Juggling Dynamite

“One of the biggest American myths is limitlessness. You’d think by now we’d understand our own limitations but the American myth – and you can hear it on Rush Limbaugh every day – is one where the horizon goes on forever and more growth is always possible and any failure from Vietnam to the 2008 crash that we’ve ever had is just a case of failing to fully exert our exceptional American qualities.

Writer Paul Roberts, sees that myth, being wired up to a dangerous culture of impulse gratification where Amazon knows what kind of shower head you want – before you do and will send a drone to drop it on your doorstep before the words of your wish come out of your mouth.”

Here is a link to an audio clip of Roberts in conversation with Colin McEnroe talking about some of the material in his new book, The Impulse Society:  America in the age of instant gratification.

Points of reference to ponder:  the energy (21.6% weight) and finance (36% weight) sectors account for a combined 57% of the broad market TSX composite today.  Even with significant declines since June, the energy sector index still has a further 24%, and the financial sector index some 67% (which includes 90% of income trusts/REITS), of downside before returning to their 2009 cycle lows (see top lines on far right of chart below).  If you think that seems impossible, then you don’t appreciate the range bound dynamics that create market cycles within secular bears.

Having these 2 dominant sectors recouple with other key economic sectors that have already retraced near their 2009 lows, would knock the broad market TSX 29% lower –so from current 14000 to the 9900 range.  And that’s without any commensurate declines in other so called ‘conservative’ sectors like health care, utilities, consumer discretionary, telecom etc.  When likely weakness in these other areas is added, a retest of the 8000 area becomes quite plausible for the TSX before this full cycle completes.

A similar magnitude decline for the correlated S&P 500 also makes cyclical sense–so greater than a 50% decline from present levels.  Sectors and broad markets often lag one another, but historically ‘decoupling’ is a finance myth.

As we have written frequently in the past, the Canadian stock market is precariously concentrated in its over-valued energy and finance sectors today. With both in a much deserved mean reversion phase, the TSX has completed a rapid round trip back to levels first achieved in early 2007–when the world actually believed commodity producers were invincible and Canadian banks were genius.  Goodness how things have changed.

Off 3% so far today, the TSX is now below the rebound peak it achieved in 2011 when some actually believed that central banks and ‘QE’ could paper over the world’s debt problems.  As reckless leverage and naive optimism recede, the truth is that the TSX may well have a difficult time holding at the QE-4ver uptrend (green below) that began in 2012.

If price support fails there, then a retest of the 2012 lows in the 11,200 to 11,500 level (shown at lower purple band), before QE-4evr beliefs began, seems a likely next test.