CDN Matrix Portfolio – July 2024 Our Conclusion
June proved to be a challenging month from an internals and breadth-decay
perspective – more stocks drifted than lifted. The rate of change of breadth
indicators, measured by the percentage of indices’ constituents above their
respective 50-day and 200-day averages, had its weakest print year to date.
This, in conjunction with the weaker Q3 seasonal influences during a U.S.
Presidential election year, adds more weight to our cautionary tone for the
next few months. Additionally, we note that more stocks in the U.S. and
Canada have entered the ‘Lagging’ quad of our relative-strength rotation
process. On the surface, large-cap leadership in the U.S. indices appears
extended in both amplitude and time; comparatively, beneath the surface,
laggards have not yet shown enough breadth expansion or momentum to
spark a discussion for rotation between laggards and leaders.
On the other hand, July historically marks the beginning of the summer rally
with better hit-rates of 67% for TSX (average return of 0.9%) and 60% for
SPX (average return of 1.6%). The common performing GICS sectors with
higher hit-rates in July are Financials, Industrials, Technology, and REITs.
Comparatively, defensive GICS sectors (Staples, Utilities, and Healthcare)
have a lower historical hit-rate. This leads us to believe a positive mean-
reversion in the laggards’ performance may be the likely outcome after the
recent breadth decay approaches a more supportive seasonality backdrop.
Key Points
The technical red flags in breadth indicators are too noticeable to dismiss,
albeit mainly because of the large-caps’ outsized performance year to date.
The percentage of equity indices’ constituents above their medium and
longer-term averages, in both the U.S. and Canada, has continued to decline
in recent months – June printed the weakest marking year to date.
Summation index, A-D lines, as well as the ratio between the equal-weight
and cap-weight indices continued to show a lingering decay in breadth that
peaked in March and April. The US-dollar index is showing relative strength
against other majors, with a historical negative correlation to equity indices’
performance. We note the 10-d and 55-d Arms index measures are in a
higher-low trend above one, a reading often associated with distribution, not
accumulation.
Our top-10 best idea basket for the month of June came in line with the TSX
index and returned -1.7%, reflecting +6 bps of Alpha. Quarter to date and
year to date, our 10-best ideas have produced 6% (713 bps of Alpha) and
12.51% (814 bps of Alpha) respectively. The following are the top-10 best
ideas for the month of July: Gibson Energy (GEI), Pembina Pipeline (PPL),
EQB Inc (EQB), Manulife (MFC), SNC-Lavalin (ATRL), Cargojet (CJT),
Gildan (GIL - carryover), Saputo (SAP), Chartwell (CSH-U) and CCL
Industries (CCL/B).