Canadian Stock Market Outlook for Tue Mar 10 2020
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Market Breadth Analysis as of the close of trading Mon Mar 9 2020
In the last Market Breadth Indicator article I wrote that the index looked like it was trying to hold onto 16000. At 16000 this would amount to a normal 11% correction. Instead as you can see in the chart below, the collapse of oil prices, which will have a definitely negative effect on the Canadian economy, dropped the index right below 16000 and below the important 15000 level. The selling was so intense that the index fell below the Lower Bollinger Band and closed well below it. This will push the 21 day to below the 100 day shortly for a second sell signal.
TSX Composite Index to Mar 9 2020
You can see in the chart that MACD has the worst reading since Oct 2008.
The collapse today is all about oil and it dragged down everything including the banking sector which had hung on fairly well. This is because the banking sector holds a lot of oil debt and defaults in that area will affect Canadian banks. While this might not be as bad for Canadian banks as the credit crisis was, banks will still be hard-hit depending on what happens in the oil sector. Coupled with declining interest rates, banks are going to show weaker quarterly earnings going forward. Another rate cut by the Bank of Canada will hurt the financial sector further. In my opinion that means there is no rush to jump into banking stocks. I think there will be plenty of time to nibble on the banking sector but to do this will mean selling put options out of the money and taking time to setup trades. For RRSP or RIFs where naked or credit put spreads can’t be setup, selling in-the-money covered calls can also be done.
Toronto-Dominion Bank Stock (TD)
All the banks were hammered today and I don’t think the selling is over but bargains are beginning to appear. A good example would be buy shares in TD today at the close for $57.38 an selling the $52 call strike for $7.00 For April 17. If the stock fell below $52, my cost basis would be $57.37 less 7 = $50.38. At $50, it would represent a 35% decline from the recent 52 week high and it places my trade in at long-term support. The annual dividend is $3.16 which at $50.38 works out to 6.2%. Depending on how bad the oil war gets and how low oil prices go, TD Stock could of course fall lower. But if it did, I would sell covered calls at lower put strikes to keep the trade bringing in income. The next support level in the stock is at $40 from back in 2011 to 2013. TD Bank is not the bank it was back then. It is bigger, better capitalized, has much higher earnings and a stronger balance sheet. I think $50 would be an amazing price to own the stock. These are the types of trades I am watching for and will work my portfolio into on a small scale, using small amounts of capital over the coming weeks.
TSX Composite Index Market Breadth Indicators
Volume today was the highest volume in over 10 years and according to Bloomberg, it marked the worse one day plunge and losses since the crash of October 1987. I was trading in 1987 and I must say, today did not feel like 1987. On that day more than 20% was lost in a horrific collapse that took down even preferred stocks.
Everything points to a bear market on the index tonight with 1095 new lows which is 11 stocks down to a new lows for every stock that made a new high.
Down volume was 95% and declining stocks came in at 91%. All of this is very bearish. It also means the index is deeply oversold.
TSX Composite Index Outlook
We should see a bounce on Tuesday but it won’t be any kind of end to the sell-off. There is more pain to come to the TSX but with that pain we should get some excellent opportunities to pick up stocks at levels that have only been this cheap in the credit crisis of 2008 to 2009.
I am watching for more trade opportunities as described in the TD trade above. I will not be rushing in though as there will be more opportunities ahead and probably at better prices. Patience will definitely be rewarded for further trades.
Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. Read the full disclaimer.
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