Let's compare the Relative Strength of Canada's market to the American major Indexes.
Why would we do this and what value might it serve?
Did you know:
1) We have outperformed the Dow for 10 years.
2) We have underperformed the Nasdaq consistently for the last 3 years.
3) In 2011, we broke a decade long uptrend and failed on the backtest to get back into the uptrend compared to the $SPX.
4) We outperform the Russell during market corrections.
5) There are so many moving factors, sometimes the big picture is required to help us understand what is going on.
The big questions for me are:
Will the TSX be able to continue outperforming the $SPX? If so we should start that outperformance soon as we are at/below the low edge of the trendlines.
Does our TSX just mimic Gold, RIMM, or Oil? Remember when Nortel was 33% of the index? What does that say if we outperform /underperform?
As the world debates inflationary forces and deflation, watching commodity prices can tell us a lot about the direction of Canada's economy. As the world struggles with Sovereign debt, can we remain strong? Our banks are off 30% from the highs yet we created more jobs than America did in some months this year. Our last economic indicator for growth/recession was slightly negative, with the fundamental analysts just saying it was a weak blip in a bull market. Charts can help us with finding those turning points better than fundamentals.
My takeaways from this chart are:
If Gold, Oil, Metals, Lumber and Ag can get a bid here, we'll start a really strong rally back to the top of the relative strength boundaries from the lower line which should make for a very profitable rally. This is seasonally a strong quarter for some of these commodities. If we see continued weakness in commodities, I would expect the Canadian market to start a new period of relative underperformance compared to the SPX. I don't even want to go there. This would imply commodities starting at least an intermediate downtrend.
To really outperform, we have to find stocks that outperform the Nasdaq 100, which would also be outperforming the SPX. Those are tough to find..but worth finding!
Canada's general economy continues to outpace the Dow Industrials. Not a real feat of power, but there are some great companies in the Industrials.
Compared to the Russell 2000, Canada can compete but with all the Midcap and smallcap ETF's, the Russell is very volatile. Notice the red dotted lines on the last three pullbacks. The TSX outperformed (does not mean went up) as investors bailed on small caps. I don't like the recent downtrend of lower highs over the last few years.
Greg Schnell, CMT
