CIBC NotesEQUITY RESEARCH
April 30, 2023 Industry Update
Good On The Surface, Weakening Beneath
CDN Matrix Portfolio – May 2023
Our Conclusion
Based on historical performance of the past 10, 30, and all years, equity
indices’ positive hit rates tend to drop notably during the month of May –
particularly when compared to April. The weekly return profiling for the month
of May tends to be front-end loaded and short-lived for U.S. equities.
Comparatively, in the past 30- and all-year history, TSX has relatively
outperformed against the SPX index (albeit at a rate of 60%). TSX Staples
and Utilities have historically been the leading GICS sectors during the
month of May, at a rate of 70% (defensive narrative). Similarly in the U.S.,
Staples and Healthcare GICS sectors have performed the best throughout
the month of May, with a hit rate of 70% (defensive narrative).
In addition to historically defensive posturing associated with the month of
May (weak seasonality), we also note that the latest technical breadth factors
have generally been on the weaker side. Technical internals have continued
to deteriorate beneath the surface, masked by the stronger performance
from the larger-cap stocks – the Russell 2000 small-cap index is breaking to
a new low relative to the S&P 100 large-cap index. Similarly, the TSX 60
large-cap index is triggering a positive reversal signal relative to the broader
benchmark TSX index. In other words, it would be reasonable to suggest
that equity indices are entering a weaker seasonal month of the year with a
deteriorating technical backdrop – hence, the recent market preference for
the large-cap members (liquidity and quality).
Key Points
Our technical signals are mixed. Rapid rotations among sectors with a
preference for large-cap stocks may have helped keep indices stable on the
surface. However, beneath the surface, technical internals show a murkier
picture – the number of trending participants above the 200-d avg in the U.S.
indices has dropped back to January levels. The value-line indicators have
also rolled over, reflecting the market-cap size deterioration in value terms.
This, in conjunction with the latest downshift in the Summation indicator,
shows a market setup that may have become more fragile from a breadth
perspective. Additionally, we note that the U.S. Transports’ relative strength
line is breaking to a new two-year low (albeit oversold). It also merits
highlighting that the monthly ratio between copper and gold commodities has
rolled over, which is often viewed as a negative from a cyclical perspective
(similar observations were printed in 2011, 2015-2016, and 2018-2019
periods).
Our April basket returned +3.57%, outperforming the TSX index by 90 bps
(Mth) and 575 bps (YTD). The following candidates were selected in our
TSM-process for the month of May: Loblaw (L – carryover), Couche-Tard
(ATD), Intact (IFC), Great-West Lifeco (GWO), Cdn Nat Res (CNQ), CP
Kansas City (CP), Wheaton Precious Metals (WPM), Rogers (RCI.B –
carryover), Fortis (FTS – carryover), and Can Apartment Prop (CAR-U).