January 15th, 2016

Interim Commentary: A Rough Start to 2016


The purpose of this interim commentary is to communicate with our clients in regard to important recent developments in the markets, whether positive or negative, that we believe clients may be interested in hearing an explanation about. If you are not interested in receiving these communications, please let us know and we will take you off the mailing list. If we do not hear from you, we will continue to send along communications such as this when the situation warrants it.  


As we noted in our Quarterly Commentary, 2016 has begun with extremely tumultuous markets; the S&P/TSX Composite is down 7.9% so far this year, while the S&P 500, NASDAQ, and Dow Jones indices are down 8.7%, 11.2%, and 8.8%, respectively. The rout began with contagion from falling Chinese markets, and has been sustained due to a continued crash in oil prices. The supply-demand equilibrium for the oil market has been out of whack for some time, thanks largely to the US fracking boom, as well as the looming threat of Iran’s re-entrance to the market, a strengthening USD, and continued pumping from both the US and the major Gulf countries. Virtually all of these developments have contributed to further weakness in oil prices moving into 2016. This weakness in oil has an obviously negative impact on our Canadian markets and currency, which – along with general global market contagion – is the primary reason for our own weak markets at home. Fuelling the fire this weak has been some disappointing economic data out of the US, as Industrial production, manufacturing and retail sales data announcements all failed to beat expectations. Simply put, investors have been spooked into exiting the market en masse, and very few investors maintain enough vindication to jump in and support the market through purchasing stocks.


It is hoped, however, that this volatility will be contained and short-lived, for a number of reasons. The first pillar of the argument hinges on technical analysis, where virtually every key metric is indicating an ‘oversold’ market. Typically, when a market is oversold, a rebound is expected in the near term. Typical metrics for this argument are the number of stocks above their 10-day moving averages, which is very low, as well as the nearing of market prices to key levels which have acted as extremely strong support in the past. Just as stocks cannot rise indefinitely, they also cannot fall indefinitely. Another point, stated by Tom Lee, Managing Director and Head of Research for Fundstrat Global Advisors, is that the downside of the market has been accentuated due to a lack of conviction from the market bulls. These are uncertain times, and many market bulls are awaiting economic data which reaffirms their position, or even just less market volatility, before they begin to entrench their positions for the year. Speaking to volatility, Tony Dwyer, the Chief US Market Strategist for Canaccord Genuity, notes that the VIX (a measure of volatility) has sustained a reading of above 20 for the duration of 2016, so far. Historically, when such sustained volatility occurs, Dwyer notes, there have been market rallies for the ensuing 30, 60 and 90 day periods following the end of the volatile period. Dwyer also referenced the Investor Intelligence sentiment survey, which recently reported only 28.6% of respondents as being bullish. Typically used as a contrarian indicator, this reading has only fallen below 25% twice in recorded history, once at the market bottom in 2008, and once in 1994 during another Fed interest rate hike period; both readings pre-dated strong rallies.


Although we cannot say that the current market volatility will, with 100% probability, be rectified in the near future, we would like to indicate that there are a number of indicators and strong opinions which suggest that we should see happier times as early as next week. Reading current news headlines, it is easy to believe that the world is falling apart, but we remain of the belief that this is not 2008, and we are not on the precipice of a total market collapse. Every secular bull market has its cyclical bear markets and short-term corrections, and we are hopeful that this is nothing more than that.




All of the best.







David A. MacNicol, 

B.Eng.Sci., CIM, FCSI


Portfolio Manager

MacNicol & Associates Asset Management Inc.

January 2016