November 2014, S&P/TSX Composite Market Strategy Update

My friends this Canadian Index is far more interesting to talk about!

The last month and a half has been brutal to all commodities especially gold. As I have noted in previous blogs the sub-index sectors of Energy and Materials (which includes gold stocks) represents 36% of the Canadian Composite Index weightings compared to 13% of the S&P 500 Index. With such a large weighting in commodities obviously the S&P/TSX Composite Index has been adversely impacted.

Model Price Chart of the S&P/TSX Composite Index

 

S&P/TSX Composite Index with weekly price bars and EBV Lines (colored lines).

S&P/TSX Composite Index with weekly price bars and EBV Lines (colored lines).

 

The first very apparent observation you can make of the above model price chart is the negative transit of EBV+2 in the middle of October – annotated by the arrow.

This is significant.

Negative transits, as I have written about many times, indicates a change in fundamentals. Unfortunately, as longtime followers of Model Price Theory [MPT] know, negative transits usually corresponds to negative future economic fundamentals.

I have said numerous times Model Price Theory [MPT] is NOT ‘Technical Analysis’ in the traditional sense however because we extensively use price graphs to display mathematical fundamentals repeatable ‘graphical formations’ are inevitable.

Keen observers will note that this Composite Index closed above our EBV+2 line on the same week as the negative transit. Unfortunately this is a normal repeatable ‘graphical formation’ of negative transits and I’m speaking with 15 years of experience here.

The first negative transit is usually the market testing or whether the index belongs in a lower zone, in this case between EBV+1 and EBV+2. Again, in general, the market (I’m talking about indices here) usually rallies above the EBV Line it just negatively transited.

And sometime later – could be weeks/months/quarters another negative transit will occur confirming the initial negative transit.

THIS SECOND NEGATIVE TRANSIT WOULD CONFIRM THAT THE CANADIAN MARKET HAS ENTERED INTO A BEAR MARKET.

Do I have your attention!

Does this mean the world comes to an end? Of course not! It’s just that an investor/trader has to adjust their expectations. My most profitable trading has occurred in BEAR markets of the past. You just have to know what kind of market you are in (Bull market vs. Bear) when trades are initiated and rates of return are assessed.

CONCLUSION

The last couple of months in the Canadian market have been interesting and eventful from a Model Price Theory [MPT] prospective. The highly cyclical market weight portion of the S&P/TSX Composite has been “taken out to the woodshed and shot.” Because of the negative transit of EBV+2 in the middle of October, market participants in Canadian equities should be on guard for a second negative transit that would be a negative sign and possible signaling of negative markets in the future. (As of this writing if the S&P/TSX Composite Index fell below an index level of 14,329 a second negative transit would have resulted.) Can you make money in BEAR markets…absolutely. Model Price will lead the way!

One response to “November 2014, S&P/TSX Composite Market Strategy Update

  1. George koutlakis November 6, 2014 at 3:03 pm

    Excellent work Brian. I am a long time fan of yours that has followed you on BNN. Keep up the great work. It is greatly appreciated.

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