With the US oil services sector index (OSX) already in a bear market, down 24% since June so far, and falling, thoughtful minds might wonder what if anything this sector’s performance might portend for the broader stock market. While the S&P 500 is about 10% weighted in energy, the Canadian TSX 60 Index is more than twice that at 23% in energy. This overweight helps explain why the TSX Index has historically been closely correlated with price moves in the oil service sector. The chart below shows price movements for both since 2004.
In a closer view below, we note the now ominous gap that has developed since June between the diving OSX and the still modest 7% decline for the Canadian broad market. A re-coupling to historical correlations, would see the TSX composite decline at least a further 17% from current levels, to around 12,000, or the level it first reached a decade ago. And that’s if it gets off luckier than previous secular bear declines which typically have registered -50%. Buy and hope?
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