Hamilton's E-Wave Analysis

BNS, Bank of Nova Scotia.

The “earnings season” for the Canadian Banks is starting again this week. Not that there really is a season as these venerable institutions are hunting for your nickels and dimes, and a lot more, all year round. They can do this without fear as no one shoots back, so strong is the oligopolistic armour that they have cultivated over the years. As it happens BNS is the most daring of the lot with relatively the most “international” footprint. It also has followed the EW patterns most closely and therefore we will use it as a proxy for the whole. Here are the charts again;

On the left the big picture. The stock climbs 10-fold in equal or smaller number of years. This is of course perfectly normal, after all how else can you retire at 55? That cheap money might have a little to do with it is a thought that only a cynic would entertain, and that they too received a $114 billion – relatively more than in the US -  in a liquidity boost has been completely forgotten. Anyway, what might one expect next? The EW pattern is fairly clear. The recent top at $61 (nice Fibo #), is either the top or the top of a wave B (purple and black in the chart).  The difference is not material at this time. The direction should be down as indicated by the first 5-wave sequence in that direction, this can be counted in different minor ways but the end result is plain to see. The a-b-c wave 2 rebound was entirely predictable (see previous blogs). We are presently at the end of minor 3 of 1 of 3. For BNS that probable means that the earnings are OK enough to create a minor wave 4 bounce. A minimum target would be around $42, but  in the face of headwinds from rising interest rates, Volcker rules and lack of growth opportunities $25 or so would be quite reasonable.

Note; Cheap money does not necessarily help banks earn larger margins, that is more a function of how rates change and how fast. Where cheap rates help the banks is through the general effect of increasing all asset values which then provide better collateral and larger loan amounts. When this reverses the problem starts.