Technical positives indicate an upcoming rally in the markets, this analyst says

A rally in equity markets is expected over the intermediate term, says Javed Mirza of Canaccord Genuity, who argues that in addition to strength signals in the retail and real estate sectors, information technology is showing early signs of improved performance.

Canada’s main stock index had an up and down day on Tuesday with the S&P/TSX composite index falling 17.52 points and closing at 16,144.79. The drop, a first after 11 straight days of gains, was in part triggered by declines in the energy sector brought on by reports of a potential OPEC production increase.

But looking forward, we should expect an end to a near-term corrective phase in the markets which began a week ago, says Mirza, who sees three key technical positives to support an intermediate-term rally in equities.

In a technical note to clients on Monday, the analyst argued that: (1) market breadth is strong, with the S&P 500 Advance/Decline line breaking out to new highs; (2) Dow Jones Transports is outperforming Utilities; and (3) there is strength in small caps as the Russell 2000 has triggered a new weekly “mechanical buy” signal.

“The S&P 500, Nasdaq 100, TSX Composite and Russell 2000 remain above their 50- and 200-day moving averages, confirming that short- and intermediate-term trends are up, a strong technical positive, and which support adding exposure during this near-term corrective phase,” says Mirza.

In the Consumer Discretionary sector, the analyst says that the relative performance of retail versus the TSX Composite is reaccelerating, adding a tailwind to stocks in the sector. In particular, Mirza highlights BRP Inc. (TSX:DOO) and Gildan Activewear Inc. (TSX:GIL).

The analyst says that the TSX Composite also reveals early signs of improved relative performance from both Healthcare and Information Technology, with IT currently on weekly “mechanical buy” signal.

Over the long-term, Mirza says that the current weakness should be seen as an opportunity to add exposure to the ongoing secular bull market.