Andrew Pyle
August 04, 2022
Not all ships are rising at the same rate
Since the middle of July, the TSX has gained close to 7% - a welcome relief for investors that watched their stocks decline during the first half. Even with this lift, the index is still down almost 8% since the beginning of the year. While the TSX continues to outperform the major US indices in 2022, the gap has narrowed with this latest rally and the reason has been a relative lack of breadth. Now that market participants are starting to lower their probabilities of recession, there is scope for some lagging groups on the TSX to pick up the pace.
When we talk of breadth, we are referring to how the various segments and companies in the index are doing. For example, if one or two sectors account for most of the improvement, we say the market has little breadth. In contrast, if the index is firing more equally across all segments, then breadth is healthy. Since July 14th, the TSX has seen gains in 10 of the major 11 sub-groups (the outlier is health care, with a loss of about 9%). The top three groups in terms of gains (tech, industrials and consumer discretionary) account less than a quarter of the entire index.
Now, let’s compare this to the S&P500. Here, the top three groups (consumer discretionary, tech and industrials) have a combined weight in the index of close to 48%. Further, there are only two sectors in the S&P that have gained less than 5% since July 14th – health care and consumer staples. There are five groups in the TSX – materials, consumer staples, utilities, communications and health care. Based on this, it’s easy to see why the S&P has outperformed the TSX by about 300 basis points over this period. The NASDAQ has basically doubled the gain here at home.
How long this recent lift in market spirits will last is unclear. The S&P has crossed above both its 50-day and 100-day moving averages but is still about 4% from testing its 200-day line up at 4340. On Wednesday, the index hit an intraday high of 4167 – about 10 points from its intraday high back on June 2nd. From a technical perspective, we would have to take out that June 2nd high before entertaining a move up through the 200-day moving average.
The trek for the TSX is a little more daunting. Even though we have crossed back above the 19,500 mark the index is barely through its 50-day moving average. The 100-day line is north at around 20,370 and the 200-day moving average sits at 20,770. Moreover, the TSX is still close to 7% from its June 2nd intraday high of 21,036. In other words, we would have to repeat the performance from July 14th to get back to where the S&P500 basically is today.
That doesn’t mean the Canadian equity market can’t continue to improve through August, but it is going to require more cylinders firing, the most important of which will be financials, energy and materials. If we are indeed moving away from a true recessionary situation, then all three should be able to do better. Crude oil prices did break below $90/barrel this week – extending the disinflationary trend that Ally and I were looking for coming out of the second quarter. It has now reversed all of the gains since early February, but these levels should start to fire up demand again.
The same holds true for materials – particularly base metal stocks. The TSX composite metals and mining sub-index came close to testing 3800 for the first time in two years back in April, but last week it had fallen to below 2300 – lowest since right after the incidence of the pandemic. Again, recessionary fears and cost pressures have fueled an exodus from the sector, although we believe that we may have just seen a bottom. Where we had taken profits on mining in the second quarter, this is looking to be an opportunity to add back exposure alongside the increases that we have made in financials over the past several weeks. Even if metals could recover a third of the lost ground since April, this would give the TSX a lift and possibly close the gap against the S&P.
On behalf of the Pyle Group, have a wonderful weekend.
Andrew
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These are the personal opinions of Andrew Pyle and the Pyle Group and may not necessarily reflect those of CIBC World Markets Inc.