Are Canadian Bank Stocks a Good Buy Right Now?

November 17, 2023No Comments

Are Canadian bank stocks a good buy right now? Is now the right time to buy Canadian bank stocks?

Hello and welcome once again to the Smart Money Dumb Money Show. I am your host, as usual, Keith Richards. I’m President and Chief Portfolio Manager at ValueTrend Wealth Management and I am a technical analyst. Today we are going to answer a question that we get relatively frequently here at ValueTrend, both from clients and just interested followers of my blogs and videos. And that is:

Are Canadian bank stocks A GOOD BUY right now?

I’d like to try to answer that question through my typical tool, which is the charts because in the end, price is all that matters, isn’t it? It’s nice to own something that’s of value, but if it ain’t making [00:01:03;25] you money, it’s not doing you much good. So, let’s go right to the charts. I put together a number of charts on, which I’m sure many of you watching this video do use yourselves.

I want to start off with the BMO Equal-Weight ETF. Now, somebody’s going to mention this before I do if I don’t mention it, so I’m going to mention it myself, which is banks have high dividends [00:01:33;25], and because of those dividends, it distorts the prices. I’ve discussed this on a couple of blogs and on our recent ‘Ask Us Anything’ blog where people ask, “Well, why does StockCharts distort the chart by adding in the dividends and whatnot?”. There’s also an adjustment they make for stocks and it kind of screws the chart up a little bit, it distorts it.

In order to not distort [00:02:00] the chart, you can go to the left-hand side like I am with the BMO Equal Weight Index and I’m just going to put a little underscore here and take a look at the chart right now and then watch what happens when I click this.

You see how the move was actually quite a bit lower when the dividend was not added back into the stock price, okay? So, whatever the case, the banks, whether we want to look at the extent of the breakdown without the dividend [00:02:33;25] helping it out or just on a raw price basis, which we’re doing here. The banks in Canada have been the dog’s breakfast, they have been in horrible shape. And so I guess that does bring in the question:

Are they an undervalued stock situation? Has the move gone too far?

Well, I don’t like seeing breakdowns and this level of support on the banks at around $32 with the BMO ETF, it was broken and [00:03:00] it had not been broken for well over a year – in fact about two years almost – and then suddenly it broke. So, it is now rallying and trying to get back into that $32 level.

I’m only going to say that from a technical perspective unless this ETF (and the banks in general as we will be looking at in a moment), unless they start moving up and break back into that old trading zone, which in the ETF’s case was [00:03:33;25] between $32 and $36 as you can see on the chart [00:03:36;25]. Unless that happens, I don’t think I’m much interested in the banking sector with a few exceptions and that’s going to be kind of the topic for today.

Are all the banks the same?

Let’s take a look. [00:03:52;25] First of all, I did want to quickly give you a picture, so I’m going to flip forward a little bit to the TSX. So, what we’re looking at here is TSX. Again, from this point on, I’m not going to use that underscore to take out dividends just to keep things simple because the relative look of the charts stay the same even though the extent of the moves changes when you add in dividends, whatever the case, the TSX has been trapped between about 20,500 or so. I think it’s actually 20,600, but whatever.

And on the low side it’s been [00:04:33;25] about 18,500 or so. And you can see recently it touched near that 18,500, it was closer to the 18,600 area and then it has bounced up about halfway of its trading range. I do think as Ed mentioned in past videos that the TSX has the chance of getting back to that 20,500. So, because the banks are 30% of that index, the banks are going to have to help do some of that lifting, aren’t they?

TSX Composite Index TSE November 7, 2023 11:50 am
TSX Composite Index TSE November 7, 2023 11:50 am

Considering the current market conditions, are Canadian bank stocks a good buy right now?

Let’s take a look at the individual banks.

Bank of Montreal

So, [00:05:00] let’s take a look now at the individual banks and I’m going to jump right to the Bank of Montreal. Now, several of the banks look the same as the BMO ETF Index that we were just looking at. When you look at Bank of Montreal, when you look at Royal Bank, Bank of Nova Scotia, these names as we’re going to see kind of look the same, but there’s a couple of names that I’m going to show you that don’t look the same and they’ll be mixed into these charts. I want you to keep a sharp eye. So, once again, you’ve [00:05:30] got the breakdown by Bank of Montreal in this case below support.

Are Canadian Bank Stocks a Good Buy Right Now - BMO S&P/TSX Equal Weight Banks Index ETF TSE November 7, 2023 11:25 am
BMO S&P/TSX Equal Weight Banks Index ETF TSE November 7, 2023 11:25 am

Now again, if you did the underscore on the left-hand side, you’d see that the breakdown is even worse than it looks on this chart because the dividends have supported this stock to some point. Whatever the case, the chart is trying to get back into the trading range, it’s brushing up against old support probably if we did the underscore. In fact, let’s just prove my thesis here, [00:05:60;25] let’s do the underscore and update it and I think we’ll find that it’s not testing the old level of support.

In fact, on this chart, you can see the lows were getting a bit lower each time.  So, it was a bit more of a downtrend than a flat range. Whatever the case, I needed to take out the last low and even better the last high, but certainly the last low before I would become interested in this stock. So, at this point, the Bank of Montreal does not look so good.

Alright, so back to the non-adjusted chart. [00:06:33;25] In other words, including the dividends.

Bank of Nova Scotia

So, let’s look at Bank of Nova Scotia. Same idea. The dividend has not helped it much and it’s struggling to get back into the lower end of that trading range. Until it does break through it, I wouldn’t want to be buying this stock. Very much like the ZEB, I don’t want to be buying the ZEB right now because the bank sector in general is controlled by a few major banks that all kind of look the same.

Canadian Imperial Bank of Commerce

[00:07:03;25] Here’s CIBC, same picture, isn’t it? I mean level of support broken, trying to get back into the zone, hasn’t done so yet.

Are Canadian Bank Stocks a Good Buy Right Now - Canadian Imperial Bank of Commerce TSE November 7, 2023 11:38 am
Canadian Imperial Bank of Commerce TSE November 7, 2023 11:38 am

Now, I maybe stop here and say that there’s no reason why they can’t get back into the trading range and perhaps I’ll take this moment to take a quick look at the seasonals.

BMO S&P/TSX Equal Weight Banks Index ETF Seasonality (Timeframe: 13-Year range ending 12:31/2022)
BMO S&P/TSX Equal Weight Banks Index ETF Seasonality (Timeframe: 13-Year range ending 12:31/2022)

So, seasonals aren’t everything as we all know. They’re a tendency, not a rule, but you can see that through [00:07:30] October, November into December, you can have some seasonal strengths. We saw a little bit of a bump there as you saw through October, and maybe we get some more bump through November at the point you’re watching this, it should be about mid-November.

We could see a reprieve, but then more upside basically from the end of January into the spring. So, there is some potential for the banks to break into their old trading range [00:08:00] if the seasonals play out between now and March as they have as a tendency. So, CIBC, would I buy it today? Absolutely not. I don’t buy when something’s broken support. I wait. Patience.

Canadian Western Bank

I want to look at one of the banks that is my favorite in the group: Canadian Western Bank. I don’t own this stock, but Craig and I are examining it right now for a possible move. You can see this chart is [00:08:30] on the same scale, it’s in the same timeframe as the other charts we’ve looked at so far. And yet take a look at the difference here, It is literally forming a base and it’s forming a neckline.

Are Canadian Bank Stocks a Good Buy Right Now - Canadian Western Bank TSE November 7, 2023 11:34 am
Canadian Western Bank TSE November 7, 2023 11:34 am

Heck, let’s do the old, let’s take out the dividend exercise and take a look.

And there we are. It’s right at the neckline. Can you see that? There’s a neckline around $29 on this stock. It’s $28.57 as I record this on the 7th of November. You’re probably watching this a week later. Maybe [00:09:00] it’ll break out by then, maybe it won’t, I don’t know. But the point is that this stock, if it does break out, has tons of upside.

The old support levels around here, $35 could be seen again and that would be a good move. $29 to $35. Pretty nifty return actually about 20%. So, I’m not saying that’s going to happen – so do not read that into my comments here – this is not a buy recommendation, but certainly it’s one I’m watching and I might take a small piece. Remember, you can see [00:09:30] a failure, it could break out of the neckline and then fail, go right back in.

That is the nature of the game. And so, you leg in, you move a bit at a time, but if this stock does break out, then it’s probably an anomaly amongst the Canadian bank names. Why? Because it’s got a concentrated market in the western part of the country and for whatever reason (I’d have to talk to Craig) that seems to be helping it versus the look of the other banks.

Okay, so [00:10:00] I’m just going to flip through. We looked at Bank of Montreal, Bank of Nova Scotia, CIBC, and Canadian Western Bank. Let us take a look at the other kind of ‘tier-two’ bank, which is Laurentian.

Laurentian Bank of Canada

And Laurentian has a swing pattern. Now, for long-term investors, this is a horrible stock to own, but for swing traders, this is probably pretty interesting. Again, high risk/high return, you’ve got to keep that in mind. But look at Laurentian’s pattern. I mean [00:10:30] somewhere around 40 as a lid and, it really, you know, has kept to that.

Are Canadian Bank Stocks a Good Buy Right Now - Laurentian Bank of Canada TSE November 7, 2023 11:31 am
Laurentian Bank of Canada TSE November 7, 2023 11:31 am

There was 38 back in 2019 and it kind of kept to that 38 to 40 range for much of the past three or four years. That’s great news. [00:10:45] It’s right at the bottom of the range, which seems to come in. You can see COVID Lows brought it down to around 23, but probably the biggest cluster you can see here, which is around where it is right now, around $26. Boom, boom. And here we are again.

Are Canadian Bank Stocks a Good Buy Right Now? Here are the Momentum Indicators

So, [00:11:00] if we look at some of these momentum indicators: this is Money Flow Index where you’ve got a very oversold Money Flow Index. The momentum of money flow coming into this stock has been way underdone you could say. So that means often you’ll get a turnaround. In fact, the Money Flow Index is a pretty darn good indicator for finding peaks and troughs and it found a peak year right on schedule, but it found a trough right now. So I’m kind of convinced that this might be a candidate to watch for swing [00:11:30] traders.

This is Force index. I’ve talked about this before. It’s just a combination of volume and price momentum and it’s showing us that it’s got pretty oversold. You’d want to see this swing up some more, but it is showing that it’s oversold. And again, Rate of Change. Now this is Rate of Change on a very big scale. So, it’s really looking back 240 weeks. That’s a pretty big period.

I like looking for the big possible moves. You can see a big possible move there and you [00:12:00] can see that its oversold. Problem is it hasn’t hooked up. See, that’s a hook when it’s like a ‘V’ shape. When you start to see a move up like that, then you have confidence that the move is actually happening. It’s not happening yet. So, I’m giving you kind of a heads-up on this. Keep an eye on Laurentian, but it could be interesting for swing traders. Definitely not for buy-and-hold people and you know your stop. If it breaks 25 let’s say, get out and you’ll take your losses and you’ll move on. That’s just the way you have to think [00:12:30] with swing trading stocks.

National Bank of Canada

Are Canadian Bank Stocks a Good Buy Right Now - National Bank of Canada TSE November 7, 2023 11:43 am
National Bank of Canada TSE November 7, 2023 11:43 am

[00:12:43] Okay, one of the other stocks that does not look the same as the others is National Bank. National Bank really didn’t put in that lower low. I mean in this cluster it did and it looks ugly, but it’s coming down to an area of support that it saw last year in 2022. So again, it’s a little different. I don’t like this chart so much, I just thought I’d show it to you. It’s still been very weak, which caused [00:13:00] the ZEB (the BMO Bank index ETF), to show weakness. It added to the weakness, but it’s still not necessarily as outright dangerous as some of the other charts we’ve looked at.

So it’s kind of an interesting one, although again, I don’t like it.

Royal Bank of Canada

Royal Bank looks the same as all the others. There’s the breakdown, and again, I’m not going to do the underscore, but you know that if we put the underscore and took out the dividends, this would be even [00:13:30] worse looking.

Alright, so Royal Bank looks the same as CIBC, which looks the same as Bank of Nova Scotia, which looks the same as, you know, Bank of Montreal, et cetera.

Are Canadian Bank Stocks a Good Buy Right Now - Royal Bank of Canada TSE November 7, 2023 11:44 am
Royal Bank of Canada TSE November 7, 2023 11:44 am

The big banks, the ‘Big Four’, are really looking horrible. But we’ve seen that a couple of the outliers, a couple of the tier-two banks, Laurentian and Canadian Western, are both looking kind of interesting. Aren’t they? From a trader’s perspective, anyways.

Toronto-Dominion Bank

The last one to look at [00:14:00] and it’s one that we own personally at ValueTrend is TD Bank. I hold it through the equity platform and so Craig and I both hold the platform. We, by default, own shares in this, so we have to disclose that. But, you can see that this stock has actually held its neckline. It’s $75 or so support level it has held. And, we bought it off of that level hoping for a swing up.

Are Canadian Bank Stocks a Good Buy Right Now - Toronto-Dominion Bank TSE November 7, 2023 11:45 am
Toronto-Dominion Bank TSE November 7, 2023 11:45 am

We’re just trying to get to here, like $85. Probably as [00:14:30] a new buyer, I don’t know if I’d bother at this point it’s $81. If we get our wish and we see $85, we’ll be out. That’s not much upside for a new buyer. Had you looked at it perhaps a month or two ago, you might’ve been able to pick it up in the mid-seventies and that might’ve been a bit more of a trade for you.

It’s kinda not a great risk/reward trade-off to only look forward to about 5% upside. And that’s what I am thinking it has left in it. Nevertheless, it does [00:15:00] look different than the others. Do you remember the Sesame Street game “One of these things are not like the others”? So, a couple of these stocks are not like the others and yet if you add them all up, it ends up looking like the BMO Index.

Alright, so there’s generally been weakness in the sector, but there are a few outliers. I always like tearing apart a sector whether I like the sector or I don’t, before I make any decisions.

So, food for thought… [00:15:30]  Are Canadian Bank stocks a good buy right now? I can only say that a few of them might be. They might be interesting for traders, they might be interesting for investors with a medium to short-term time horizon. But I don’t know that I’d be all over them as an index trade. And I don’t know that I would be all over them as a long-term buy-and-hold dividend trade because [00:16:00] I think they’re going to be pretty choppy.

Thanks for watching. Hope that helps.

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