IS THIS A SHORT SQUEEZE OR A REAL RALLY?
Something in the air is different for equity fund managers in Canada. Just a few months ago, most weren’t touching Canadian stocks, as dark clouds hung over the country’s economy. But now managers are starting to lean bullish.
A rally in the loonie, a bounce in commodity prices and a relatively robust earnings season has managers buying. The past month, the S& P/ TSX Composite Index has jumped 11 per cent, while the loonie is up four per cent against the U.S. dollar.
The question now is whether this is part of a new bull market for beaten-down Canadian stocks or merely a short squeeze. Investors amassed large short positions against Canadian stocks in 2015, which turned out to be an incredibly profitable play.
With t he recent rally, many of the shorts have been forced to buy stocks to cover their positions, especially if they bet against the banks ( up 13 per cent in the past month) and mining companies (up 30 per cent).
While the shorts are certainly getting squeezed, fund managers say there are signs Canadian stocks have fundamental momentum to rally further this year.
“You’ve got the valuation fuel for a real rally and you’ve got the short-term fuel for a shortcovering rally — every bull market starts with short covering,” said Jason Mann, partner and chief investment officer of Edge Hill Partners.
The TSX recorded its longest winning streak since 2014 this month, posting an eightsession climb on the back of higher oil and metal prices. Crude has seen its value surge more than 40 per cent this year, with the cost of a barrel of oil rising 1.7 per cent to US$38.50 Friday on the New York Mercantile Exchange.
Some of the biggest gainers thus far were among the biggest losers in 2015. Mortgage lender Home Capital Group Inc., which was one of the most shorted stocks last year, has surged 35 per cent. Crescent Point Energy Corp., the largest player in the Saskatchewan Bakken, has rebounded 27 per cent in the past month after sliding 40 per cent last year.
“The sectors t hat did worst last year are leading the charge,” said Mann.
Martin Roberge, analyst at Canaccord Genuity Corp., notes that the breadth of the rally has been “spectacular,” with 83 per cent of stocks trading above their 50- day moving average — the highest percentage on record.
But not all investors appear convinced that Can- ada’s market is in a spring thaw. Roberge notes that speculators have actually increased their short positions on Canadian stocks during the rally, with 22 per cent of the iShares S& P/ TSX 60 Index Fund now being shorted.
Short interest in Canadian banking stocks has also increased in that time, jumping to four per cent of total shares. Roberge said, however, that a short squeeze might be underway in banking stocks as well, as the group has moved above its 200-day trading average.
David Baskin, president of Baskin Wealth Management, is one of the bigger Canadian market bulls now, forecasting Canada’s stocks will benefit immensely from a cyclical shift in the coming years.
“Our view is that the Canadian market could go up 30 per cent before it approaches being fully valued,” he said. “It’s not going to happen tomorrow, but I’ve got no problem buying stocks today. There’s just lots and lots of stuff to buy.”
The market, however, will likely have to contend with strong short pressure once again this year. International investors continue to eye Canada’s housing market, particularly Toronto and Vancouver, as potential bubbles ready to burst. The particularly high debt of households is another area of concern where short sellers see opportunity.
The Canadian economic picture remains challenged. Statistics Canada said Friday that the unemployment rate in February ticked up 0.1 per cent to 7.3 per cent, the highest level in three years. Economists warn that rate is likely to continue to increase this year as layoffs in the energy sector pile up.
Beyond the oilpatch, there is some gathering momentum. The Bank of Canada says evidence shows nonenergy exports are picking up and the U.S. recovery remains “broadly on track,” which will serve to benefit Canada.
If the Canadian economy’s non- energy segment continues to pick up alongside a rebound in commodity prices, the recipe could be enough for an even bigger market rally this year.
But the Canadian stock market has seen a few bear market rallies in the past year. Bounces followed last April’s correction and August’s bear market retreat, mostly spurred by short covering, before stocks started trending lower again.
Still, fund managers say, there is an air of a sentiment shift going on among investors. “Various credit- spread measures have also been narrowing and all of a sudden, the fear of being in the market is being replaced by fear of being out of the market,” said Roberge.