Canada Update

From the desk of Tom Bruni @BruniCharting

On May 1st, we wrote an update called "Canada or Cantada" going through the major sectors/indexes to provide a view on how we wanted to approach Canadian Equities.

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 we were right, so let's take a look at where we're at now and see what's actionable.

First, let's start with the TSX Composite. It confirmed a failed breakout and bearish moment divergence as we expected but has 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 and could potentially set us up for the third test of those 2018 highs.

Click on chart to enlarge view.

Meanwhile, at the sector level, whipsaws continue with the Tech 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.

Meanwhile, 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.

Same can be said for the Equal-Weight Global Base Metals. 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.

There have been some trends that have completely ignored the broader market's inability to find direction. With that said, even the strongest trends have to end...and Thomson Reuters looks like it's finally going to correct after meeting our price objective near 89. The accelerated trends have become too steep and momentum isn't confirming the recent highs. It's time we step aside and reevaluate.

With that said, given the current environment, we want to focus on stocks like Thomson Reuters that are trending and presenting an opportunity in the face of a lackluster backdrop.