Is the tide coming in or out?
Don’t get this reference? Please refer to my previous blog “January 2015, S&P 500 Market Strategy Update” for a refresher.
The tide is certainly going out in Canada. World money flows have reversed not only in the commodity countries (Australia and Canada) but also in the BRIC countries, as well.
Commodity prices are slumping, with a huge drop in oil prices leading the way. Actually it’s kind of fun watching people in the financial press spin themselves into circles trying to come up with a reasonable explanation as to what is depressing crude and other prices.
I have no clue as to what is going on here – I can guess like others – but it seems to me both on the supply and demand side of the equation market dynamics and complexities are being sorted out by a daily market price that we all can see. So leave the predictions to others, here at Model Price, we have no need to entertain worthless prognostications when dealing with real facts.
See here at Model Price we have two pieces of independent data coming together and giving you real information – investible and tradable information. What are these two pieces of information? Stock prices (index values) and our calculated EBV Lines! Each source and piece of information is both independent and verifiable. I don’t know of any other financial concept or tool in use today that even comes close to this very valuable tool. And to me, even though it looks like technical analysis, this information gives me clues and a heads up on future fundamentals of a company and the market. Sure, we will never know in real time what the public future news will be, but as we all know markets always seem to move before the fact.
What is the Canadian market saying through Model Price?
First, let’s have a look at the model price chart of the S&P/TSX Composite Index as of January 12th, 2015
S&P/TSX Composite Index with weekly price bars and EBV Lines.
As a reminder we aggregate all companies in the S&P/TSX Composite Index into one chart on a market capitalized basis (like the S&P/TSX Composite Index itself), so we can see where the market – S&P/TSX Composite – is trading relative to its EBV lines.
As you can observe the Canadian market, as defined by the S&P/TSX Composite, is in the zone bookmarked by EBV+1 and EBV+2. If the market rallied to EBV+2 (14,764) this would represent a gain of some 3.5% (Upside). If the market corrected back to EBV+1 (12,405) investors would be suffering Index losses of almost 14% (Downside).
For people new to Model Price Theory [MPT] the index value or price can move within an EBV zone with no real consequence. However when a transit occurs – index value or price crosses one of our parallel lines – an EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectfully.
As I have annotated on the above model price chart we have experienced three negative transits starting back in mid-September. What does this mean? Simply the fundamentals are deteriorating in Canada and the market will probably feel more comfortable trading in the valuation zone between EBV+1 and EBV+2. Yes, this means EBV+2 now becomes resistance and EBV+1 becomes support. And, support for this market is a long way down…some 13%!
As I have said in last month’s blog on the Canadian market;
Where are we going, in terms of the Canadian equity market? Not sure! But until we see positive transits both in individual stocks and the S&P/TSX Composite Index I would be cautious with a healthy cash balance and wait and see where this market wants to go. I’m reminded of the great quote by Yogi Berra, “It’s tough to make predictions, especially about the future.” A negative transit is a negative transit and an investor can act accordingly, the future can take care of itself with or without my and your capital.
Three times the market has spoken. This is rare that a market through an index or a stock gives anyone this much of a warning. But in this situation the Canadian index is certainly giving all Canadian investors a warning that negative fundamentals maybe on the horizon. Certainly investors in the Canadian oil patch have already experienced negative (maybe severely negative) rates of return.
Any stock in the Canadian equity markets that resides in your portfolio and has a negative transit would be a sell candidate in my mind. Bear markets are about survivability on one hand and opportunity for excessive trading profits when to dust and the falling stock prices have stopped. This spells great opportunities ahead in the Canadian equity markets for those with capital and superior leading information about changing market fundamentals – future positive transits.
I can’t wait!