Can the Canadian Bull Market Continue?

The S&P/TSX60 closed at 890.00 the other day. The market is now just 10 points away from the 900 level, which also corresponds with the 2008 all-time high prior to the great bear market that wiped out 50% of the value of the index.

This leaves many investors asking the question: will the S&P/TSX60 be able to make all-time new highs or will we see the impressive bull market advance stall out at this psychological threshold?

It is my hypothesis that in order for the Canadian market to be able to make considerable progress from the current price levels, it will have to be on the back of a new commodity bull market.

Here are the considerations that I am using to draw my conclusions:

1. The Canadian bank and railway stocks have accounted for a very large portion of the advance, but it is unrealistic to anticipate them continuing higher at the same pace. Other sectors must pick up the slack when these stocks begin a much needed correction.
2. The energy stocks have advanced significantly in a few short months, but is it sustainable considering the underlying commodity prices are not validating the advance.

If we reflect on the robust bull market advance in the Canadian markets from 2003 to 2008, it occurred on the back of a historic rise in commodity prices driven by demand from China and the emerging markets and a defined U.S. Dollar decline.

Can we witness a similar market condition? I don’t assign a high probability to it. I am sure there are a number of alternative arguments that can be made, but I consider the Canadian stock market vulnerable to a much needed market correction.

So should investors sell?

Maybe, but there are a number of problems and/or obstacles for investors and advisors. The first is the risk of exiting too soon. If an investor begins taking profits and raises cash, there becomes an increasing amount of anxiety if the market continues to advance and the bull market continues. In addition, there are a number of tax considerations to profit taking. If a market correction proves to be shallow and uneventful, the investor would have triggered unnecessary taxes and have to deal with the challenge of trying to strategically buy back into the market.

This is why it is an interesting proposition to consider S&P/TSX60 Index Options. There are strategic advantages to the European style index options. The index options are cash settled and do not involve the exercise of an underlying equity position. This ensures that no tax disposition occurs. This allows a diversified Canadian investor to hedge the downside risk of the broader Canadian markets with put options while leaving the primary composition of the portfolio unchanged. This puts the investor in a relatively reasonable position. If the markets continue to rally, the investor remains fully invested, if the market corrects or crashes, the index put hedge will substantially reduce the damage caused.

To learn more about the SXO (S&P/TSX60 Index Options) watch the video and download the PDF.