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

 

OK… in my career in the financial markets I don’t think I have ever seen anything like the month of January 2016 in the Canadian equity markets!

From the end of 2015 the S&P/TSX Composite dropped 11.4% without a meaningful up day in the first 13 trading days of 2016 then reversed and climbed 11.2% in the last seven trading days, again without a meaningful down day. Leaving the index down only 1.44% for the month.

Wow!

Let’s have a look at our Model Price chart to see what happened.

sptsx.to213

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

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 – our EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectively.

What our Model Price Chart is Saying?

You can observe the downward spike in the market hitting an index low of 11,531 and the rally back up to and almost reaching EBV+1. Could the Canadian index have a positive transit of EBV+1? Not likely was my guess in my comments [Comment Section] on our Model Price app. EBV+1 would be huge in terms of fundamental resistance according to Model Price Theory [MPT].

As I have said in my previous blogs on this Canadian index, I believe we will see the market fall to our EBV Level (Green Line) that is calculated at 10,809 as of Friday, February 5th close. That’s a fall of over 15 percent for those at home keeping score.

So what was the market action about in January? Well, the Canadian market was falling with every other equity market around the world. Up until the time Premier Li made a comment in Davos, Switzerland that the Chinese would not devalue the renmimbi (RMB). Again, as I stated in my blog on the US equity market (see here) this comment seemed to go unnoticed in the front pages of the international business press however Twitter participants were tweeting up a storm.

Since Li’s comment at Davos global equity markets went from a risk-off sentiment to full bore risk-on. And Canada’s resource heavy equity index saw heavy buying, or was it short covering, to satiate traders’ risk-on appetite.

Unfortunately none of this wild and whacky trading does nothing to change my mind in terms of where this market is heading in the future. Again, unfortunately… we have to feel the pain of the market’s fall in the first part of January all over again.

Nice.

Conclusion

What a wild ride the month of January was. And I’m glad it’s over. However with the rally at the tail end of the month left us at the top of the EBV zone with nowhere to go but down.

No economic or company specific news in the month of January convinced me that a bottom had been reached and that we were on a new course, a new bull market. Just more falling share prices. Again, what makes me excited about the Canadian equity market is if and when this Canadian index does fall to EBV… this will, or I should say has a high probability, of being the bottom for the Canadian market/index.

In my last blog on the Canadian market (see January’s blog and reproduced here below) I gave readers our long-term Model Price chart going back to 1995. You can see the start of the Bull Market in the late 1990s started at this EBV Level or Green Line. Also the market bottom of the March 2009 market crash was… you guessed it the same EBV Level. So it just makes sense, doesn’t it, that a potential bottom in this current market is… EBV.

Again, see what happens.

sptsx.to211

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

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