There are a number of other possibilities than shown here. However, these two are the most plausible. One is a large a-b-c correction that would later lead to new highs. We do not think so as the recent drops are totally out of proportion. The other is that the real bear market has started and we are in wave 3, more precisely 4 of 3 or more bearishly, 4 of 3 of 3. Either way the large ups and downs fit well with the notion that we might be tracing out a triangle pattern (typical for 4th waves). This should take us through the weekend and then we will continue with 5, or 5 of 3 and 4 and 5. The whole thing should take us down to about 13200 or lower.

The DOW shown below, is clearly “out of phase” with the TSX. No idea why but obviously low oil prices are generally good for the US and not necessarily for Canada. So far this is the first clear manifestation of the coming deflation. It will have to metastasize to other areas like housing, banking etc. before it takes hold of the US economy. In the mean time their plunge protection team is far more skilled than ours. They have barely budged.

This time it supposedly was a 40 beep lowering of the Chinese CB discount or whatever rate, from 6% to 5.6% AND more Draghi talk about an urgent need to do something. In any event it was good for a 2.6% rise in the DAX (you have to hold a 10-year bond for a few years to get the same return!) and a pathetic 1/4 percent in our own index.

For the past 5/6 years markets always seem to go beyond what they “normally” do and here again we have retraced more than 62% and may go even higher. Nevertheless we note that the c is now equal to the a in the ( so far at least) a-b-c correction. Moreover the RSI and MACD are touching on overbought readings. Stepping aside is the prudent thing to do here.

With the TSX we can be reasonable confident that the “orthodox” high and the actual high are one and the same and that it occurred in 2007, this in contrast to, perhaps, the DOW. The count, despite some ambiguity perhaps with respect to the subdivisions of wave 3, also appears to be fairly straightforward. On top of that it is quite clear that the rise from the lows  of the Great Recession in 2009 is most definitely not a 5-wave structure but a 3-wave, corrective counter-trend affair. How it subdivides is debatable, as is the question whether or not it has peaked. With respect to that last point it is clear that we double topped and then some, and also that for the past 3 or so years we accomplished very little in terms of additional height relative to the 2011 top of the a-wave.

There is nothing from an EW perspective that would suggest that this index could not go another 1000 or so points higher (that is where the parallel upper trend line would run if drawn through the top). However, given what is transpiring in other markets it is highly unlikely that Canada can continue to do it all on its own as it has been doing the last little while. The 1000 extra points is not worth the potential loss of 7000 or more points should the C wave down start momentarily.  When in doubt, get out.

There is no better time than father’s day to revisit the TSX or TSE once again. At the beginning of 2011 (Feb.) we were already at 14250, so we have spent the past 3+ years gaining a mere 750 points. This compares to the roughly 6000 points gained in the 2 years immediately after the lows of March 2009, slightly 10-times more “robust”. Clearly the bloom is off this index.

As pointed out earlier, in the 31 or so years to the top in 2008, this index has doubled 4 times as in 1-2-4-8-16. Using the rule of 72 yields a return of about 9%. Add to that a dividend of 2% and we get a total return of 11% on average for that entire period. That compares very favourable to other broad metrics as , for instance, population growth. From StatsCan we get;

• Since the early 1970s, the rate of population growth has held at just over 1% per year on average.
• Over the past 10 years, with an annual average growth rate of just over 1%, Canada’s population has grown at the fastest pace of any of the G8 countries.

This comparison with population growth as a proxy for GDP growth, is incidentally the essence of professor Piketty’s concentration of wealth thesis where r>g. Here r is a lot larger than g.

From an Elliott Wave perspective it is easy to count a clean 5-wave sequence going into the 2008 top. Every minute detail conforms to the rules and or guidelines. The almost inevitable conclusion must be that the correction from the peak in 2008 is not over. A wave C down is still required! Furthermore it should take us to the level of the 4th wave of previous degree AND erase about 50 to 60 percent of the gains from 1000 to 15000.

Momentum, a second derivative, also tells us that things are not that hot. As noted above it has been running at about 1/10th of what it was immediately following the lows of the “great recession”, this despite every Central Banker or every member of the Club of GS, adding more and more booze to the punchbowl. Volume, by the way, has been dropping throughout this period and is running at about 1/2 of peak volume.

On the balance of probabilities, the TSX is now, definitely, a sell. In terms of risk-adjusted returns, it really was already a sell three years ago.