“What are your thoughts on the resource driven market and specifically Canadian resource equities? Canada has been a relative underperformer for some time and the magnitude of the declines has increased recently. The recent round of fear in our market is causing me to get interested on the buyside. Your insight is always excellent.”
Eoin Treacy's view Thank you for your kind words and this question which others may also have an
interest in. The TSX is heavily dominated by Financials (31.75%). In fact it
is one of the only indices globally where banks still represent the largest
sector weighting. When Energy (24.8%) and Materials (19.35%) are factored in
they occupy more than 75% of the Index.
Therefore how these three sectors perform will dictate how the Index as a whole
Canada's banks are lauded as some of the world's best capitalised. Nevertheless, the country's high personal debt ratio and high property prices, particularly in Vancouver and Toronto are potential areas for concern. The S&P/TSX Financials Index (P/E 11.38, DY 4.2%) rallied impressively from the 2009 lows but has been ranging mostly between 1475 and 1800 since early 2010. The Index found at least short-term support three weeks ago and will need to hold above 1530 on the current pullback if the short-term bullish outlook is to be retained.
The S&P/TSX Energy Index (P/E 14.59, DY 3.45%) has returned to test the region of the 2011 and 2010 lows, but remains in a relatively consistent medium-term downtrend. While the probability that natural gas prices have bottomed continues to increase, oil prices remain in a medium-term downtrend. The Energy sector shares oil's chart pattern over the last year and a sustained move above 2550 will be required to break the progression of lower rally highs and suggest a return to demand dominance beyond scope for a short-term bounce.
The S&P/TSX Materials Index (P/E 12.68, DY 1.17%) has been trending lower for more than a year. It had become deeply oversold relative to the 200-day MA when it found support earlier this month near 2500. The subsequent rally at least partially unwound the overextension but last week's sharp pullback capped the short-term advance. The Index will now need to find support above 2500 if the bottoming hypothesis is to be given credence.
The S&P/TSX Index (P/E 13.08, DY 3.09%) has also returned to test the 2010 and 2011 lows. While it has paused in this region for most of the month, a clear upward dynamic is now required to confirm a return of demand in this area. While I share your interest in the market following its fall and the improvement in valuations I would prefer to see some concrete evidence of demand returning before making a bold statement.