Hi there, and welcome back to CRI's S&P 500 blog.
As CRI prepares for the quarter and year end, this week's S&P 500 Blog will include a quarterly review of SPY, (and for all you Canadian's out there) the TSX Composite and TSX-Venture exchanges.
SPY
As has been the case for many weeks now, the SPY is pointing higher. Regular readers of this blog will recall CRI's bullish enthusiasm coming out of the US mid-term Congressional elections and the announcement of the US Fed's QE2 program. Fundamentally we experienced a dramatic political shift in Washington coupled with a guarantee of an additional $600 billion in Fed. bond purchases before the end of Q1'11. Technically, the market registered a very well defined double bottom breakout from 112.58 (our 'trader buy signal') coupled with a nice cross of the 13 EMA back above the 30 SMA (our 'investor buy signal').
As a special treat this week we added what CRI would consider to be the significant up-trend lines on the above chart. Notice the 2009 bull run was dominated by line 1. So far the year 2010 bull run has been dominated by line 2. CRI is expecting this trend line to hold up for the time being but if it should fail, next significant support is line 3. Notice that a 50% retracement of this entire bull run brings prices right back to line 3. at around the 95 area so keep on eye on this line should things start to get ugly again.
TSX Composite
The primary stock index for Canadian investor, the S&P TSX Composite Index is a basket of stocks very much like the S&P 500 index in the US. The Canadian stock market is dominated by commodity related assets as Canada is a very rich commodity nation. From wood to oil to gold, Canada has it all and its products are very much in demand. Very much like its southern counterpart too, the Canadian stock market registered a significant buy signal in the middle of September when prices crossed back above 12,321. Canadian interest rates are very stock friendly, a large portion of the $600 billion Fed QE2 program is going directly into commodity related assests and Canadian corporate earnings are in far better shape than their US counterparts. Given this fundamental backdrop, one should not be too surprised to see rising stock prices. Applying the same technical logic as SPY, one can clearly see a massive Bull flag formation that has been carved out over the past 2 years. The conservative upside target here is 13851 (with an aggressive target near 16,000!) and considering the violently bullish nature of many commodity markets of late, a move to this conservative point would not be too big of a surprise.
TSX-Venture Exchange
Probably the most surprising to the investment community has been the dramatic comeback in the Venture Capital market of late. Above is the Canadian equivalent of the Russell 2000 stock index in the US. This index represents the smallest companies in the Canadian universe and as you can see from the chart above, the move higher over the past two years has been dramatic. But more dramatic was its initial fall. Consider that the market has just now gotten back to the 200 week EMA. In essence, when the rest of the market came back in 2009 the venture market was still in panic mode. If one considers that corporate borrowing rates in North America have fallen from about 2% this time last year to about .5% now, it makes sense that the speculative market is finally starting to see investment capital again. Unlike their larger brethren, venture stocks took off like a rocket heading out of the summer and into the fall. The election and subsequent QE2 announcement was further validation for this index. What is interesting here is that if one looks at the Point & figure charts (link) we still have some way to go till we get to our target (2640 area). Like the major index's, the venture exchange has a bull flag working too. The formation here suggests that prices want to move up into the 2355 area.
Summary
North American stocks are in a massive bull wave which is pushing prices higher across the board. Canadian stocks look to benefit from the move higher in a greater degree than US stocks because of the better structure of the Canadian banking system, a friendly macro trend towards commodity related assets and a strong currency. The first two weeks of Q3 suggested money was going to be flowing primarily into Basic Materials, Energy and Tech. Two of which are a hallmark of the Canadian investment landscape, need we say more...
The markets never move in a straight line so CRI will be looking for ebb and flow to this move higher but make no mistake, equities are moving higher and if you are not participating you will be left behind.
That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com
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