Recap: Week Ending October 10, 2014

October 13, 2014

Equity markets across the globe sold off for a second straight week as North American stocks continue their decline away from all time highs. Last week the largest decline was seen in the NASDAQ, which fell 3.88% on the week. The Toronto Stock Exchange Composite Index, TSX, did not fair much better losing 3.80% on the week. The sell-off in the US appears to be very two sided with a strong presence of both aggressive buyers and sellers. The Dow Jones Industrial Average has fallen over 4.3% since making new all-time highs back in the middle of September. With this being said, it has taken 15 trading days for the market to fall that amount. Comparing it to the TSX, which formed atop a 10 days sooner, has fallen over 9%. The action on the TSX appears to be much more one-sided than its US counterparts which are seeing volatile horizontal chop trade day after day. Even though the chop is not ideal to trade, it shows that there is still a strong presence of buyers in the market, and all is not lost for another push to the upside to make new all time highs.

The TSX has been pushed lower recently by a sell-off in both crude oil and gold. Both crude and gold are large components of companies listed on the TSX and have a high correlation with these securities. A lower price of gold means that the mining companies will not be able to sell their newly extracted gold for as much, pushing down profits. This move lower in many of Canada’s staple natural resources has caused a sell off in the TSX. Currently, the daily correlation between the TSX and West Texas Intermediate Crude, which is commonly referred to as the North American benchmark for oil pricing, is 0.84. The daily correlation between the TSX and the price of gold is not as strong, however, remains positive at 0.43. These positive correlations must be taken seriously as it is important to follow these commodities on their decent lower as they will pull the TSX down with them. On a technical basis, the TSX is sitting at 19 on the daily RSI, Relative Strength Index, indicating it is oversold. Values over 70 are considered overbought while values below 30 are consider oversold. It must be noted that the TSX had not seen the RSI at these daily levels since May of 2012 when the market bottomed at rallied almost 40% to make new multi-year highs.

The biggest news on the economic calendar this week was the release of US Federal Reserve FOMC minutes. The minutes noted that policy makers are looking for a “slow lift-off” from what many are calling a zero interest rate policy. Furthermore, the minutes stated that the policy makers are looking for a slow increase in rates. The dovish news from the FED sent equity markets higher on the daily, with the Dow closing over 275 points higher. The dovish notes were not able to withhold the market much longer as the sell off started up again Thursday erasing all gains made Wednesday.

This week is a shortened week on Canadian markets with the TSX being closed Monday for Thanksgiving. American markets will remain open. Canadian markets will open Tuesday as normal.

 

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