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Canadian Stocks are Driven by Energy, Metals and Mining

David Becker
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One of the year’s strongest performers is Canada, which has gained gain 10% this year more than twice as much as the S&P 500 gain of 4.75%. The monthly bars show the TSX Composite Index having exceeded its 2011 peak and nearing a test of its 2008 high. The commodity drive index made a fresh 6-year high last week. A large part of the optimism in Canada is coming from rising commodity prices. WTI oil prices high a 2014 high last week, notching up a value above $107 per barrel.

Since Canada is a big producer of natural resources, its fortunes are closely tied to the direction of commodity markets. Stocks tied to basic materials and energy account for half of the TSX. This week’s surge in gold and oil prices certainly helped. The two strongest Canadian stock groups this week were materials (8.2%) and energy (3.6%). Three of the top five material leaders were gold stocks. Over the the last month, the two strongest Canadian stock groups have been energy (8.4%) and basic materials (4.8%).

The central bank early this year gave investors the impression that they were poised to tighten interest rates. It has become clear over the past couple of months that rates will remain very accommodative for the near future and the Bank of Canada has not expectation that they will be tightening rates anytime soon.

Momentum on the TSX is strong generating a buy signal last week. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The index moved from negative to positive territory confirming the buy signal.

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