I mentioned on this blog in September that, despite the possibility of the TSX reaching its old highs – I didn’t think those highs would be breached. The TSX high of just under 16,000 had not been cracked -in fact its been relatively flat since 1999…coming up on 2 decades! I felt that rising rates and the rampant introduction of anti-business policies of the current government would give trouble to the long term outlook for stocks, and thus eventually put pressure on the TSX index as it approached 16,000 again. Obviously, that assessment was incorrect – albeit it may not be in the long run…
Nonetheless – I stand corrected at this time. The TSX is through its old highs.
Having seen the breakout by the TSX 300, we debated if we should buy the TSX as a broad market play via the iShares TSX 60 index. The problem with that index is the 20% weighting in energy. Oil has technical resistance at current levels of $56. We didn’t want to own a broad index with so much exposure to oil in case it fails (as it has historically) from that mid-$50’s level. The BMO low vol. ETF is basically the TSX index with a filter for the lowest volatility stocks- and it has much less oil exposure. So we took a position in that ETF in lieu of a TSX index ETF—as noted on my Top Picks on BNN last week.
Again, we will buy an oil stock (or two) if oil does manage to maintain its break through resistance. I’d rather wait for that, and still be in the TSX via a low-oil exposure ETF in the meantime.
The case for oil may be getting stronger. Looking at the WTI chart below, you can see the point of resistance being tested.. Energy producers and service companies have been lagging the rise in oil. It is my belief that today’s breaching by WTI oil of $56 would be a significant reason to buy into that sector if, and only if, it remains above that level. Give it another 2-3 days, then we might have confirmation of an entry point.
Should that happen, the XEG chart below shows us that there is at least a few dollars to go before the next level of resistance on that chart. A breakout through that resistance point is probable in the event of oil moving higher when it it’s hit. In other words, the producers look like they have some upside in them, should the current breakout on the underlying WTI commodity remain in place.
Thanks as always Keith for sharing your insight. Are you aware of and can share any cycles in oil? It seems oil had a yearly cycle low in the summer and has been heading up since but I wonder if it’s due for another cycle low soon.
Wanda-I dont know of an oil specific cycle–but I can share this chart that I posted 3 years ago on a blog re the broad CRB commodty index: https://www.valuetrend.ca/commodities-are-trending-lower/
Basically, there is a 33 year average commodity cycle between peaks on the CRB basket. The trough in the cycle occurs about 1/3rd through it, so that means that after a peak, you would expect a trough 10-12 years later. Based on that cycle, the commodities basket was predicted to peak in or around 2011 —and it did-right on schedule! This implies a potential trough somewhere in the 2021 +/- a year or two.
The fact that oil is a big influence in that basket suggests that it may indeed follow this cycle.
If this is the case, expect counter-trend movements –eg right now oil could move up for a bit. But the bigger trend may continue to move down for another few years before the real bottom occurs.
Great information Keith. Thanks so much for the insights.
It seems to be to me that oil is somewhat speculative now. It has moved up. Do you think prior support levels should hold up? Would you think that some downside protection should be put on these positions? The oil price could likely move to $62 and the oil stocks would be expected to have a move with it. I believe that you think it could be a worthwhile trade. Thanks.
John–this is where my minimum 3-day rule comes in. We look at $56 as resistance. That $56 resistance broke on Monday (Nov 6). Today is the second day of the break. At time of writing, it has pulled back from $57 closer to $56. Will it hold? Give it to Friday and we shall see. If $56 holds, it increases the probability of the $62 resistance target. I will buy some energy stocks on that trigger–possibly Friday or early next week–but only if that vital $56 level holds to become new support. The energy producers have more upside than the commodity given their lagging performance. But its worth it to ensure that $56 holds for oil itself before buying producers.
Also, you can leg in a bit at a time. Eg–If you want a 10% position, consider buying 5% x 2 stocks or something like that.