Despite warnings from technical analysts, National Bank Financial strategist and chief economist Clément Gignac says the bank remains optimistic about the stock market in the medium term.

In a new report Tuesday, Gignac notes that last week the Dow Jones blue-chip indicator fell for a fifth-consecutive week, the longest decline in nearly two years. More disturbing, he says is that some technical analysts have also indicated the Dow’s 50-day moving average is close to a downward crossing of its 200-day moving average — a so-called “death cross”.

Gignac admits he’s not much of a chart reader, but he does point out that “death cross” has happened 21 times on the Dow Jones over the last 30 years; and, in only 11 of those 21 cases was the Dow lower one month later; in only seven of those cases was the Dow lower three months later. “More important, each of those seven cases in three decades can be associated with a special event,” he says. “Also, each “death cross” technical event in the blue chip indicator was ratified by a similar negative reading in the DJ Transport and DJ Utilities sub-indices in the previous weeks or days. This is not the case today, or at least not yet.”

The seven big death crosses occurred around special market shocks: March 1973’s first oil shock, December 1978’s second oil shock, August 1981 when the Fed’s Paul Volcker jacked up rates harshly to quell inflation, the 1987 stock market crash, in 1999 when blue chip stocks were drained by the rush to techs, Sept. 11, 2001, and breaking corporate scandals in 2002.

NBF says that its 12-month targets remain 1225 for the S&P 500 (closed Monday at 1084) and 9200 for the S&P/TSX (closed Monday at 8314). It is still overweighting equities and favouring resource stocks.

It says fundamentals argue that equities should be overweighted because:

  • top-line revenues of Corporate America are still growing at more than 10%, reflecting an acceleration of the world economy;
  • the positive impact of U.S. dollar depreciation and some pricing power in some industries;
  • corporate spreads do not signal any deterioration of balance sheets in the offing;
  • real short rates are still negative and upcoming Fed hikes are likely to be gradual; and
  • stock market valuation is low relative to current bond yield.



That said, risks include ongoing uncertainty about the U.S. presidential election results, Middle East geopolitics, the pace of Fed tightening, and the implications of a Chinese slowdown for resources.

“All in all, we believe that the current environment of high productivity and subdued inflation (similar to that of the mid-1990s or early 1960s) still warrants an overweighted position in stocks,” Gignac says. “At this point, it would take a sharp acceleration in unit labour costs coupled with a fall of economic growth below potential to prompt us to scale down our exposure to equities.”