trends – like utilities – look they still need further consolidation to stave off the possibility of a failed breakout after a 25% rally off the December lows.

Some trends have completely ignored the broader market’s inability to find direction. With that said, even the strongest trends have to end… and Thomson Reuters (TSX: TRI) looks like it’s finally going to correct after meeting a price objective we’d defined near $89.

The accelerated trends have become too steep and momentum isn’t confirming the recent highs.

Given the current environment – in Canada and across global markets – we want to focus on stocks that are trending and presenting an opportunity in the face of a lackluster backdrop…

To good trading,

J.C. Parets

Editor, Big Market Trends