Market Insights: Trend and Breadth Are Your Friends

Milestone Wealth Management Ltd. - Jan 07, 2022

Macroeconomic and Market Developments:

  • North American markets were down to start the year this week. In Canada, the S&P/TSX Composite Index was down 0.65%. In the U.S., the Dow Jones Industrial Average declined 0.29% and the S&P 500 Index was down 1.87%.
  • The Canadian dollar was flat this week, closing at 79.08 cents vs 79.12 cents last Friday.
  • Oil prices were higher this week. U.S. West Texas crude closed at $78.93 vs $75.45 last Friday and the Western Canadian Select price closed at $66.04 vs $62.87 USD.
  • The price of gold dropped this week, closing at $1,796 vs $1,829 last Friday.
  • The big driver in the markets this week was interest rates. Government bond yields in the U.S. and Canada shot up this week, pushing the price of bonds down, as investors begin to price in quicker than expected rate increases by the central banks. As a result, technology, and other high growth (and highly valued) stocks were pushed down aggressively to start the year.
  • Bank of Montreal (BMO) has agreed to buy Bank of the West for US$16.3 billion in cash from French financial giant BNP Paribas. This deal will extend BMO’s retail exposure into the western U.S., adding 1.8 million customers. BNP Paribas has said that they will use proceeds from the sale for stock repurchases and other investments.
  • Dye & Durham (DND) announced a deal to acquire Australia-based Link Group for cash of approximately C$3.25 billion or A$5.50/share. Dye & Durham has said that the acquisition will expand its global scale, adding approximately A$1.2 billion in revenue, A$257 million in EBITDA and 7,000 employees.
  • Tesla (TSLA) released its quarterly vehicle deliveries on Monday. Fourth quarter global deliveries totalled 308,600 vehicles, well ahead of the average analyst estimate of roughly 263,000 vehicles and topping the company’s previous record of 241,300 from the prior quarter. This 7th consecutive quarterly gain comes despite a global semiconductor slump that has crimped production at most other automakers and kept sales in check despite rising demand.
  • In other auto sector news, Toyota has outsold GM to become the top selling car company in the U.S. in 2021, a title that GM has held since 1931. To take the top spot, Toyota sold 2.3 million vehicles, a rise of 10%, compared to GM’s sales of 2.2 million, a 13% decline. Toyota had strategically stockpiled computer chips anticipating a faster recovery in the U.S. car sales market following the pandemic, which helped the company keep up with soaring demand.
  • The U.S. ISM Manufacturing Index declined to 58.7 in December, coming in below the expected 60.0 (levels higher than 50 signal expansion: levels below 50 signal contraction). The major measures of activity were mostly lower in December, but all above 50, signaling growth. The production index fell to 59.2 from 61.5 in December, while the new orders index declined to 60.4 from 61.5.
  • The U.S. ISM Non-Manufacturing (Services) index declined to 62.0 in December, well below the expected 66.9. The major measures of activity moved mostly lower in December, but all stand comfortably above 50, signaling growth. The business activity index fell to 67.6 from 74.6, while the employment index fell to 54.9 from 56.5. The new orders index fell to 61.5, while the supplier deliveries index dropped to 63.9.
  • Employment numbers were released on Friday. In Canada, employment increased 54,700 last month, more than double the 25,000 gain economists were predicting, with the unemployment rate falling to 5.9% vs 6.0% last month. Making the report even more positive, full-time jobs surged by 123,000 as many part-time workers shifted to more permanent employment. In the U.S., jobs numbers disappointed, with 199,000 jobs created compared to the 422,000 expected. However, the unemployment rate dropped to 3.9%, better than the 4.1% expected.
  • Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Fed, rates, and pullback: DWYER VLOG

Weekly Diversion:

Check out this video of ET Canada’s tribute to Betty White.

Charts of the Week:

Happy new year to all and welcome back to our Charts of the Week. We wanted to start 2022 with a recap of the main headlines of 2021 illustrated on both an equity and bond market time chart, with events that occurred along the way and what potentially drove markets. As with any year, markets swing but despite all the negative news, the S&P 500 (and the S&P/TSX Composite for that matter) had one of its best years. This data provides another reason to focus more on the longer-term trend and fundamentals as opposed to the daily grind of media and forecasts. On the other hand, it was a difficult year for bonds, particularly longer-dated government, and investment grade corporate bonds. The 10-year US treasury yield rose from 0.92% to 1.51% (and has since jumped to 1.77% as of today), while the Canadian 10-year government bond yield increased even more from 0.68% to 1.43% (and now 1.72% today). As a reminder, all else being equal, when long-term interest rates rise, the price of an existing bond declines. Coming into 2020, our highest conviction view was that long-term yields would rise, which worked out well with most of our core mandates returning 10% or more in the fixed income space. The FTSE Canada Universe Bond Index, however, declined 2.54%, along with the vast majority of the largest bond funds in Canada controlling tens of billions of dollars. Although it is still very early in the year, the trend has continued, and it would not surprise us to see yields push closer to 2% at some point in 2022.

Source: Bespoke Investment Group

Turning to this week’s subject, there is one internal metric of late that has been running very hot: breadth. For those unfamiliar with the term breadth as it relates to the markets, it refers to the relative change of advancing to declining securities. Breadth indicators can be useful tools to forewarn of reversals and uncover strength or weakness in the movements of an index that are not visible simply by looking at a chart of the index. As of early this week, many equity sectors’ current breadth readings, including consumer staples & discretionary, industrials and materials, are through the roof. We have witnessed huge moves over the past couple of weeks resulting in those sectors hitting 99th percentile readings (top 1% since 1990), including the overall S&P 500 Index.

Typically, strong breadth readings have been followed by consistently strong broad market returns. We often see some short-term weakness as one might expect, but broadly speaking, it has usually been a sign of strong forward-looking longer-term results. The following chart shows the 10-day Advance-Decline Line since 1990. On Tuesday, it crested the highest level since mid-2020.

Source: Bespoke Investment Group

When examining the average readings across all sectors, as of earlier this week the reading stood at the 94th percentile, which is at the higher end of occurrences when the overall S&P 500 is in the 99th percentile. Higher readings have arisen in past times, namely 2009, 2011 and 2016 when six sectors were in the top 1%, although the current readings are still very high. As mentioned above, strong breadth is typically considered to be a positive sign as it indicates there is robust market participation as opposed to just few big names (like Apple or Microsoft for example) pulling everything along. An overall view of the past market trends when we’ve seen a 99th percentile S&P 500 advance-decline line reading for the first time in 3 months in the table below, notice that over the very short term (one week), markets have only fared above about average. However, the following 1- to 12-month period has demonstrated a much more consistent pattern to the upside and stronger than the norm. This tendency is especially true over the next 6 and 12 months, where these past instances have resulted in returns that are 40-60% above average compared to all other periods, with a 100% positive return rate over the following year. This historical data certainly does not predict a certainty of what 2022 will produce, but it is still encouraging to see strong breadth measures when equity markets hit new highs, especially within the context of the current secular bull market.

Source: Bespoke Investment Group

Sources:, Globe and Mail, Financial Post, Connected Wealth, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Bespoke Investment Group