The stock market staged a strong recovery in 2009, and now there has been some debate going on about whether it’s still a good time to buy, or whether it’s time to sell, because the global economic outlook isn’t exactly sanguine yet. I think this type of debate could lead to bouts of market volatility in 2010, but I believe the Canadian stock market is poised to outperform.
If you look back to the start of the past decade, remember there was concern about a technology bubble building. Alan Greenspan, Chairman of the U.S. Federal Reserve, gave his infamous “irrational exuberance” speech in 1996 as a warning the market might have been overvalued. The Fed tightened monetary policy until the Fed funds rate hit 6.5 percent in 2000, and the stock market collapsed.
The Fed essentially broke the back of the market back then by raising interest rates, but the market fell well below what most people anticipated. It lost about 50 percent of its value in less than three years. Interest rates then were then gradually dropped to 1 percent. After injecting liquidity into the marketplace, the stock market found a bottom and started to recover. But one of the tricky things about monetary policy is that there is typically a six- to eight-month lag in the market’s reaction to policy changes. Once rates were increased, the market became over-extended again. Then as we know, the housing market collapsed, and interest rates moved lower by the end of the decade than during the tech wreck at the beginning. So essentially, we now are in a situation where the stock market is back where it was a decade ago—a lost decade if you were a buy-and-hold investor.
Risky assets tend to perform better during times of low interest rates, which has been fueling both stocks and commodities. (Buying a Treasury bill isn’t going to help you very much as an investor these days!) I personally believe all this liquidity in the market right now will continue to drive the stock market in 2010, even in absence of corporate earnings or performance, simply because there really isn’t a good alternative for buy-and-hold investors.
I think the Canadian market looks to be in a good position to outperform, and the S&P/TSX 60 futures, traded on the Montreal Exchange, are worth considering. The S&P/TSX 60 is based on the 60 largest companies on the Toronto stock exchange, allocated fairly evenly between financial and resource sectors. Learn more about the index here and futures here.
Both of those sectors in Canada have look prospects in the coming year. If the global economy improves, it’s likely that commodity prices will continue to rise, and Canada, being rich in natural resources, is likely to benefit from that. Canada has the stuff the world needs. The Canadian banking sector is also in a good position to gain global market share, as Canadian banks faired better than most during the recession of the past year. Many Canadian banks have been making moves outside Canadian borders, and are behaving more like big international banks. They have slipped through the crisis relatively unscathed, and the future looks bright. So the S&P/TSX 60 should perform well.
S&P/TSX 60 Index
The VIX
When talking about stocks, I think volatility is also worth a mention. The Chicago Board Options Exchange Volatility Index (VIX) is a measure of the implied volatility of S&P 500 index options. It takes the options prices observed in the market, and calculates the volatility implied by those various prices. As you can see, the VIX spiked dramatically through the financial crises of the past decade, and we’ve also had periods of low volatility.
VIX futures can be used as a defensive tool if you are afraid of volatility in the stock market. This contract is based on real-time prices of options on the S&P 500 index, listed on the CBOE. It is designed to reflect investors’ consensus view of future (30-day) expected stock market volatility. Visit www.cfe.cboe.com for more information about this product, including contract specifications.
One of the advantages the futures market gives investors is a more sophisticated response to defend against market shocks. I don’t think we are out of the woods in terms of market volatility, so I think this contract is worth exploring.
Please contact me with any questions you have about this topic or the markets, and to develop a custom trading strategy based on your particular situation.
Aaron Fennell is a Senior Market Strategist based in Toronto, and is serving clients in Canada. He can be reached at 877-840-5333 or via email at afennell@lind-waldock.com. You can follow Aaron on Twitter at www.twitter.com/LWAFennell.
The data and comments provided above are for information purposes only and must not be construed as an indication or guarantee of any kind of what the future performance of the concerned markets will be. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. Futures and Forex trading involves a substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. Please carefully consider your financial condition prior to making any investments. Not to be construed as solicitation.
MF Global Canada Co. is a member of the Investment Industry Regulatory Organization of Canada and Canadian Investor Protection Fund.
Futures Brokers, Commodity Brokers and Online Futures Trading. 123 Front St. West, Suite 1601, Toronto, Ontario M5J 2M2.
Source
