Gold and Oil Fuel the Canadian Stock Market Rally

June 16, 2014

One of the best performing markets this year is Canada. The Toronto Stock Exchange (TSX) has gained over 10% this year. That is more than twice as much as the SP500 which has gained 4.75

The TSX Composite Index has exceeded its 2011 peak and is about to test the 2008 high. A large part of the strength is coming from rising commodity prices. The TSX Composite is resource-weighted and this market has lagged its counterparts around the world in the last year. This means it is time for Canada to play catch-up.

These equities may hold up well when the US market starts to correct. This is because the TSX’s is heavily weighted in late-cycle stocks (resources), it’s not unusual for the Canadian

market to lag in the early stages of a bull market in the USA, catch up in the late stages, and then outperform toward the end. This appears to be happening now.

Last week's surges in gold and oil prices are fueling the rally in Canada. The two strongest Canadian stock groups were materials and energy.

price of crude oil

Gold Stocks Lead The Way Higher – GDXJ

The junior gold miners chart shows that money is flowing into these stocks this month. Because they are the most leverage way to play the price of gold, speculative traders and investors tend to put their money to work in these stocks first, before they start accumulating physical gold.

Precious metals mining stocks (GDX, GDXJ, SIL) tend to lead the price of gold by a few days and sometimes a couple weeks.

The chart below clearly shows gold junior stocks surging and breaking through key resistance levels.  I am waiting to see the larger cap PM stocks clear their key resistance levels (GDX & SIL) before I will start to get interested in building a long position again in the precious metals sector.

gold mining stocks

Trading Conclusion:

The chart below, courtesy of Donald W. Dony, shows how the market moves in terms of sectors and commodities. Our focus is on the stock market cycle below (blue cycle) and the numbers 9, 10, and 11.

In the last few months we have seen money move towards the safer investments. Utilities have performed very well, and so has the energy sector. Precious metals on the other hand are still trying to find a bottom. I feel this will happen sooner than later but until then metals will be volatile.

Typically commodities perform well in the late stages of a bull market which is where the US market feels as though it is at within its life cycle. 

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Chris Vermeulen

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Chris Vermeulen, founder of AlgoTrades Systems., is an internationally recognized market technical analyst and trader. Involved in the markets since 1997.  Chris’ mission is to help his clients boost their investment performance while reducing market exposure and portfolio volatility. Chris is also the founder of TheGoldAndOilGuy.com, a financial education and investment newsletter service. Chris is responsible for market research and trade alerts for multiple newsletter publications. Through years of research, trading and helping thousands of individual investorsaround the world. He designed an automated algorithmic trading software for the S&P500 index, which solves his client’s biggest problem related to investing in the stock market: the ability to profit in both a rising and falling market. He is the author of the popular book “Technical Trading Mastery – 7 Steps To Win With Logic”. He has also been featured on the cover of AmalgaTrader Magazine, Futures Magazine, Gold-Eagle, Safe Haven, The Street, Kitco, Financial Sense, Dick Davis Investment Digest and dozens of other financial websites. 
You can reach Chris at: chris@thetechnicaltraders.com.

 

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."