I wrote about the $TSX in September as it broke the 40 week FLD. The TSX started its correction lower last fall before US markets, this on the back of a very weak energy sector. Despite oil’s recent bounce (/CL made a 45 week low late Jan.), the weakness in energy shares is likely to continue this year until the bottoming process is completed. The interesting thing is that concerns for Canadian energy debt/financing has pulled down the Canadian banks and we now see weakness developing there as well. The crash in oil last year could have a pervasive effect on the $TSX for much of 2015. Time will tell.
I’ve come to the conclusion that trying to analyze cycles in US markets or US stocks at the present time is not working very well. It is actually much easier to see the cycles working in assets outside of the US priced in US dollars. The first look is the ishares global ETF for Canada (EWC). I’ve taken a recent step and changed the nominal defaut cycles for Sentient and used a 13 month and 39 month cycle for the Hurst nominal 18 month and 4.5 year. William Randall’s bandpass filter work clearly shows these cycles are running shorter than Hurst’s original nominal model for stocks. I have also looked at a longer term price analysis and have found cycles to average more or less the same, perhaps 14 months and 42 months periods for these cycles. Sentient seems to have a much easier time identifying these cycles, particularly when working non-US assets for the moment. So in the case of EWC, price broke below the 4.5 and 9 year Hurst cycle FLDs and is trying to bottom. Follow through here would imply a continued rally in the USD and a weak $TSX.
I would add that this phasing contradicts the phasing I had last Sept. The $TSX is likely heading into the next 40 week low soon and the first of off the 18 month low last October.
The next chart is XEG, the ishares $TSX Capped Energy Fund. The carnage has been terrific and there is real concern for some of the highly leveraged oil plays. If oil fails to head higher soon, say above $55, a retest is in the cards and it will have an impact elsewhere. Notice the bearish M-shaped price chart and lower high made last year. A full retest of the 2009 low looks likely sometime in the 2015. The break of the 4.5 year FLD targets 10.XX.
Weakness has spread to the financial sector where the Canadian Banks have corrected significantly for the first time since 2011/2012. When viewed in USD as traded on US markets, the correction looks more advanced than in $CDN charts. Nevertheless, Royal Bank for example has broken both its 4.5 and 9 year VTLs and is trading below its 40 week and 18 month FLDs, a trademark sign of a bear market. The Canadian Banks continued their declines to new lows despite the bounce in the $TSX. Weakness in Canadian Financials could continue until energy shares make a clear bottom.
What is unclear now is how much of an impact low oil prices will have on the overall Canadian economy and various TSX sectors. Non-bank financials such as insurance companies have not corrected very much. I would expect that over the course of 2015, we’ll see a negative sentiment that spreads to other sectors.
One market to watch though is the $DAX, and in particular the ishares ETF EWG. The German index is often looked to as a lead market to the $TSX. With a breakout to new highs in the $DAX thanks to ECB QE to infinity, does this suggest the $TSX will follow? Again I would defer to the USD priced EWG instrument for a signal. From a cycles point of view, EWG started its correction last year long before other assets and now the question is whether this is just a bounce to an important secondary peak, or a leading indicator for continued breakouts in other markets in general.
The interesting thing is that Sentient has marked the October low for EWG as a 9 year low (a very short 6 years at best in actual time). And again this is based on a revised nominal model as mentioned above. However this could have important consequences for markets if this phasing holds to be true. Unfortunately we won’t know for several weeks. As always, the markets are poised here to make an important move one way or another. And I learned my lesson last year and will not try to predict the outcome. But I will maintain that 2015 will prove to be volatile.