The Toronto stock market could be in for more choppy action this week as the first-quarter earnings season winds down and investors consider what has made the TSX one of the top market performers in early 2014 and whether those reasons are still valid.
It is also a relatively light week for market-moving economic data.
The Toronto market had a negative week last week after three weeks of gains that pushed the TSX up about 8.4 per cent year to date and within about 300 points of its all-time high from the summer of 2008.
But cracks started to appear last week and the TSX fell 1.57 per cent, still leaving it up 6.7 per cent year to date while the Dow industrials had gained just 0.43 per cent.
It is also a gain that many analysts thought the TSX would register for the whole year.
Bob Gorman, chief portfolio strategist at TD Waterhouse, didn’t think the decline last week had much to do with the recent slew of earnings reports, pronouncing them by and large “pretty solid”.
Rather, it is that some of the sectors that sustained the biggest declines last year have staged impressive comebacks for good reasons and it’s hard to see what can drive those components higher.
For example, the TSX Global Gold sector is the biggest percentage gainer this year, up about 14.5 per cent and Gorman believes the sector is vulnerable right now.
He noted that gold has done fairly well so far this year, in part because the U.S. dollar index has been off, reflecting a stronger euro that has benefited in part from capital flows out of Russia in response to its stance in the Ukraine crisis.
“But if, as seems probable, at some stage you do get the U.S. interest rates starting to creep up — they will likely move before European rates — that interest rate differential will probably start to move the U.S. dollar higher,” he said.
“Gold is denominated in U.S. dollars, the U.S. dollar goes up, gold typically comes under pressure so I would be a little skeptical about the golds hanging on to all of their early gains.”
Energy has been the other big winner and the sector is still up about 13 per cent so far this year.
Gorman noted that the price of heavy oil produced in the Alberta oilsands improved after a major BP refinery in Indiana came back online following refurbishment.
“This refinery took a lot of that heavy oil and, (when) they weren’t in a position to take it, you didn’t have the demand and the price went down,” he said.
“It is up again and, in fact, they have increased capacity now to take heavy oil so the supply demand balance is much better than it was. The price has gone back up so the discount, which at one point was 50 per cent . . . is now back to historical averages in the upper teens or so.”
Gorman said the sector will still likely benefit from solid earnings reports during the year, but with it already up about 13 per cent “a certain amount of this is baked in.”
He still sees the TSX ending 2014 with a gain in the high single digits.
“(But) I don’t think the numbers we generated year to date are going to be repeated,” he said.
“Maybe it does better than we forecast. Given the very strong early start it’s certainly possible, but it’s not our base case.”
On the economic calendar, investors will be looking to see the latest reading on existing home sales. Economists expect that sales were up two per cent year over year in April while prices gained six per cent.
And in the U.S., traders expect that April retail sales will show a 0.3 per cent rise after gaining 1.2 per cent in March.