Investors’ market outlook has them seeking safety in U.S. dollar

Look to iShares CDN S&P/TSX Capped Financials Index Fund for a signal that Canadian stocks are due for a correction. When trying to gauge market outlook, financial stocks are a bellwether sector.

The flight to a safe haven by investors continues with the U.S. dollar taking centre stage. Over the past few months, many of the world’s currencies, including the loonie, have fallen sharply against the greenback. And the slide is likely to continue.

That’s the market outlook of Toronto-based Brian Hoffman, CPA, CA, and a member of the Canadian Society of Technical Analysts. Writing in Investor’s Digest of Canada, Mr. Hoffman continues:

That’s because whenever there’s trouble, investors flock to the perceived safety of the U.S. dollar. And given the turmoil that now grips much of the globe, the greenback may very well become this year’s best-performing investment.

Remember how investors pushed up the U.S. dollar during the 2008 market meltdown?

But the dollar’s strength doesn’t mean that U.S. stocks and bonds will continue to do well this year. What it does mean is that the greenback will likely attract a lot of attention if the market becomes unstuck.

Sure, U.S. treasuries have done extremely well over the past few years as bond yields have reached a generational low point. But the bond bubble, combined with U.S. dollar strength, foreshadows trouble in financial market outlooks.

Keep in mind that despite massive rounds of quantitative easing, economic growth almost everywhere is now anemic at best.

Moreover, another financial crisis could unfold — worse than in 2008 — since conditions are even direr this time around. That’s because the debt deleveraging process only went so far in repairing financial conditions for households and governments.

Debt levels are high

Many nations, including the U.S., are now deeply in debt, while household finances remain stretched, to put it mildly. In the interim, institutional investors are growing skeptical that central bankers can successfully navigate their respective economies through the next crisis.

Then, too, governments in the developed world seem more concerned with being re-elected, than with taking measures that will be of benefit over the long term.

As a result, politicians continue to kick the proverbial can farther down the road, putting off making the hard choices about debt, deficit reduction, tax increases, as well as almost anything else that might spell death at the polling station.

But back to equities. Despite some increased volatility, North American markets have marched forward — more so in the U.S. than in Canada.

Still, there are some key support levels investors need to pay attention to.

U.S. stocks have powered ahead with the S&P 500 setting a new all-time high in February. But a pullback should be expected and the first level of key support rests at 2,000 followed by 1,900 and, then, around 1,820.

Moreover, a breach of all three support levels would bode ill for America’s stock market outlook.

End is nigh

With the end of the seasonally strong half of the year almost upon us, we’ll see how U.S. markets fare over the next few months.

In Canada, the S&P/TSX Composite, after some initial weakness in January, bounced higher off a very oversold level — particularly in financial services and energy.

Although the index has now neared the all-time high that it reached last summer, it found some resistance near the 15,200 mark in February when the shares of financial institutions and commodity producers once again came under selling pressure.

The first level of support exists at 14,250, followed by excellent support around 13,600.

Depending on how the spring plays out for Canadian stocks, the market outlook for a correction of some sort could be lurking around the corner.

ETF could flash warning

For a warning signal, watch the price action of the iShares CDN S&P/TSX Capped Financials Index Fund (TSX─XFN), an exchange-traded instrument that tracks Canada’s big banks and insurance companies.

After steadily trending higher for more than two years, the fund is now trying to find support near $29 a unit. A breach of that level could reveal an extremely bearish stock market outlook— particularly since financial services are generally the sector that starts to cower when the bear starts to emit a growl.

On the other hand, the sector could resume its bullish trend should the fund push through its resistance level of $33 a unit.

Over in the oil patch, there was a strong bounce from a deeply oversold level, although in February, prices for crude again found themselves under pressure.

Yet, a test of oil’s January low — around US$43.50 a barrel — now looks like a distinct possibility. Moreover, a breach of that level could bring about a further free-fall in petroleum prices — perhaps to as low as US$30. But hey, at this stage, anything is possible.

Metal ran out of steam

In the precious metals column, prices for gold bullion rose to just above US$1,300 an ounce in January before running out of steam.

To improve its technical market outlook, gold needed to move to US$1,400 an ounce. Instead, toward the end of February, it was treading water around US$1,200 an ounce.

Over the next few months, a move lower for gold is likely, given its weak technical price. Watch for a breach of support in the range of US$1,130-US$1,150 an ounce, which could set the stage for a price drop to US$1,000 or even lower.

Should this happen, it would be a tough time for gold and silver producers until the return of seasonal strength around May or June.

Nonetheless, a washout in the share prices of precious metals mining companies could mark the turning point of their bear market.

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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