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TSX Market Review and Forecast June 2010

It’s all Relative…

Market Review

As expected, the TSX continued to pullback in the month of May. Despite good earnings reported by most firms, the market found itself in a position of having already reflected those numbers. The net outcome was a yawn by the market for good earnings, and punishment for those companies that failed to hit expectations. Witness the performance of Royal Bank. After reporting earnings that rose 40% year over year, but slightly below expectations, the stock dropped $4.08 dollars or 6.8% in 2 trading days.

The market correction in Canada continues to be led downward by falling commodity prices. Copper prices and oil prices have both hit multi-month lows in price. Oil in particular hit a 9 month low. These two commodities have a huge impact on Canada and investors can watch them for clues as to the direction of the TSX.

Where do we go from here?  

First the good news, last month the 11,337 level on the TSX was outlined as the first level of support for the TSX as it corrected. That closing level on the TSX held firm in May. Unfortunately, that is also the bad news.   Why? Well, on three different occasions during the month, the TSX traded sharply below the 11,388 level before rallying by the close of the day to remain above this important technical indicator. This is bad news because this indicates that weakness is indeed the order of the day. Further reinforcing the negative tone to the market is the big volume on down days which dwarf the buying volumes on up days.

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Our intermediate term forecast remains unchanged.   Expect the next market “all clear” signal sometime in late summer or early fall of this year.  In the interim, the down trend should continue with the TSX testing the strong support at the 10,765 level.   Investors should look to those sectors that outperform the market on a relative basis during this downturn as likely candidates for future investment.  Relative outperformance during down periods has consistently been a strong indicator for those sectors and stocks that will lead the next bull market.  So from an investment standpoint it is all relative. 

THE BOTTOM LINE:  Keep your powder dry.  Raise cash from weak positions or those underperforming on a relative basis.  Our long term readers know we have been cautious since the fall of 2007 and it has served client portfolios well.  The key to making money is not to lose it and going against the primary trend is the best way I have seen in 25 years to lose money.  A very low risk re-entry point into equities is just around the corner so until then, enjoy the summer, and ignore the volatility of the market as we are watching out for you.

An in-depth analysis of the 10 sub groups of the TSX is contained in the Private Client area of our web page located at www.onestrategy.ca.   For clients, access is guaranteed, if you require a password call Jay at 905-444-4524 and he will assist you in gaining access.  Located in the Technical Analysis section of the Private Client area, under the Technically Speaking tab, each sub group of the TSX and its investment attributes are reviewed.