The End Draws Closer

by JDH on July 29, 2023

Good title, eh?  The End Draws Closer.  The End of What?  What does “Closer” mean?  Are we a day away from whatever the end is?  Or five years?

I don’t know. I get up early on Saturday mornings and write down my random thoughts.

But let’s start with a chart, shall we?  This is the chart of the BMO Equal Weight Banks Index ETF, ZEB on the Toronto Exchange, which, as the name implies, is an ETF that contains the big banks in Canada.

As you can see, the bank stocks crashed in March 2020 when we thought the world would end, then had a massive bull market (due to low-interest rates, and government stimulus) leading to a peak on February 9, 2022.  Since then, a year and a half ago, ZEB is down 18%.  (It was down 27% by October 2022, but has since recovered, somewhat).

The point, of course, is that the Canadian bank stocks are in a bear market, or a correction, or a pause, or whatever you want to call it.  We’ve had “green candles” the last four weeks, so does that mean the worst is over?  The bottom is in?  Perhaps, but probably not.

Starting exactly a year ago, the week of July 25, 2022, we had four green weekly candles.  Then down it went.  At the bottom, in October 2022, ZEB had a string of seven green candles.  There were four green candles in April of this year.

My guess is that the Canadian bank stocks are due for a pause if not a leg down, for two reasons:

First, we’ve had four up weeks in a row, so it’s unlikely we’ll have four more without a pause.

Second, the obvious downtrend line in the chart above has been touched, and I assume it will act as significant resistance.

“But technical analysis is B.S.,” you say.  Who cares about the stupid charts?

Fair enough (although if enough people believe that the squiggly lines mean something, they become a self-fulfilling prophecy).  Let’s instead look at the fundamentals.

The yield on the 5-year Canadian government bond is 3.93%, the highest level it’s hit since February 2008.

The yield curve remains massively inverted.

The inversion between the 2s and the 10s is -1.164%.  It was around -0.75% in March (but has narrowed from -1.289% two weeks ago).

I could go on, but you get the point.  Those are all signs that point to a recession.

So, for now, I’m hoarding cash, and we’ll see how it shakes out.