TSX looks bullish in spite of itself

I believe that the TSX 300 has better upside than the US markets over the coming 1-2 years. This may surprise a few of my readers. If you read this blog regularly, you know that I have long been concerned about Federal Governments fiscal policies.

Former Chief Economic Analyst for Statistics Canada Philip Cross warned us well before COVID that we would not be prepared for any downturn due to this rampant and frivolous spending. His words haunt us today. Fitch recently downgraded our credit worthiness for the first time in 30 years.

So, yes…There are challenges to my bullish TSX prognosis: Continued Federal spending decisions, growing COVID cases with corresponding lockdowns, and growing unemployment problems. But – there is an offsetting factor that should aid the Canadian stock markets. That factor is the relatively high presence of sectors in the  materials, energy and commodities space in the TSX 300 composite. While that weighting has shrunk a bit in recent years, the TSX 300 still weighs in at about 25% materials and energy, vs. less than 10% weighing within the S&P 500  index.

This chart of the TSX sector weightings, courtesy Siblis research illustrates the fact that, as a weighted composite, the poor performance of energy stocks has forced a lower weighting in the index. However, you will  note that as materials have performed well in the second half of 2020, so too has the allocation in the index of their weighting.

If you believe, as I do, that commodities are likely to continue to perform well on  a relative basis in the coming year or so, the TSX is the superior index to hold. Search my prior blogs for commentary on the energy and metals if you wish to see the technical analysis behind this thought. The cap-weighted nature of that index is such that, as energy and materials flourish, their weightings will continue to grow within the mix.

The chart below (CRB in black, vs TSX in red) shows us just how tied the TSX is to the commodity index. Note the correlation study at the bottom of the chart. This study suggests that, if anything, the related performance of the TSX to commodities has grown over the past two years, despite the reduction in weightings of the commodity stocks. I’ve circled the period since 2019 on the correlation line, which has largely remained above the “0” line over the period noted.

Lets take a look at the TSX index chart for technical clues to its future. You’ll note on the chart that the TSX is struggling at its old highs near 18,000. The index needs to break that level (it attempted to do so recently) – but remain above that level for at least a few weeks to confirm a potential outperformance.

 

Before you ask…

I’ll no doubt get a question on the C$ outlook given my bullish prognosis for the TSX, so I will answer it ahead of time here.

Below is the C$ chart. I’ve posted this chart in the past. The recent break of our loonie through the $0.77 zone suggests potential upside ahead. There is some former resitance that comes in near $0.84 that could present an upside target. However, (not shown), many of the momentum indicators I watch are a tad overbought on the short termed charts. It may be that we see a small pullback on the loonie (rise in the USD) in the coming weeks. So long as (roughly) $0.78 can hold, I would think that the loonie may hit the low $0.80’s…. eventually. This, of course, could be negated by a strong relative USD vs world currencies. That, or Canadian government policy (fiscal, monetary, and environmental) that remains so counterproductive that it offsets the potential upside revival the commodity sectors might offer. We shall see.

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