Equity markets have been choppy but not significantly lower so far and in this edition of Market Factors we’ll look at four charts one strategist is watching to gauge how long stocks can hold up. We’ll then see how disgust is making defence stocks more attractive to me and we talk meatloaf in the diversion section.
Indicators
Lines in the sand for equity markets
Evercore ISI strategist Julian Emanuel has diagnosed investors with wild mood swings recently, gravitating from extreme greed to extreme fear. Mr. Emanuel is watching four “fear lines” – charts that might signal a sustained market downturn if they collapse.
Mr. Emanuel cites boom/bust patterns in Oracle Corp., silver, software, the KOSPI, alternative investments, oil, flash memory and real estate services companies as evidence of excessive investor twitchiness. He is watching for charts involving credit, copper, the trade weighted U.S. dollar and software (the iShares North American Tech-Software ETF, IGV-A) for signs of market participants throwing in the towel.
The strategist notes that option activity is more bearish than seen in current cycle mini-panics which all proved to be buying opportunities. Geopolitical uncertainty is the cause of the unease but this is offset by positive factors like modest interest rates and no signs of recession on the horizon.
Mr. Emanuel has lines in the sand for each of his charts – levels that if broken could signal a deeper selloff. For credit he is watching two indicators: investment grade corporate bond spreads (he is watching for a breach to above 170 basis points here, signaling balance sheet concerns ) and, secondly, high yield credit default swaps (a rise above 350 basis points would indicate solvency-related stresses).
For copper, trading in the US$5.80 per pound range, the strategist would become concerned if spot prices fall below US$5.50 and stayed there as a sign markets were worried about global growth.
The trade weighted U.S. dollar index is near 99 now and a jump to 100.5 would signal to Mr. Emanuel that investors were anxious enough to move towards alleged safe havens. The final chart, plotting the iShares North American Tech-Software ETF, would disturb him if it dropped below its 200-week moving average.
The investment grade bond spread can be found on the Federal Reserve data site here. The high yield CDS is tough to find and the copper spot price is harder to locate than most investors might think but I use Kitco Metals here. The U.S. dollar index can be found here.
A U.S. Air Force F-22 Raptor fighter jet takes off.Ricardo Arduengo/Reuters
Sectors
The temptation of defence stocks
I have described investors in defence stocks as karmically challenged in the past but I’m getting tempted to buy them. Part of it is a feeling of disgust - if world leaders are going to act like jackasses I might as well benefit.
Morgan Stanley analyst Kristine Liwag published a jargon-laden research report on Friday outlining the top 45 defence companies to watch and “where they live in the disruption framework,” whatever that means.
The analyst emphasizes that an increasingly multipolar world- not dominated by the United States in other words - is a strong catalyst for armament spending across the world. Within the United States, the president has indicated a 50 per cent increase in annual defence spending to US$1.5-trillion which, even if it doesn’t happen, indicated a clear desire for more spending.
Ms. Liwag predicts that future military conflicts will require development in hardware, AI-enabled software, increased manufacturing capacity and cyber capabilities.
The major defence companies are carrying an estimated US$530-billion order backlog according to the report. The U.S. is now spending less than Russia, China and Iran as a percentage of GDP.
The sector currently trades at a 16 per cent discount to the S&P 500 in terms of next 12 months price to free cash flow. Historically, defence stocks have traded at a premium to the market during periods of rising spending.
Security concerns have left the defence industry supply chain fragmented and struggling to increase production. The analyst lists overweight-rated Transdigm Group Inc. (TDG-N), Curtiss-Wright Corp. (CW-N) and RBC Bearings Inc. (RBC-N).
Among the major defence players, Ms. Liwag recommends Northrop Grumman Corp. (NOC-N), suppliers of the B-21 bomber and the Sentinel intercontinental ballistic missile, and General Dynamics Corp. (GD-N), which is expected to benefit from government pledges to increase the naval fleet. Fighter jet maker Lockheed Martin Corp. (LMT-N) and RTX Corp. (RTX-N), the analyst’s top pick in the aerospace subsector, are also cited as a strong opportunity.
Martha StewartBEBETO MATTHEWS/The Associated Press
Diversions
In praise of Martha’s meatloaf recipe
I’ve been good about cooking on the weekends lately, setting up so I don’t have to worry about meals for the week. On Sunday I made Martha Stewart’s All American Meatloaf for the first time in forever and it was so good I need to tell anyone who’ll listen.
There are numerous keys to the recipe but the biggest one is likely the combination of ground beef, pork and veal. The rest is a sorcerous combination of tastes and spicing. The use of parsley and carrot adds brightness, onions and garlic bring earthiness and the ½ cup of ketchup has sweetness.
As for spices I think Thomas Keller must be jealous of Ms. Stewart’s ability to add the perfect amount of salt. Rosemary is involved but doesn’t dominate like it does in bad recipes. The use of dry mustard isn’t immediately tasted in the result but I sense it’s really important.
I used the “1 teaspoon or to taste” option on Tabasco to add a lot more but otherwise stuck with the recipe. And why not, it’s delicious.
The essentials
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Globe Investor highlights
Canadian bank stock valuations are rich. But David Berman suggests that may not be a big problem
Larry MacDonald has his monthly writeup on what’s going on with short sellers on the TSX
Even with the latest market dip, Jamie McGeever warns investors may be recklessly complacent right now
Quick hits
Goldman Sachs’ new chief U.S. equity strategist Ben Snider predicted that AI will account for 40 per cent of total S&P 500 profit growth for 2026. Remarkable stat and a source of market risk.
I get reports on web traffic on the Globe and Mail site and noted readers digging back into the “Five reasons lower stock prices are ahead” version of Market Factors from February 23. None of the five factors was higher oil prices because of war with Iran though, so I don’t think anyone’s been Nostradamus. Expected result but not for the expected reasons only gets partial credit.
I understand they have to say something but economists and strategists stating the obvious with some form of “the market effects of the Iran conflict increase the longer it goes on” is getting really old.
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