Recap: Week Ending November 7, 2014

November 8, 2014

Equity markets closed the first trading week of November on a higher note with almost all North American indices closing in the green. The continuation in bid activity comes as the Dow Jones Industrial Average rallied almost 11% in the past 17 trading sessions to make new all time highs. Similarly, the S&P 500 has rallied about 11.5% since making lows in the middle of October when it appeared that a major selloff was in the works. Despite the upside seen this week, it must be noted that both the Russell 2000 and NASDAQ 100 indexes closed flat to negative on the week. Both of these indexes have led the market lower and higher in recent months. With the lack of participation in these markets, many investors and traders are going to be watching these two equity indexes closely next week to see if the divergence from the other major indexes continues. If such action continues, one can only expect a stall in the current upside activity which the market is experiencing.

Unlike its American counterparts, the Toronto Stock Exchange Composite Index, TSX, has rallied just over 7% since making lows on October 16. The TSX has seen a real beat down this season as the price of crude oil continues to fall. Crude has a direct correlation with the TSX as many of the companies traded on the TSX produce or refine oil, making a fall in prices a negative for the Canadian benchmark index. On the flip side, transportation companies such as Air Canada have fared relatively better as the price of gasolines fall, increasing their profits. With this being said, the number of energy related companies on the TSX dwarf those who benefit from lower costs of fuel, resulting in a sell-off of the TSX. The price of oil has been taking a hit recently as production at refineries in the US are operating at historic high levels. This is not good for the price of oil as more supply makes a decrease in prices. Since the US is producing at such high levels, the demand for oil from Saudi Arabia has decreased. This has caused many Saudis to become unhappy; as a result they have offered oil at lower prices in an attempt for North Americans to purchase their oil from them. This strategy will in turn work as the cost of production of oil is Saudi is extremely minimal and is believed to be one of the lowest in the world. On the flip side, the US cannot afford to produce oil at such levels. It appears that Saudi oil companies are attempting to push the price of oil to levels where it does not become economical for the US to produce, making many flock to the Saudi oil market. Many believe that this level in the US will be between $65 – 70 a barrel of oil. It will be important to watch these levels as the market drifts lower slowly toward these zones where a possible bounce may occur.

This past week the key highlight on the economic calendar was the release of the unemployment rates in both Canada and the United States. The rate ticked down in both countries to 6.5% and 5.8% respectively. This caused a bid market in both countries with both the Dow Jones and TSX closing around their weekly highs. It appears that the market is back to basics when it comes to a good economic number being bullish instead of bearish which was seen in recent times regarding talks about a rise in interest rates.

DeGroote on Facebook DeGroote on Twitter WMA LinkedIn