Recap: Week Ending January 15, 2016
Equities around the globe traded lower last week as a selloff in China, and a weak price of oil continue to weigh on the markets. The sell-off last week marks the third straight weekly decline for stocks. Last week the tech-heavy NASDAQ 100 led the way lower for equities in the United States, closing down 2.17% on Friday to settle at 4,141.08. The S&P 500 was one of the better performing indexes, closing the week down only 2.17% as it settled at 1,880.33 on Friday. The selloff in equities is nearing the 10% mark. A downturn of 10% is considered by many to be a level where markets commonly correct themselves and the selling slows or reverses. Like in weeks past, fears out of China have cast a dark cloud over US markets. Last week the Peoples Bank of China or PBOC attempted to reduce speculation in their currency the Yuan. As a result of such actions the offshore Yuan liquidity tightened and subsequently the overnight Hong Kong Interbank Offered Rate to 66.8%. Such actions sent fear throughout the Chinese markets as the Shanghai Composite Index lost 9% last week. Such fears spilled over into US markets where equities subsequently sold off. It must be noted that the Shanghai Composite has sold off 18% so far in January alone. The selloff in China also had effects on the price of crude which sold off heavily last week once again. Last week the price of NYMEX crude hit multiyear lows once again, falling $2.20 or 6.69%. On Friday crude closed the week at $30.68. The move lower in the price of the energy product can be related to fears of weakened demand out of China as well as the belief that Iran will begin exporting crude. Due to sanctions Iran has been unable to export crude; however, many believe that over the course of the weekend such sanctions will be lifted. Iran has stated that when these sanctions are indeed lifted they will begin exporting crude, flooding an oversupplied market even more. The market has been pricing in this event for the past six months, and the event is believed to be already valued into the price of the oil especially after the fall last week. With this being said, the selling in crude did without a doubt spill over into equities as a positive correlation between equities and crude still exists.
The Toronto Stock Exchange Composite Index, or TSX, was hit especially hard by a falling price of crude with the Canadian benchmark index falling 371 points or 2.99% last week. The TSX has fallen for the past three weeks straight as the price of crude continues to tumble. From a technical analysis standpoint, the TSX is currently beginning to enter the oversold territory on the weekly timeframe in the RSI or Relative Strength Index. Reading below 30 on the RSI are considered oversold while readings above 70 are considered overbought. Currently, on the weekly timeframe, the TSX has an RSI reading of 31. With this being said the MACD or Moving Average Convergence Divergence indicator is widening, forming divergent signals. Currently, the MACD line is moving away from its moving average, signalling that more selling is to come. The last time which such indicators provided conflicting signals was in the middle of August of last year, and the market subsequently fell 15%. It will be important to see if the actions of such indictors repeat once again and more downside occurs.