As expected the earnings were pretty solid, good enough to provide the anticipated (see previous blog) minor 4th wave bounce. However, soon the downtrend should continue  more or less as shown with an even bigger bounce as wave 2 (of 3 of C).  Why? Who knows maybe a few trillion yuan and another 50 beeps off bank reserves in China,  more talk about QE3 or Greeks loving austerity, in any event nothing whatsoever having to do with BNS.

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 an 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.

Bank of Nova Scotia did pretty well as expected (see older blogs), except that it just had to go to the highest reasonable possibility on the rebound. Having reached $57 it started to decline again and is about $3 off that level. The rebound is clearly an a-b-c correction and therefore it  follows that the stock should one day trade at least below the lows on this chart (and for the same reason but on a larger scale below the $25 level of March 2009). We now have overlap situations that essentially exclude any other count giving a great deal of confidence to this outlook. Obviously the view in Canada is that nothing of the sort can happen as our banks have an oligopolistic stranglehold and will simple keep adjusting their fees in order to keep the process going (they just abolished free banking for seniors). But nobody knows where the  growth is supposed to come from, interest rates could rise, the Volcker rule has yet to be implemented and the dependence on “wealth management” has increased at a time when wealth might actually start dropping. There are dozens of other reasons why banks may get hurt not the least of which is their uncanny ability to every ten years or so to find a hole to fall into. Not a time to own these stocks.

BNS is. of course, one of the better performers in Canada, perhaps because of it’s international scope. Even so a quick look at the long-term chart below makes the point;

The high was at $61.28, and it made that high after the great recession. Still we think the “orthodox” top occurred in 2007, making this the top of a B-wave but either way the stock should revisit the $25 low. Over roughly 20 years and starting at $5 that would still constitute an annual compound rate of 8.5%, not including dividends!

Here is the expanding diagonal once again. The low today, so far at least, was at $47.54. The trend line , using a fine pencil runs about 50 cents lower so lets just call it $47+. These wedge like structures seldom exceed their boundaries even if that is possible, so that should be the best possible level to buy into this stock. Given the overlap this diagonal is the only structure that fits. However there is also the possibility that we are looking at a 4-5, 4-5 sequence; not completely out of thin air as the entire 5-wave sequence may have started with a 1-2, 1-2. But even in that circumstance the 5th waves tend towards equality with the waves 1. These are both approximately $4 in vertical distance, $5 combined, so that too has been achieved. See below;