View from Toronto: Trade Upside Momentum as Signals Appear

10/25/2017 4:20 pm EST

Focus: STRATEGIES

Ziad Jasani

Managing Director and Partner, Independent Investor Institute

Trade idea: If the S&P 500 reverses and breaks support at 2,565 and the TSX presents a swing-high under 15,850 closing most short-term long-side trades makes sense, writes Ziad Jasani of the Independent Investor Institute.

If Trump’s tax reform is not fully priced in, then this market can go higher – assuming no pushback from the House this week.

We’d also need to have a Dovish-Draghi (Oct. 26) to substantiate further upside.

The macro-market setup into this week suggests a mildly stronger USD and U.S. Treasury yields, complimented by a weak-form risk-on from Equities.

However, both the USD and yields are over-bought and under major resistance structures, more likely to move down and drag equities with them to begin a draw-down (-1% to -3%) at a global level.


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If said assets break-out above resistance, we can expect the S&P 500 (SPX) moving up to 2,613 in short-order, led by Financials, Healthcare, Industrials, Energy and likely Technology – with under-performance from Defensive Sectors, Bonds and Gold. The latter scenario is less likely than the former.

We can also look forward to no rate-hike from Poloz this week further weakening the CAD (FXC) and strengthening the US dollar/Canadian dollar (USD/CAD) pair to 1.27 or higher. Combining an expected equity swing-high (-1% to -3%) with Oil being dislocated and expensive and defensive assets on the cheaper side of annual routines…and the output of that equation = be in capital preservation mode!

Watch my market video here (Oct. 23, 11 am)

video

  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 – but ready for a dead-cat-bounce.

Financials (XFN-T) are dislocated and expensive and more likely to succumb to yield compression this week. The TSX is the most expensive market in North America on an absolute and relative basis.

We see no good reason to invest at this point, but are willing to trade the upside momentum as signals present.

Our expectations for the week:

  • S&P 500 is projected to open around 2,575-80 (all-time-highs) front end of the week, but swings-high into week’s end < 2,565.
  • The USD remains at top of basing range to start the week, softens into mid-week but holds support of basing range; with risk to the upside on Draghi not being dovish enough (Oct. 26).
  • The USD/CAD is likely to migrate to 1.27 or higher post no expected rate hike from Poloz on Oct 25.
  • Bonds & Gold are likely to provide a mini-bounce mid-week but start the week softer (TLT, GLD, SLV are trade-able when we see a swing-high in yields & USD).
  • The TSX starts the week around 15,850, and attempts to move towards 15,943 (all-time-highs) but fails. Oil starts the week positive but fails to hold above $52.50, causing a drag mid-week; a retest of support at 15,400-360 is realistic – Energy & Financials are likely responsible for the ↓move
  • S&P 500 starts the week > 2,570, attempts to move to a projected line of 2,582, fails to hold above and gives us a swing-high with risk of -3%.

Short-term strategy this week

  • Use price strength to trim mid-to-longer-term positions as the S&P 500 rises to 2,582 – 2,613 projection levels.
  • Short-term risk-capital only to play a grind higher above 2,575 on S&P 500 and above 15,850 on the TSX in the following spaces: Discretionaries, Telecom, Staples, Utilities, REITs.
  • Note: If the S&P 500 reverses and breaks support at 2,565 and the TSX presents a swing-high under 15,850 closing most short-term long-side trades makes sense.

 See my full weekly report (Oct. 22) here:

report

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