by Ryan Lewenza, North American Equity Strategist, TD Wealth
Our call for short-term weakness has not materialized, and with the recent breakout for the S&P/TSX Composite Index (S&P/TSX), we are getting more constructive on the outlook for Canadian equities. The S&P/TSX is nearing a short-term overbought condition with its Relative Strength Index (RSI) reading of 63 (above 70 indicates overbought), so we could see some near-term backing and filling in the coming days. However, if the S&P/TSX holds above the previous 12,900 resistance (now support) level and the 50-day moving average (MA), currently at 12,756, then we would likely become more bullish on the S&P/TSX, as the index may finally be in a new higher trading range.
• With the S&P/TSX Capped Industrials Index in a confirmed long-term uptrend, and trading above its rising 50- and 200-day MAs, we continue to favour this sector and recommend that investors overweight it in their portfolios relative to the benchmark weight.
• The S&P 500 Index (S&P 500) has been strong on the back of a short-term resolution of the budget and debt limit impasse in Washington. With these fiscal issues sidelined until early 2014 (the debt limit is suspended until February 7, 2014), and the U.S. Federal Reserve (Fed) likely to maintain its asset purchases until H1/14, we believe the path of least resistance is to the upside.
• The U.S. dollar index remains under pressure in part due to the Washington budget/debt battle. The U.S. dollar index is finding resistance around 80.75, which was support in June and August. Given this “change of polarity” and the U.S. dollar trading below key MAs, the short-term outlook remains negative.
• The short- and long-term trends remain negative for gold prices. Gold rallied strongly on October 17, due in part to its near oversold condition as its RSI neared the 30 level. Gold prices could see some additional near-term strength but we would look for upside to be capped around the US$1,340/oz-US$1,350/oz level, which is the intersection of the 50-day MA and its short-term downtrend.
• In this week’s report we highlight Brookfield Asset Management Inc. (BAM’A-T) and Lam Research Corp. (LRCX-Q) as attractive technical buy candidates, and recommend investors trim/sell Gap Inc. (GPS-N).
