May 2015, S&P/TSX Composite Market Strategy Update

Waiting.

Yes, I know it isn’t much fun. But waiting is sometimes what the market forces you to do.

And it’s about energy.

As a trader/investor you could expend a massive amounts of energy into a market or a group of stocks without much a reward. Your personal energy is a finite resource, especially the older you get, and I husband it every opportunity I get. So when I see the Canadian market as reflected by the S&P/TSX Composite Index, I sit back and relax and try to do minimal activity. Because I know what is coming….

The Canadian equity market, like all global equity markets, takes its cues from the U.S. equity markets. And as I have written the U.S. equity markets are ‘boxed in’ at the top of the zone bookmarked by EBV+3 and EBV+4, as I have blogged about recently here.

If the S&P 500 were to correct back to EBV+3 or 18% lower, I am sure the Canadian market, as well as other global equity markets, would correct also. Conversely, if the S&P 500 had a positive transit of EBV+4, this would propel the Canadian market higher, EBV+3, would be an important target for the S&P/TSX Composite Index…some 37% higher!

S&P/TSX Composite Index

S&P/TSX Composite Index with weekly price bars and EBV Lines.

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.

For people new to Model Price Theory [MPT] the index value or equity price can move within an EBV zone with no real consequence. However when a transit occurs – index value or equity 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, respectively.

So the Canadian markets will rally a little above EBV+2 and then fall back to this same EBV Line for support. Yes, we could have a negative transit as well however if the S&P 500 is still ‘boxed in’ – as it has been for months – we will probably rally back up to the aforementioned and same EBV+2.

So you can expend a prodigious amount of energy trying to trade this ‘ go nowhere’ phase in the market but I’m not sure what kind of profits you will be racking up both on the long and short side of the market. Sure there are exceptions, but the individual stock risk a trader may have to take in a sideways market can be high, and yes, I’m talking from personal trading experience.

Conclusion

The whole world is waiting for a signal from the S&P 500 and Canada is no exception. Do valuations go higher or lower? Global interest rates are now in the process backing up – going higher: What does this mean in terms of equity valuation? (Hint: I wouldn’t necessarily assume lower equity valuations.)

Better still, I believe I have made a strong case for ‘taking the summer off.’ My personal energy is precious and I don’t want to waste it in a sideways, choppy market with little to show for my concentration and thought process. When and if the global equity markets make up their minds, I want buckets of energy to grab my share of trading profits. What about you?

2 responses to “May 2015, S&P/TSX Composite Market Strategy Update

  1. Patrick May 13, 2015 at 9:42 am

    I’m a retired Canadian with 70% of my portfolio in U.S. funds, I’m getting killed (Canadian Dollar Wise) with the strength of the Canadian dollar lately; I believe you’re long term expectations for the U.S. dollar is very bullish, which I agree to, but I can’t help thinking there’s some underlying effort from the U.S. to lower their currency to facilitate a competitive edge for international trade?? I’d really appreciate your thoughts, that is before you go on vacation for the summer – only joking!

    • ModelPrice Guy May 13, 2015 at 9:49 am

      Thanks Patrick! I wouldn’t worry about the rise in the Cdn dollar here. This is just a contra-trend rally in my mind. As I have said many times in this blog and on BNN, I believe we are in a long term secular trend in the US dollar. Meaning this trend will last for the next 5 to 7 years. There will be corrections along the way, like the one we are experiencing now….but like you I have a major chunk of my assets in US funds and sleeping like a baby.

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