EQUITY RESEARCH
June 2, 2024 Industry Update
The Need For Digestion
CDN Matrix Portfolio – June 2024
Our Conclusion
We introduced a barbell strategy for the month of May given that April had
produced a negative outside month (monthly bearish engulfing). Surprisingly,
the month of May showed little downside follow-through and printed a strong
month for the large-cap equities, which helped keep trend skews on the
positive side. Although the dataset may be limited in observations (eight
times dating back to 1930), we note that when SPX Q1 is positive, followed
by a negative reset month in April and a positive month in May, the returns
for June are always positive with a median return of 2.43%. In other words,
maybe we should give uptrend forces the benefit of the doubt.
Nevertheless, when we dig deeper, we find that technical internals are
showing a diverging breadth backdrop with a fewer number of stocks having
participated in the May rally, masked by the U.S. AI-type growth story
candidates. Our technical roadmap, adjusted for the U.S. Presidential
election year cycle, shows that the monthly hit rates for equities tend to
notably decline in Q2 and Q3 ahead of the U.S. election months. Quarter to
date, there is a large performance divergence between cap-weight indices
and equal-weight indices. The second quarter performance to date for SPX
is -0.6% and for NDX is 0.36%. Comparatively, equal-weight indices are
showing a much weaker return – equal-weight SPX is -3.0% and equal-
weight NDX is -3.8%. In other words, large caps are still dominating.
Key Points
Digging deeper into broader equity indices correction buckets, we find the
April-May corrections have been more about consolidation (0%-9.99%) and
not distribution (over 10% amplitude). It is still premature to suggest there is
a style shift in performance attributes – Value over Growth. An increasing
number of technology stocks (50% of NDX constituents) have sharply moved
lower in the past month, but they have not entered 10%+ correction category
– in other words, growth style is only consolidating, not yet altering trend.
Intermarket indicators look neutral and range-bound at best – 10 Yr UST
yield and the U.S.-dollar index remain range-bound with a lower-high
backdrop, continuing to support equity indices uptrend forces. Breadth
indicators are the only area of concern for us – upside participation has
narrowed, and the number of stocks below their 50-d average has been on
the rise. Relative-strength rotation models are placing offence-GICS sectors
in consolidation or lagging quads, compared to defence-GICS sectors
entering the improving quad. This is consistent with the seasonal influences
that are typically weaker in Q2-Q3 during the U.S. presidential election year.
Our top-10 best ideas for the month of May returned +5.12% with a 90% hit
rate, outperforming the TSX index by 257 bps (Mth) and 820 bps (YTD). The
following top-10 best ideas are selected for the month of June: Brookfield
Corp (BN), Power Corp (POW), Royal Bank (RY), ARC Resources (ARX),
Cameco (CCO), Suncor (SU), Gildan (GIL - carryover), Weston (WN -
carryover), Element Fleet (EFN - carryover) and AltaGas (ALA - carryover).