TSX Composite managed to close positive despite the unbelievable downfall in the price of oil on Monday; massive zone of supply overhead appears threatening.

Stock Market Outlook for April 21, 2020

TSX Composite managed to close positive despite the unbelievable downfall in the price of oil on Monday; massive zone of supply overhead appears threatening.

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The Markets

A historic day for the oil market with the front month contract for the commodity trading negative for the first time ever. May WTI Crude Oil futures plunged by over 200% to a low of around –$40.00 a barrel, meaning that the holder of the commodity will pay you around $40 to accept delivery. With storage levels topping out, a negative price seemed inevitable, but the magnitude and abruptness of the move into negative territory was staggering. Energy stocks, which tried to shake off the move early during Monday’s session, helped to lead the market lower on the day. The energy sector ETF (XLE) fell by 3.12%, unable to follow through to the upside following Friday’s gap-fill that hinted of short-covering, as opposed to new buying demand. Momentum indicators on the energy ETF have started to roll over; stochastics triggered a sell signal early last week; MACD is converging on its signal line; the Relative Strength Index (RSI) is rolling over from neutral territory around 50. Energy has become an extremely speculative sector that will likely be characterized by extreme moves higher and lower until the economy can return to some state of normalcy. For this reason, we have no exposure to the energy sector and don’t intend to gain exposure until the fundamentals change.

In our monthly outlook, we highlighted the areas of excess in the market, including the aggressively long allocation that large speculators had been holding in oil futures for many years. The downfall in the price of oil has been a massive unwind of this consensus bet, likely leaving those large speculators, whether they be hedge funds or otherwise, in a world of pain. The collapsing of funds can have a domino effect in other areas of the market as those entities may be forced to unwind other allocations on their books, whether it is a result of the bankruptcy of the fund or simply to cover the loss on the trade. We will be looking for an unwind of some of the other areas of excess highlighted in our April monthly report in the days ahead. Subscribe now and we’ll send you a copy of our report.

Despite the destruction in the oil market, which had become somewhat of a proxy for the risk-off trade in this market rout, the decline in the equity market seemed rather muted, all things considered. The S&P 500 Index shed 1.79%, turning lower from its declining 50-day moving average. On Friday, the large-cap index gaped above a significant zone of resistance between 2800 and 2830, hinting of another upside attempt that counteracted short-term sell signals triggered mid-week. On Monday, price merely moved back into this range that is now short-term support. Momentum indicators continue to show signs of rolling over, hinting that a sell signal with respect to MACD and Stochastics may be imminent. The benchmark continues hover around previous significant support, now resistance, around 2850. The supply of stock that could sell within the range of 2700 to 3000 is significant given that this is the range that the index has traded predominantly within over the past couple of years. Should those holders of stock from this range turn into sellers, it will likely overtake any short-term demand attributed to this rebound attempt.

The TSX Composite, which is more sensitive to the oil market than the US, actually closed higher in Monday’s session. The Canadian benchmark closed the day with a gain of 0.20%, an astounding accomplishment considering that Canadian energy and financial sectors closed in the red. The downfall in the Canadian dollar, along with support from gold producers and technology stocks, were factors behind the strength. The TSX still has a way to go before it hits the same zone of overhead supply as its US counterpart. The benchmark has spent much of the past couple of years trading in the range of 15,000 to 16,500, a likely zone that the supply of stock could overwhelm demand. The TSX has persistently underperformed US counterparts for years amidst weakness in the energy and materials sectors, but market performance on Monday surprisingly suggests a relative low may be in the works. The ratio of the TSX versus the S&P 500 Index has been moving within a descending triangle for the past month and a half and the break from this narrowing range will define whether you would want to be in the Canadian benchmark or the US counterpart. Up until now, the US market has been the place to be, for years. Seasonally, the TSX Composite tends to outperform the S&P 500 Index between the end of April and the end of August.