Canada and the end of the stock market rally
The stock market rally is ending, says this analyst, and while Canada looks better than the U.S. in the long term, it won’t escape trouble.
If the party’s over, do we all have to leave?
If the long stock market rally is coming to an end, does every market have to take a beating?
Canada’s economy appears to be recovering rapidly, so perhaps it can resist the worst effects of another downturn — the dreaded “double dip.”
Not really, says one pessimistic analyst. He believes the credit crisis may be entering Stage Two. And Canada will not get off scott free.
Mr. Ian McAvity is a Canadian. He lives in Toronto and publishes Ian McAvity’s Deliberations on World Markets for an audience that includes many American readers.
Both his experience and his technical charts are telling him that the Toronto Stock Exchange cannot escape another crisis.
There is one potential bright spot in the gathering gloom, however. Canada’s oil sands may look more attractive in light of the disaster in the Gulf of Mexico, this observer believes.
But first, this analyst pronounces the stock market rally dead.
Amazing change of character
The bizarre stock market crash of May 6 was successively blamed on a “fat finger” hitting the wrong button (not true) and a miscommunication between robo-trading computers on competing stock markets.
Those computers are not programmed to recognize that stocks from the New York exchange that are traded off the NYSE can escape the protective stop limits of the NYSE’s big board altogether.
This exposes “the corruption of the NYSE and its bizarre competition with Nasdaq and other markets,” says Mr. McAvity. But it does not explain the real source of the crash.
The real problem started in early April with intense selling pressures, he says. Downside volumes on the market increased sharply, “an amazing change of character from the prior 12 months.”
Tracing the movements of the markets since then, this analyst finds that a big shift from buyers to sellers started April 16th. It continued through “intense selling days” late in May.
“This character change prompts me to conclude that the stock market rally from the March 2009 lows is over.”
The reasons are not hard to see. The European debt crisis is far from being solved. The euro is fighting for its life. What’s more, says this analyst, China appears to be moving toward a revaluation of the yuan to cool down its economy. The ripples could spread far and wide.
Where does this leave Canada?
Unlikely to be spared
The “global market shakeouts” of May spread pretty evenly across all 13 sectors of the S&P/TSX Composite Index, says Mr. McAvity.
If he is correct in his belief that the “multi-trillion dollar bailouts and quantitative easing rally” from March 2009 lows is over, he adds, “Toronto generally is unlikely to be spared.”
Among non-resource sectors, only Consumer Discretionary stocks avoided that “rolled-over look” that struck the others.
Meanwhile, the two energy subindexes on the TSX ran into a wall of resistance “and have been stalled for months despite improved oil prices that have now softened as well.”
Still, BP’s never-ending oil spill in the Gulf of Mexico might be beneficial for Canada’s oil sands producers, this analyst states.
Restrictions on offshore drilling in the Gulf are already in place. “With the typical political over-reaction to events,” adds the analyst, “there’s no doubt that offshore exploration in northern Canada (Beaufort Sea) will encounter massive new restrictions.”
Offshore drillers are not a group to scout for opportunistic buying, he adds dryly. “I’d avoid them for some time to come until the legislators complete their process of rearranging the deck chairs on the Titanic.”
Casino-like markets
Canada’s stock market had “an extraordinary run” from 2002 to 2008, says Mr. McAvity, with several major takeovers helping it hit the heights before the crash struck. If New York heads back down, Toronto is likely to follow, and may be even more volatile than its American counterpart.
There is a light at the end of this analyst’s tunnel. “There’s no doubt that Canadian prospects really do outshine the fiscal disaster to the south when taking a longer-term view.”
But that’s a bit like saying the sun will shine next summer. Modern markets “have become casino-like with the majority seemingly thinking that long term means holding a position over night.”
So increased volatility in the New York market could bring Canada down even more. He points out one advantage to this for his U.S. readers. This will offer some good buying opportunities in the Canadian stocks they use to add diversity to their portfolios.
Canadians will have the same buying opportunities, of course, but when will they pay off?
This forecast is not exactly a cheery way to end the week, and not all observers will share this analyst’s pessimism.
But if the markets have taught us anything in the past few years, it is this. Preparing for the worst is a much better strategy than simply hoping for the best.
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