Sunday, May 23, 2010

The worst of the correction is likely over

On Friday, the Dow rose 125 points to close at 10,193 points, on news that Germany has approved its part of the commitment for a new European stability fund. Financial and commodities stocks were particularly strong, with JP Morgan Chase and Bank of America rising 5.9% and 4.5% respectively on Friday. In addition, the volatility index VIX dropped to 40.1, the euro rose 1.7% to post its largest weekly rise in 8 months, and the price of copper rose 4%. It was simply a reversal of what had been happening the whole week.

Given the current market condition, I stand by my prediction of a 10% correction for the TSX (which takes the TSX to 11,089.58). With Friday's developments, I believe the pace of decline in the stock market will slow in the coming weeks. 100-point falls on the TSX will replace 200-point drops, and the TSX will have days in which it ends in positive territory, in addition to days where it ends in negative territory. However, with the VIX at 40.1, which is higher than the norm of 20, expect significant volatility in the week ahead. Also, keep in mind that in order for the TSX to experience a 10% correction, it has to further fall 431 points.

For individuals with cash on the sidelines, now would be a great time to buy. In terms of the TSX, the only shares that I see are currently overpriced are shares of banks and gold and silver companies. Meanwhile, commodities and energy are sectors that offer many stocks that are undervalued, such as Canadian Oil Sands Trust (COS.UN), PetroBakken Energy (PBN) and Teck Resources (TCK.B). These stocks, along with many others in their sectors, offer tremendous upside potential in the coming months.

No comments:

Post a Comment