The Downturn Signal in the TSX and Strategic Positioning for the Coming Week

The S&P/TSX Composite Index has been a standout performer in 2025, driven by a combination of resilient domestic sectors and global macroeconomic tailwinds. However, beneath the surface of its 13.61% year-to-date gain lies a growing tension between technical indicators and macroeconomic sentiment. As investors prepare for the coming week, the interplay of these forces demands careful scrutiny.

Technical Divergence: A Cautionary Signal

The index's recent close at 27,775.20 points underscores its dominance in a rising trend channel, supported by robust moving averages. The 200-day moving average, at 25,563.80, has been a key underpinning, with the index trading 13.61% above it. Shorter-term averages, including the 50-day (27,084.36) and 20-day (27,569.81), further reinforce the bullish momentum. Yet, a critical red flag emerges from the Relative Strength Index (RSI).

The RSI has shown a negative divergence against the price, with the indicator forming lower highs while the index continues to rise. This mismatch often precedes a correction, as it suggests waning buying pressure. The critical support level at 25,700 points becomes a pivotal watchpoint. A break below this level could trigger a retest of the 200-day moving average, potentially reversing the index's trajectory.

Macroeconomic Crosscurrents: Rate Cuts and Tariff Uncertainty

The technical optimism is tempered by macroeconomic shifts. The Federal Reserve's anticipated rate cuts in September 2025 have already priced in a 70% probability of a 25-basis-point reduction, according to CME FedWatch data. While lower rates typically buoy equity markets, the Canadian economy's reliance on U.S. trade introduces volatility.

Recent downward revisions to U.S. non-farm payroll data and softening inflation figures have bolstered rate-cut expectations, but the lingering threat of U.S. tariffs—particularly on refined copper—remains a wildcard. Copper prices, which surged to $5.87 per pound in July, are now trading at a 30% premium on the COMEX due to U.S. tariffs. This structural dislocation has reshaped trade flows and investor sentiment, with Canadian energy and materials firms like Enbridge and Agnico Eagle benefiting from infrastructure demand and geopolitical demand for critical minerals.

Sector Rotation and Strategic Positioning

The coming week presents an opportunity to rebalance portfolios in light of these dynamics. The materials sector, up 2.5% in August, remains a strong contender, supported by copper's role in the energy transition. Conversely, the technology sector, which has underperformed with a 1.8% decline in early August, may face further pressure as investors rotate into defensive plays.

For tactical positioning:
1. Hedge with Commodity Exposure: Copper and gold equities (e.g., First Quantum Minerals, Barrick Gold) offer inflation protection and align with structural demand trends.
2. Monitor Key Levels: A break below 25,700 in the TSX Composite Index could trigger a short-term pullback. Consider partial profit-taking in overbought sectors like tech (e.g., Shopify, down 4.2% on August 15).
3. Leverage Rate-Cut Expectations: Financials and real estate sectors, which have outperformed in August, may continue to benefit from lower borrowing costs.

Conclusion: Balancing Optimism and Caution

The TSX Composite Index's technical setup remains bullish, but the RSI divergence and macroeconomic uncertainties necessitate a measured approach. Investors should prioritize liquidity, maintain a portion of capital in cash, and use the coming week to assess whether the index can hold above 25,700. For those with a longer-term horizon, the energy transition and U.S. infrastructure spending provide a compelling backdrop for Canadian equities.

In a market where technical signals and macroeconomic forces often collide, strategic positioning is key. The coming week will test the index's resilience—and offer a critical inflection point for investors.