10/08/10: As the US dollar works its way towards to latest downside target, almost every commodity price (which happen to be quoted in US dollars) has moved in earnest the other way. The notable exception being the meat market (which as a negatively correlated market to the grains is understandably weak). It is interesting to both see and literally feel the bullish euphoria in commodity land of late. Not surprisingly, The Canadian stock market as a whole look quite bullish (and is the focus of this week's CTS spotlight). My contrarian concern should not surprise regular readers - as I am quite convinced this is a mini-bubble in nature and shall reverse come late November if not into early 2011. Enjoy the ride while it lasts and lets all make some money!
Canadian Stock Market - TSX 60
With the dramatic increase in Canadian rich commodity prices of late, it should be of no surprise to see Canadian stocks in general on an upward trajectory. Since a good portion of the index is commodity related, prices for Canadian companies will trend in the direction of the underlying. I believe there is a unique opportunity of late in Canadian stocks because of our under performing currency from two perspectives.
1. Companies selling assets into the US commodity market are getting an artificially high commodity price (relive to their base currency) which may represent a windfall gain vs. farmer or miners in Australia for example.
2. Since we live in a truly global world, an international firm shopping for such assets may compare various companies across the globe in an effort to both maximize shareholder value and get a good deal. In short, Canadian companies are relatively cheap in comparison to other country's companies.
I believe its just a question of time until the Canadian dollar once again resumes its upward march vs. the US dollar. It may be because of exactly the reasons stated above, or something completely different. Regardless, the fundamentals do point higher for commodity rich Canada but lets look at the technicals to see if they confirm our underlying bullishness.
Above is the chart for the TSX-60 stock index (Canada's index for its largest 60 stocks and very similar to something like the OEX - S&P 100 in the US).
The Bullish case: Notice the higher highs and higher lows of late. This suggests that indeed this market is moving higher and one ought to expect higher prices generally going forward. Specifically, one ought to be long from 721.2 with your stop below recent support at 645.5. The 575 pivot point represents both the high from late '08 and the low of the spring '09. If we draw a flag pole formation off these points [(721.2-575)+645.5] we come up with a target of 791.7. Coincidentally, there exists a small gap on the weekly chart that will at some point be filled at 822. If I put these two numbers together I come up with a target window between 791-822 for this rally (or between 8-15% higher from here).
The Bearish case: Notice the bearish momentum divergence in the MACD. This latest rally is NOT on momentum and traders should be well aware that unless we move higher in earnest (so much so that we break the spring momentum peak) this may be the last gasp in an a classic bear market dead-cat-bounce. Currently yhe weekly 50% level is at 585.6 [(721.2+450)/2] (or 20% lower from here).
Conclusions: There is fundamental justification for higher Canadian corporate earnings due to rising commodity prices. As well, Canadian corporations are currently on discount for international shoppers due to an under performing currency. There are no sell signals working currently so one ought to be either long or flat. There is currently a buy pattern confirmed this past week from 721.2 with suggested stops just below 646.5. If long, understand we are getting very late in this rally and this latest move higher is not on higher momentum. Understand too that the public is often most euphoric at the end of moves not the beginning. Enjoy the rally and be sure to sell into your targets.
That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com
No comments:
Post a Comment