Bank stocks need to recover before the TSX can go higher this year: Technical strategist
Speaking with BNN Bloomberg on Tuesday, Strategas Research Partners’ ETF and technical strategist, Todd Sohn, said bank underperformance is the main barrier standing in the way of positive year-end returns for Canadian equity markets.
“The second half of the year for the TSX starts with the banks,” said Sohn. “If Canadian banks can stabilize, any sort of improvement would be helpful to the TSX; we’ll take anything at this point given how choppy they’ve been.”
The S&P/TSX Composite Index Banks has underperformed its broader index since March, back when Silicon Valley Bank collapsed and sent shockwaves through global financial markets.
Higher interest rates could also be to blame for the lack of recovery in bank stocks, said Sohn, “perhaps interest rates are the key driver here, perhaps we need to see rates cool off so the banks can gain their footing and start to turn higher.”
Tech has also been a factor in the TSX underperforming against the S&P 500 this year, as Canadian markets were left out of the mega-cap tech rallies that pushed the S&P into a new bull market.
“Banks have an almost 31 per cent weighting on the TSX, that’s bigger than tech’s impact on the S&P if you can believe it,” said Sohn, “Canada is very heavy on banks, energy and gold mining stocks, things that have been out of favour as tech rallied around the globe.”
U.S. MARKETS COULD END 2023 HIGHER
When it comes to narrow tech leadership, Sohn said he’s not worried.
“We’re OK with the top five stocks on the S&P weighing nearly a quarter of the index. It’s OK if the equal weight underperforms for now.”
He is tracking the performance of the Nasdaq 100 to predict the next upward move in the markets, saying recent trading indicates the tech rally could still have more room to run.
“The other day, the QQQ [Invesco QQQ ETF] was trading about US$24 above its 200-day moving average. What that means is it’s absolutely stretched in the near term,” remarked Sohn, “but historically, when you get this kind of stretch paired with this type of momentum, it’s consistent with major market lows and stronger returns.”
“Don’t be afraid of how stretched the Nasdaq is, use any weakness to keep getting into these types of names” said Sohn. “Keep the longer term picture in mind here instead of focusing on the last few months if you are an investor in the Nasdaq.”
To anticipate the next rally, Sohn recommends investors keep an eye on the equal weighted index.
“If you’re trying to gauge market health, keep an eye on the Invesco S&P 500 Equal Weight ETF. Any sort of improvement there in breadth is a boom for U.S. markets and I think we can see some stabilization in the back half of the year while tech leads.”
