(10/17/17) View from Toronto: Watching S&P Climb as Bond Yields Dip

Trade strategy: Use price strength to trim mid-to-longer-term positions as the S&P 500 rises to 2,575 projected level and as the TSX attempts a retest of highs at 15,943, writes Ziad Jasani of the Independent Investor Institute.

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“Are Q3 earnings enough to float the boat?” With Trump reaching across the aisle on tax reform, North Korea held at bay by “diplomacy,” the ECB looking for palatable ways to extend their QE, and China still running their money-printing presses feverishly, the Bulls continue to have the advantage.

However, Q3 earnings have presented less future optimism (so far). When combined with highly over-bought markets, this backdrop makes us climb a wall-of-worry, looking carefully for fractures that lead to a draw-down (-2% to -3%).

Most short-term technical tools suggest a draw-down of -2% to -3% is a high-probability outcome over the next week globally, wherein the TSX, Russell 2000 (RUT) and emerging markets under-perform as the USD bounces.

If the S&P 500 (SPX) finds itself below 2,550 this week, we are likely starting said draw-down, which implies the TSX moves towards 15,400-360 (Support), and the culprits are likely: Financials, Energy, Healthcare, Industrials and Technology.

In the interim we continue to profit from our Bond, Gold/Silver and Defensive Equity Sector Trades picked up late September 2017, but are trimming even those positions.

This week we’ll be focused on trades in the USD (UUP, DLR-T), and setting up high-probability inverse trades like RWM, PSQ, SH, EUM, FAZ, VXX and potentially DUST/JDUST, while managing downside risk on our longer-term holdings.

We have a small pocket of time to play long on Energy (XLE, XEG-T) we transacted this into the close October 13; we’ll be managing this with kid-gloves.

The Canadian market (TSX) finds itself highly over-bought and presenting as if a “new-normal” is beginning. Without Oil tearing higher into the mid-$50s it’s hard to substantiate current prices, especially as Energy Equities (XEG-T) have gotten dislocated and expensive on all short-term routines and broken short-term up-trends.

Financials (XFN-T) are inches away from resistive structures (highs) that are more likely to hold as bond yields are tilted downwards. The recent “uber-positivity” in Canada has been incongruent with the U.S. and global markets, leaving our market dislocated and expensive vs. the world. We still see no good reason to invest at this point, but are willing to trade the upside momentum as signals present, and vigilant for signs of a pull-back.

Our expectations for the week

S&P 500 remains close to or slightly above all-time-highs front end of the week, but fails to reach its next target of 2,575 and closes the week below 2,550.
The USD faces a hang-over from the October 13 CPI miss, however, attempts a bounce to top-end of basing zone mid-week onwards.
The USD/CAD is likely to hold above support of 1.24 and attempt a bounce up to resistance of 1.25 mid-week onwards.
Bonds & Gold are likely to hold-up front end of week but give us a mini-swing-high mid-week onwards; trade-able but not investable.
The TSX starts the week above ~15,775, attempts to move towards 15,850, fails to break above, as Oil & Gold move lower into week’s end; retest of support at 15,400-360 is realistic – Energy, Financials & Industrials likely responsible for the ↓move.
S&P 500 starts the week > 2,550, attempts to move to a projected line of 2,575 but is stunted as Bond yields tilt downwards and investors prefer fixed income.

Strategy this week

Use price strength to trim mid-to-longer-term positions as the S&P 500 rises to 2,575 projected level and as the TSX attempts a retest of highs at 15,943.
Short-term risk-capital to play a grind higher above 2,550 on S&P 500 and above 15,775 on the TSX in the following spaces: XLY, XLK/IYW, QQQ, EPI, EEM, EFA, FEZ, BCE-T, XLP, XST-T, XLU ZUT-T, XRE-T, XLRE, VNQ, TLT, XBB-T (XLE, XEG-T if Oil >$51).
NOTE: If the S&P 500 reverses and breaks support at 2,550 and the TSX presents a swing-high under 15,775 closing most short-term long-side trades makes sense.

See the video Market Strategy session recorded October 16 here