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Toronto Trade Ideas: Financials XFN, Energy XEG

06/12/2017 2:57 am EST


Ziad Jasani

Managing Director and Partner, Independent Investor Institute

We see short-term merit in long Energy & Financials within Canada into the mid-point of this week. Sectors more likely to out-perform Financials (XFN), and Energy (XEG), asserts Ziad Jasani, Co-founder of The Independent Investor Institute, Toronto, in his weekly Trader video.

To hike or not to hike? That actually isn’t the question for Wednesday’s US Fed Policy Statement, as odd for a 25bps move are greater than 95%. The question is how Yellen will be able to keep on the path to “normalize” rates in light of the recent economic weakness (June 2nd Jobs number sorely missed forecast of 181K, printing 138K)? Will she introduce language to delay the market’s expectation for another hike in December 2017? And can she do so without lowering confidence in growth?

We see one of the below 2 polarizing (but high probability) scenarios playing out this week:

  • Dovish – Risk-On: US Treasury Yields rise, the USD strengthens, Equity Markets are led higher by Financials, Energy & Industrials. While Bonds, gold, the yen, Defensive Equity Sectors, and Technology under-perform.
  • Dovish – Risk-Off: US Treasury Yields pop ‘n’ drop, Equity Markets suffer higher volatility and are led lower by cyclical sectors including Financials & Energy, investors bid up the USD as a “safe-haven” trade, and we end the week at the beginning of a macro-market pull-back (-3% to -5%).

Our expectations for the week lean to scenario #2:

  • Global Equities iShares MSCI ACWI Index Fund (ACWI) start week with indecision tilted weak-form risk-off; with down-side risk of ~2.5% into week’s end
  • Defensives (Bonds, gold & the yen) start the week slowing in their declines from last week = holding up with indecision, but are overshadowed by USD strength as a “safe-haven” trade into week’s end
  • S&P 500 starts the week around 2,430 and closes the week below
  • TSX starts > 15,400, attempts a test of 50-Day Average (15,542) and finishes under
  • Oil is likely to drift between $46-$48 starting the week positively above $46, bouncing into mid-week and closing the week under $48
  • Gold starts the week indecisively as the USD rises, then bounces into the Fed on Wednesday and stays under $1,280 to end the week–still on path to test $1,251.

Global Markets Update: Global equity markets remain on up-trend formations from February 2016, and have broken/limped out to new all-time highs June 1 & 2. While US equities pushed out to new all-time highs (SP500 2,446) on June 9 but closed back under. A retrace to January 2016 primary trend line (-4.4% away for ACWI) is a more likely outcome versus new highs sustaining.

With markets stretched to extremes a correction (-10% to -12%) is plausible, especially if the US Fed keeps their current path of hikes (2 more in 2017) while US economic data softens (slower growth). We see the globe represented by ACWI now 1 Std. Dev. expensive on annual routines, with higher odds for a move to $64.92 this week (- 2%). This implies that the bulls have a struggle pushing much higher on the S&P 500, but there is some runway on the TSX with the expected bounce in oil towards the TSX’s 50-Day Average (50-80 points higher from June 9 close). Currently, a defensive posture is the highest probability decision with long-term capital and especially with short-term capital.

US markets update: This week starts after volatility in the Technology Select Sector SPDR Fund (XLK) left markets with an indecision candle under all-time highs (2,446.2).

Weak-form risk-off expected to start the week, with chasers in the Financial Select Sector SPDR Fund space (XLF), complimented by bounce-buyers in the Energy Select Sector SPDR Fund space (XLE) holding the S&P 500 up as we wait for Yellen’s policy statement on June 14. A drift down towards 2,415 or 2,400 would be par for the course only to be uplifted by another rabbit pulled out of the US Fed’s hat on Wednesday. If Yellen fails to present dovishly, we can expect a break below 2,400. If she’s successful, new all-time-highs are in our sights; likely led by Financials (XLF), SPDR KBW Bank (KBE), iShares S&P/TSX Capped Energy Index (XEG), Industrial Select Sector SPDR Fund (XLI) and Miners SPDR Metals & Mining ETF (XME)–while Technology XLK, Discretionaries Consumer Discretionary SPDR ETF (XLY), Utilities (XLU) and Staples (XLP) are more likely to under-perform. If support at 2,400 breaks, the most vulnerable sectors in order of downside risk are Technology XLK, Discretionaries XLY, Utilities Select Sector SPDR Fund (XLU), Consumer Staples Select Sector SPDR ETF (XLP), REITs Real Estate Select Sector SPDR Fund (XLRE), Financials Financial Select Sector SPDR Fund (XLF), and KBE, Mining Stocks XME, Health-Care SPDR S&P Biotech ETF (XBI), SPDR S&P Pharmaceuticals ETF (XPH).

TSX Update - Short-Term (Days-to-a-Week): With Oil readying for a bounce, and Energy Equities confirming swing-low-formations into the end of last week (June 9) we see the lifting off 15,400-360 on path to test 50-Day Average (15,542) this week, and attempting a test of resistance at 15,775-718 (+1.94% away). Financials turning up to test and poke above down-trends from late Feb 2017 is encouraging, however, Yellen’s June 14 policy statement would have to lean dovish and keep yields rising, a difficult task especially after weaker US economic data recently (June 2 Jobs number missed sorely printing 138K vs forecast of 181K).

We see short-term merit in long Energy & Financials within Canada into the mid-point of this week. Sectors more likely to out-perform this week are Financials iShares S&P/TSX Capped Financials Index ETF (XFN), Energy (XEG) Material Stocks ex-Precious Metals. While under-performance would be expected from Telecom, Staples iShares S&P /TSX Capped Consumer Staples Index ETF (XST), Utilities BMO Equal Weight Utilities Index ETF (ZUT), Tech iShares S&P/TSX Capped Information Technology Index ETF (XIT) and REITs iShares S&P/TSX Capped REIT Index ETF (XRE), Industrials BMO S&P/TSX Equal Weight Industrials Index ETF (ZIN) and Gold Producers IShares S&P/TSX Global Gold Index ETF (XGD).

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