Market Insights: Market Commentary – Breakout?

Macroeconomic and Market Developments:

• North American markets moved higher again this week.  The TSX Composite index was up 2.25% and in the US, the Dow Jones Industrial Average increased 3.26% and the S&P500 gains 3.85%.

• Oil prices were up this week, pushed higher by the strike in Norway and Hurricane Delta affecting Gulf of Mexico production. US WTI was up ~$3 to $40 and Western Canadian Select was up ~$4 to ~$30 this Friday.

• The Canadian dollar increased again this week, with the Loonie rising from 75.1 cents to 76.3 cents this Friday.

• Gold was up this week as well, going from $1,907 to $1,935.

• Air Canada announced this week that it has raised nearly $500-million by selling and leasing back nine Boeing 737 Max 8s. The company continues to try to find ways to increase liquidity to cope with the drastic slowdown in airline traffic due to COVID-19.

• On Friday, jobs numbers for September were announced. Canada added a much better than expected 378,200 jobs in September and the unemployment rate fell to 9.0% from 10.2% in August. Analysts in a Reuters poll had predicted a gain of 156,600 jobs and for the unemployment rate to fall to 9.7%. However, Statistics Canada says the unemployment rate would have been 11.9% in September had it included in its calculation people who wanted a job, but didn’t look for work.

• In US economic news, the ISM Non-Manufacturing index (sometimes referred to as the services index) rose to 57.8 in September, beating the consensus expected 56.2. Levels above 50 signal expansion and levels below 50 signal contraction.  The level for August was 56.9.

• In the ongoing takeover battle for Calgary based Calfrac Well Services (CFW), Wilk Brothers LLC announced this week that they have increased their offer to $0.25/share, giving shareholders the option to take between $0.18 and $0.25/share in cash.

• The total global COVID-19 cases reached 37.0 million this week, with the total death toll at 1.07 million. In Canada, cases continued to rise, notably in Quebec, Ontario and Alberta. Total cases in Canada are at 175,559, with active cases at 18,494.  Alberta currently has 2,097active cases.

• For a deeper dive, the U.S. investment company First Trust has put out a US COVID-19 Tracker: COVID TRACKER

Charts of the Week:

With the markets pushing higher this week, we are seeing some very positive technical and breadth indicators in the markets that can only be viewed as a bullish signal, especially with the fact that investor optimism is still relatively low. With the election on the horizon, one can certainly expect some volatility, but the underlying metrics are talking, and they are speaking in a positive language. We must respect this trend.

Firstly, in the past several years, the S&P 500’s cumulative advance-decline (A/D) line has consistently led the price of the index to new highs coming out of market pullbacks. Early this week we saw a new all-time high on this indicator, taking out its prior peak from September 2nd. The chart below shows both the S&P 500 index in blue and the A/D line in red. This indicator is giving an early signal that the probability of a new all-time high for the index in the short-term (weeks) has risen dramatically. A new all-time high in the A/D line does not guarantee a new all-time high in the index, but it certainly serves as confirmation of the positive trend we have seen of late. If a new high in the index does not occur at some point, we would then have a negative divergence in place, which would give us some concern.

 Source: Bespoke Investment Group

Here is another signal that started yesterday, and today we are seeing positive continuation. The Dow Jones Transportation Average (DJTA) is attempting a price breakout from a 33-month base. The longer the base, and the more attempts to move higher out of that base, the stronger the signal. In this case, we had three peaks forming the base, with the last two attempts unsuccessful. With a successful close today, we will see a positive breakout of a long base signalling strength. Again, as above, this does not guarantee anything about future performance, but it enhances its positive outlook. The Dow Jones Transportation Average is closely watched to confirm the state of the U.S. economy, especially by proponents of Dow Theory. The theory maintains that as the industrials make and the transports take, the DJTA should confirm the trend of the Dow Jones Industrial Average.

Sources: CNBC.com, Globe and Mail, Financial Post, Government of Canada, Government of Alberta, oilprice.com, Canaccord Genuity, optuma.com - J.C.Parets, Bespoke Investment Group, Investopedia