View from Toronto Video: A Bounce on TSX with Defensives, Financials

01/30/2018 11:16 am EST

Focus: MARKETS

Ziad Jasani

Managing Director and Partner, Independent Investor Institute

This week we are expecting a bounce on the TSX from 16,239  to ~16,350 wherein trading positions long Defensives, Financials and potentially Energy is our strategy. More from Ziad Jasani of the Independent Investor Institute, writing and videocasting on Monday.

View this week’s video commentary here, recorded Jan. 29:

video

The Canadian market closed last week (Jan. 26) with a dragon-fly doji, implying a positive start to this week, couched in a strong risk-on move for equities south of the border.

The TSX remains stretched to expensive on 52-week direct price routines, however, it is dislocated and cheap versus the S&P 500, which implies the TSX has a better chance to outperform the S&P 500 (front-end of the week), but this will rely on Oil holding above $65 and the Canadian dollar softening up (both likely).

chart 1

The TSX remains above its 50-day average as investors and traders remain on the ready to buy bounces; but a break and implied close below 16,160 (50-day average) would imply closure of any positions picked up as the TSX would be pointed to 15,943 or lower (15,775-718 Support).

Oil has a better chance to see inventory builds this week, keeping speculators at bay, while Energy Equity (XEG) traders attempt a weak-bounce for the space, mainly on $CAD weakness. Using the equal weight ETF ZEO makes more sense to play bounces as it presents dislocated and cheap versus the larger caps.

Risk in this space remains high.

chart 2

Canadian bond yields are more likely to remain neutral to last week or compress. This condition is supported by recent inflation data (CPI) missing forecast, and is likely furthered by a month over month GDP print that likely misses consensus.

Hence, defensive interest rate sensitive sectors (Utilities, REITs, Telecom, Staples) have a better chance to continue forward in their nascent swing-low formations.

We maintain the Hold-To-Buy decision on ZUT, ZWU, BCE, XST, and Hold is maintained on XRE. Despite a flatter yield curve, Financials (XFN, ZEB) have a better chance for a stronger bounce than Energy plays (XEG).

Why? The largest sector (Financials) of the TSX has a better “trading-setup” than most other spaces, that likely curries favor with the retail money flowing into markets. XFN or the insurers (MFC) have a fair chance for a channel bounce.

The Materials Sector (XMA, XGD) is likely caught in a tug-of-war this week driven by a stronger USD that pressure down precious metals and materials, but a weaker $CAD that “re-flates” the space. We recognize the dislocated and expensive condition of this space and the underlying, keeping us on the Hold-To-Sell side of decision making. However, if Gold is able to sustain above $1,355, our viewpoint would change.

This week we are expecting a bounce on the TSX from 16,239 (Jan. 26 close) to ~16,350 wherein trading positions long Defensives, Financials and potentially Energy is our strategy (potentially = XEG remaining above $12.33).

The Cannabis space (HMMJ) is also likely to attempt a re-test of recent highs.

Failure for the TSX to bounce resulting in a close below 16,160 would be short-to-mid-term (days-to-weeks) bearish for the TSX, creating a potential re-test of the 200-day-average (15,613 roughly -3.85% away).

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