January 2016 – S&P/TSX Composite Market Strategy Update

The selling continues.

But you should know this.

Model Price Theory [MPT] has been very good; scratch that, excellent, in telling you what was going to happen. (And what will happen!)

Backing up we saw a negative transit of the S&P/TSX Composite of EBV+2 back in June of 2015. This negative transit was a sell signal for those not familiar with our Model Price work. Subsequent to this negative transit, the Canadian index went to the bottom of our EBV zone (between EBV+2 and EBV+1) in late August. Since August we have been bouncing along EBV+1 ending 2015 with two negative transits (yes, another sell signal) of EBV +1, one in the middle of December and the other, believe it or not, on the last day of the trading year (December 31), giving Model Price users a heads up on what the opening of 2016 would look like – down about 8% in the first week and a half.

Here is our Model Price chart

sptsx.to212

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

I have been negative on Canada since the negative transit of EBV+2 back in June 2015. And I have expressed so in my comments on Facebook on our Model Price app. We are in a BEAR market and it’s obvious to me we have to go to a place on the Canadian index that represents value. What is that EBV level? Well, our green line or EBV of course.

Is this the first time I’m saying this? Again, of course not. Here is an excerpt from my November 12th, 2015 blog here:

“So the question on my mind is; at what valuation or EBV level should this rebuilding start?

 My answer: At EBV or our calculated green line on our Model Price chart. This level is calculated at 10,566 as of November…

 Yes, that’s a full 22% lower than the S&P/TSX Composite Index close on November 5th, 2015.

 Gulp!”

Here is our long-term Model Price chart for the S&P/TSX Composite Index

sptsx.to211

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

How do I know we are going to EBV?

Looking back we can see (and I have annotated (above)) where the S&P/TSX Composite Index bottomed out during the financial crisis of 2008-09. Yes, it was at EBV or our green line.

Yes, no rocket science. No MBA or CFA required. An obvious spot where the S&P/TSX Composite is going to go and hopefully stabilize.

So we will wait.

Again, as I stated in my last blog in November, we could get at this valuation level quickly or very slow. Starting off 2016 one has to be thinking the former. But who knows…

Conclusion

The Canadian BEAR market continues. And the selling seems to be building to a crescendo as most BEAR markets do. This should not be a surprise to anyone who have been reading and looking at our Model Price charts.

And if you’re sitting on a bunch of cash (preferably US dollar cash), Canada does represent a buying opportunity at our EBV Level (Green Line). I know for myself, I will be purchasing both Canadian dollars (converting from US dollars) and the Canadian Index at this level. Looking out 3 to 5 years from now…returns on these purchases/decisions will look impressive I’m guessing.

 

3 responses to “January 2016 – S&P/TSX Composite Market Strategy Update

  1. John Oestreich January 21, 2016 at 12:43 pm

    Hi Brian,

    I only discovered your charts last year. Wish it had been sooner. I really like your price model work, particularly as you apply it to an index like the $TSX. I posted early last year the poor outlook for the $TSX here.

    http://hurstcycles.com/tsx-toronto-stock-exchange-2/#sthash.PioE4w9h.dpbs

    I’m a cycle guy. I have been expecting the $TSX to visit its 2011 lows this year. Now that we’ve doing that, I was not expecting $30 oil. Virtually the entire Canadian energy sector is insolvent if crude holds around these levels. There is scope now to head below your EBV level for the $TSX to EBV-1. It would coincide with long term trendlines for the $TSX. However, like you, once we find the eventually low (and I expect that this year), it should be a very good long term investment point. This is because, in my work, the $TSX is making a 14 year cycle low, the last one being 2002.TWT.

    I’ll be watching your work and the EVB line for the $TSX this year. Thanks for sharing.

    cheers,
    john

  2. John Oestreich January 21, 2016 at 10:30 pm

    Gulp. I finally see what could be coming. Crude oil is going to crash (which will finally crash everything else). First to ~18 (the 2002 low), then lower still later this year to the 1999 low (~11???). There’s no sign of a bottom here as we approach a 20 month cycle low. The $20 level will likely happen in the not to distant future? Does this seem even possible? If crude can’t rise above $30 here on the March contract next month, there’s no where to go but down.

    cheers,
    john

    PS There is no fundamental reason for it to go up right here. Not one …

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