What’s Catching Our Eye
Now that we are up almost 9% on the S&P and 7% on the TSX since the late June bottom we are assessing where we are a, what’s catching our eye, and where are the opportunities for the next couple months
BROAD MARKETS
Though we sometimes get a “summer rally”, historically markets are weak August through September
Seasonality of S&P
Seasonality of S&P
Both on the short and very short-term markets are tired. The following charts show the 4 hour and 1 hour price action for the S&P and TSX, respectively, using the correlative ETF’s. The 4 hour is actionable where the 1 hour is more a “heads ups”.
S&P (4 hour)
S&P (1 hour)
TSX (4 hour)
TSX (1 hour)
Stocks are over valued compared to bonds even with the US 10 yrs at 1.57%. This is a relative measurement, not an absolute one.
Stock vs. Bonds
Both the S&P and TSX % of stocks above the 50dma is high and peaking.
% of S&P Stocks Above 50dma
% of TSX Stocks Above 50dma
CATALYSTS & OPPORTUNITIES
It’s a challenge to figure out what event or data point moves markets. It’s also why relying on the technicals in the final filter (the buy or sell) is an important step in our investment process. In fact, they are more important in the short term than the investment thesis. You want the thesis and the longer term technicals to converge but week-to-week they don’t have to.
One relationship that has gotten off-side is gasoline and stocks. At this point in the driving season the crack spreads on gasoline for refiners should be much higher, not the $13/barrel it is today. Last year this time it was $28/barrel. With this we’ve seen the earnings estimates come down over the last few weeks on the biggest global refiners. China has started to be an aggressive exporter of gasoline (“tea pot” producers were unleashed). Together it suggests that crude inventories are going to start to build.
Crude broke short term support on July 7, 2016
Intermediate term support is at $42.60. The P&F target (bearish following July 7 ) is $42.00.
Financials too are central as the chart above shows. With the beat Wednesday by Morgan Stanley we saw an uptick in the stock but it made a mildly bearish candle on the day. Weak price action on Thursday and Friday will refute or support a near term top in financials and thus influence the direction of the S&P.
The financial sector has been bumping into resistance since late June. No Brexit break out.
The Canadian dollar is right at support, shown in a longer term (USD/CAD) and shorter term perspective (FXC). The C$ did not make a higher high. It is a “pro-cyclical” proxy, especially due to its correlation to mining and energy which have also not made new highs.
Mid Term
Short term ETF (inverted)
Gold is historically weak in mid-July but recovers at the end of the month presenting an entry or buy add.
Adding a short, or a hedge position in the S&P (single) or TSX (single) in our case, represents a good risk to reward ratio, especially with August upon us, a month where trouble seems to stir, volume dries up, volatility increases, and trading desks are staffed by juniors.
Bonds, one of the most hated assets classes is approaching a resistance zone putting it in the ballpark for a buy add.
One last thing we are watching, the Yen. We have been long it for the Two Way portfolio (yellow cross hairs was the buy). It has met our target of $91 and surpassed it. Depending how it corrects here, including Abe’s definition of “helicopter” money, it may become a buy again. 
To recap, equity markets are tired but we do not know how a correction will come – how much in price and how much in time? – or what the catalyst could be to put the indexes into their historical summer weakness. The financials, energy, the C$ and Yen will tip us.
Seasonality is on the side of gold at the end of the month, hedging equity market risk, long bonds, as well as biotech, staples and utilities.
ROBERT SNEDDON
Portfolio Manager
