As risk-markets tank worldwide, the Canadian TSX has followed suit with a loss of 30% in less than a month and is already back fathoming the 12,400 level it first reached in December 2006–more than 13 years ago. This is a good start.
The TSX is now just 9% higher than where it topped in September 2000–nearly 20 years ago–when my partner Cory and I had fewer wrinkles and were anticipating the prospects of an 18 to 20-year secular bear market starting from the irrational exuberance and record stock valuations in early 2000. Cory’s updated chart of the TSX is shown below. From here, a retest in the 9,000 area–a further 27% below present levels–would not be surprising in the weeks/months ahead.
We remain cautiously optimistic that the present downdraft could be the much needed third, and potentially final, cyclical bear of this secular bear period; but we note that bear market bottoms are a process that typically takes several months–sometimes a couple of years–to complete (see the rectangles above around bottoming action in the last two cycles).
One of the great vulnerabilities still inherent in the TSX today–following the largest consumer credit, realty and reaching-for-yield-bubble of our lifetime–is its 32% concentration in still grossly inflated and widely held Canadian financial shares.
As shown in Cory’s chart below of TD Bank since 1994, the 31% drop in TD’s share price over the past month is good progress, but long-term support remains in the $25 area–a further 50% below present levels–believe it, or not.
The Canadian financial sector basket (XFN)–off 27% in the last month–could easily see a decline of that much again as the present cycle completes. The basket lost 50% in both the 2000-03 and 2007-09 bear markets, and that was with Canada avoiding a recession in 2o01, being much less indebted heading into both downturns, and with oil-demand prospects then, unlike today, entering a boom.
Today, as usual, the underwriting, product sales and investment ‘advisory’ reps are out in full force calling bottoms and buying opportunities at every price.
But before you listen to these usual suspects, note that they’re the same false prophets who never see downturns coming, and did not recommend that their followers sell or set aside significant cash weights even as equities and corporate debt hit some of the most over-valued and over-bought in the last century of expansion cycles.
We cannot have the mental and financial strength to capitalize on bear markets unless we first protect our savings from their losses and set aside significant cash reserves to buy when everyone else is liquidating in desperation and hopelessness.
No doubt there will be exceptional investment opportunities in the months ahead for those who are properly prepared for them in advance. But remember this: when it’s actually time to buy, no one will feel like it’s a good idea.
Based on all the confident bottom-callers today, we’re not there yet. More lasting pain will be necessary to terrify the reckless–best to wait for it.
