After having swung from worst to first among developed markets, Canadian equities have spent the first two weeks of May in a sort-of-middle-of-the-pack trend.
The immediate technical backdrop is now looking tenuous for the Canadian index, although that should prove to be but a blip in an otherwise upward trajectory, according to Javed Mirza, a technical analyst with RBC Capital Markets.
"The recent outperformance of the TSX relative to global equity markets is showing early signs of stalling and could be at risk as both the TSX and the Canadian dollar could see a claw back of some of the recent resource-related gains," he said in a report this week that examined global moving averages and other chart formations.
Any ground the S&P/TSX composite index cedes to its U.S. counterpart, however, might best be seen by Canadian investors as a buying opportunity, Mr. Mirza said. "We view an intermediate-term corrective phase as an opportunity to add equity exposure, in order to participate in the ongoing secular bull market in place since 2009."
That recommendation largely agrees with RBC's fundamental outlook. The bank's head of Canadian equity strategy last week contended that a five-year period of inferior Canadian equity returns had likely come to an end.
"We believe the S&P/TSX is in the early stages of outperformance against the S&P 500 and other global equity benchmarks, which is likely to last into 2017," Matthew Barasch wrote.
He put a one-year target of 15,200 on the composite, which would amount to a 10-per-cent gain from today's level – a considerably more bullish outlook on the Canadian market than is maintained by the consensus.
That would likely be good enough to end the composite's losing streak, which has extended through each of the past five calendar years against the S&P 500, as well as most other major peers. That trend of underperformance accelerated with the sharp decline in commodity prices beginning mid-2014, as the price of crude oil in particular sunk to 13-year lows.
Then in January, the commodity selloff lost steam, the energy market regained some composure. The main Canadian equity benchmark mounted an 18-per-cent rally over three months from trough to peak.
Predictably, resource stocks have led the resurgence. Since the market bottomed in January, the materials sector within the composite has rallied by nearly 50 per cent, and energy by nearly 30 per cent.
Both sectors, along with industrials, have recently broken "important price and relative strength downtrends," Mr. Mirza said. Since 2005, the energy sector has largely proven a drag on TSX returns. But relative performance of energy stocks against the composite seems to have put in the "major low we were looking for," he wrote.
Breakouts from long-term downtrends are often quickly followed by a pullback. And indeed, the rally in Canadian resource stocks appears to be taking a breather. A recent rise in short positions among commercial hedgers suggests a decline in crude oil and gold prices over the intermediate term, the report said.
That corrective phase should provide the opportunity for investors to build exposure to energy and mining stocks, as well as industrials, according to Mr. Mirza's recommendation.
It's no coincidence that those three sectors tend to benefit from higher inflation expectations.
"Market participants have shifted towards an inflationary bias and are predicting an improvement in the global economy," Mr. Mirza said.
"The shift towards these sectors will likely come at the expense of deflation beneficiaries, namely telcos, utilities and REITs."