We have been getting requests from our Canadian readers to do a market update on the Canadian equity markets. We can do this by looking at the S&P/TSX 60 Index. Just like our S&P 500 model price chart, we aggregate all 60 companies into one chart, which can give investors a 40,000-foot view of what is transpiring in the Canadian markets as a whole. I like looking at the S&P/TSX 60 Index because we are large cap managers, and there is enough diversity in terms of the number of companies in this index to get a feel for what is going on.
Here is the model price chart of the S&P/TSX 60 Index as of last nights close.
S&P/TSX 60 Index with weekly price bars, EBV Lines (colored lines).
As you can see the Canadian market topped out at EBV+2, concurrent with the S&P 500 index on the US markets. As the S&P 500 corrected, the Canadian market corrected more severely. This is not surprising since the current fears are with a slow down in world economic growth, this will directly impact economic sensitive companies which the index has an abundance.
That said Monday’s close of 645, the S&P/TSX index is only 3 percent away from EBV+1 or 626. So in terms of percent upside/downside, as of last nights computer run, the S&P/TSX index has a possible upside potential of 15.5% and downside of 3%. Not bad profit/loss potential. This same situation occurred in the latter half of 2011, which resulted in a rally up to EBV+2.
Since investors and the financial press are extremely pessimistic these days, let’s consider full out disaster. This occurred in 2008 where the S&P/TSX 60 index traded down to EBV or 513. That’s 20 percent down from last night close. Certainly possible but is it probable? The good news for investors or readers of this blog the index would have to break EBV+1, which would be a very important signal increasing the probability of the S&P/TSX 60 trading at EBV.
What I love about this work, especially our EBV lines, is it’s based on structural equations derived from the balance sheets of public companies. When we overlay market prices the feedback to investors and analysts’ is immediate. What is our model price chart on the S&P/TSX 60 index telling investors about the Canadian large cap market? The current risk reward is positive for the Canadian market, with a 3 percent downside and a 15% upside.
As I had stated in my blog on the S&P 500, if this US index falls to EBV+2, or another 15% then the probability of the S&P/TSX 60 falling to EBV will be high. However, if this were to transpire I would consider, both US and Canadian indexes, an important market bottom.