Trader’s Narrative

More or less, the world’s central banks operate in concert with one another, often even cooperating hand in hand to help each other (whether it is in setting interest rates or foreign currency interventions).

Today the Bank of Canada surprised everyone with a 25 point basis cut. Although the higher Canadian dollar had created concern about Canadian exports, most thought that the Canadian central bank would opt to leave rates unchanged due to a buoyant economy thanks to high commodity prices.

But the sub-prime mess has once again reared its head (excerpt from their press release):

Global financial market difficulties related to the valuation of structured products and anticipated losses on U.S. sub-prime mortgages have worsened since mid-October, and are expected to persist for a longer period of time. In these circumstances, bank funding costs have increased globally and in Canada, and credit conditions have tightened further.

The Bank of Canada is also worried that the effects of the sub-prime mortgage crisis will dampen the US (and global) economies enough to diminish demand for Canadian exports.

If the commodity markets are topping, then this would be a double whammy to the Canadian economy, so the Bank of Canada is smart to judge a “shift to the downside in the balance of risks”.

Since central banks don’t just lower or raise rates in a random fashion, this change in stance is probably the beginning of a series of rate cuts. Following the built in assumption of another rate cut from the Federal Reserve’s meeting next Tuesday, the Canadian central bank is now set upon an easing campaign.

The European, Australian and English central banks (or counterparts) will be meeting this week and my bet is that similar decisions will be coming out of those hallowed halls.

Which would spell some relief for the poor old US dollar (and a cautious note for precious metal bulls).

The US market isn’t the only one getting whacked. Almost all the international markets have swooned in unison, thanks to an ever intertwining global financial market.

The Canadian market has been most recently driven by the natural resource sector: the mining (gold, uranium, etc) and energy sectors (oil and natural gas) especially.

According to Lowry’s research, when the percentage of stocks trading above their 10 day moving average is below 10%, the market reaches not only a short term bounce but also a lasting intermediate to long term bottom. It has only failed once! To see a graph of this indicator from 1990 onwards, click the above link.

On March 5th 2007, the US market had less than 4% of stocks trading above their 10 day moving average. You all know how that turned out. Last week, in the Canadian market, we saw less than 9% of stocks trading above their 10 day moving average.

While there is no law that says that this indicator can’t go lower (even to zero), past behaviour would argue that we are seeing an opportunity here for an inflection point.

Click to Enlarge Graph

Graph from Stephen Whiteside’s uptrend.com