The following Market Comment was published on March 24, 2015 – for subscribers only! To receive the latest Market Comment and stock ideas, please register for a free trial at http://www.na-marketletter.com
One of the key mechanisms of every bull market is sector rotation. Not only does it allow tired sectors and stocks to rest but also permits new leaders to emerge and carry the bull market higher. This time it’s no different.
For the last five months, while the U.S. indices have been reaching new highs, the S&P/TSX Composite Index has been locked into a horizontal trading range roughly between 13,650 and 15,300. During this time, we have repeatedly said that Toronto is most likely to come alive toward the tail end of this bull market, as it has done in previous market cycles.
Firstly, the S&P/TSX composite has been consolidating, or in other words building a base, for almost six months. The size and length of this formation could support a strong rally and a 16,500 target.
Secondly, the S&P/TSX composite has a heavy weighting in late-cycle performers such as Resource, Energy & Gold stocks. A strong rally in those sectors could have a positive effect on this index. All of these sectors suffered significant declines in the last few months and they could start a recovery rally. While Energy and Resource stocks lack solid base patterns, there are numerous Gold stocks with strong foundations that could support a significant up-move.
Thirdly, as this bull market progresses, some investors may start taking profits in Industrial and Technology stocks and looking for “bargains” in other areas of the market – Resource, Energy and Gold sectors could be the beneficiary of such a rotation.
Fourthly, the latest sentiment data shows investors are worrying about the longevity of this bull market. They not only view Resource stocks as a “lost cause” but anticipate further declines. It is music to our bullish ears!
Finally, a plethora of technical indicators such as the percentage of stocks above the 200-day moving average, rising 50-and 200-day moving averages, the MACD, to name just a few, point to better times for the Toronto index.
Only an abrupt end to this bull market and a decline below the 13,650 support would cancel the index’s bullish potential.
The S&P/TSX composite has spent the last six months in the waiting room of this bull market. With a strong technical base and heavy weighting in late-cycle leaders, the Toronto index has all the right ingredients to break the bullish monopoly of US indices. Its firm grip on the 15,000 level suggests the S&P/TSX has already set its sights on the recent all-time-high of 15,685.