Bulls still have room to run for Canadian stocks

But short-term we could have a bumpy ride

Canadian equities are in a so-called stealth bull market, suggesting the cyclical rally that began this summer has more room to run, said Martin Roberge, portfolio strategist at Canaccord Genuity.

Mr. Roberge cited three reasons why “green shoots” are appearing in the S&P/TSX composite index.

First, the benchmark on Tuesday performed a bullish golden cross as the 50-day moving average climbed above a rising 200-day moving average.

This technical indicator is supported by the large proportion of stocks moving higher. He noted that golden crosses led by such market breadth have occurred just three times (2004, 2006 and 2010) in the past decade and the S&P/TSX composite rose an average of 5.3% in the following three months and 9.7% in the next six months.

The strategist also points out that high-beta stocks have just started to participate in the rally. He believes the index is unlikely to hit a peak before the year-over-year performance gap between high- and low-beta stocks climbs much higher than zero. That measure is currently still in negative territory.

Ron Meisels, president of Phases & Cycles, noted that golden crosses occur often enough that they are typically short-term signals.

“Our indicators are all suggesting that we are in a bull market that started in March 2009,” the technical analyst said.

He noted bull markets usually have five legs, with the odd numbers moving up and the even numbers moving down.

“It seems, based on our research, that we are already in leg five,” Mr. Meisels said. “But that doesn’t mean it’s the end of the world, because leg five can be quite lengthy and could carry us all the way into next year.”

The analyst also noted that leg five is already well-developed in the U.S. equity market, while it has just started in Canada.

“This is totally normal. It usually starts later and last longer in Toronto,” he said. “The reason is because the cyclicals (energy and materials) usually perform late in the bull market.”

However, Mr. Meisels warned October is often a negative month for stocks. So while he is confident in the long-term upward trend for the TSX, he thinks the next few weeks could be bumpy.

Mr. Roberge also upgraded his rating on Canadian banks and life insurance companies to overweight, citing the forecasted convergence in forward valuation multiples of equity groups and stocks with similar dividend yields.

“This arbitrage or re-normalization in risk appetite is made possible because of the hyper-reflation policies conducted by world central banks,” he said in a research report.

He also noted that Canadian lifecos and banks provide dividend yields of 5.1% and 4.3%, respectively, compared to 4.8% for defensive groups such as utilities, REITs, pipelines and telecoms, yet the financials trade near 10x forward earnings per share, versus 15.5x for defensives.

He has no preference between the two groups of financials, even though recent risk-on trends demonstrate lifecos are more cyclical and banks exhibit more defensive attributes.