Further TSX gains could be harder to come by

The Toronto stock market could still head higher this week following a string of better than expected bank earnings and higher oil prices.

TORONTO — The Toronto stock market could still head higher this week following a string of better than expected bank earnings and higher oil prices.

But as the rally on the TSX approaches the end of its sixth month with the main index up about 45 per cent, investors are looking for good reasons to send it up even higher.

September has a brutal reputation for sharp declines and market tone could be shaped by August unemployment data coming in at the end of the week.

“It certainly looks like the market wants to go a bit higher here but it is starting to look tired,” said John Johnston chief strategist at the Harbour Group at RBC Dominion Securities.

“You’re looking at an extended rally and it’s still not easy slogging ahead.”

The Toronto market drifted to a flat close Friday, but up for the week in an advance largely fired by the financial sector after most of the big banks handed in earnings reports that largely met expectations.

The glaring expectation was CIBC (TSX:CM), which posted earnings and loan-loss provisions that missed expectations.

Johnston said the generally strong bank earnings reports reflect a Canadian economy “on the cusp of a recovery or rounding the corner from recession to recovery.”

But it’s quite a different issue as to whether the good results are enough to give the strong rally that started in early March another leg up.

“I think a lot of people are now questioning, (saying) OK, we’ve come a long way in a very short period of time,” said Patricia Croft, chief economist at RBC Global Management.

“Is this just a bear market rally — and in the past there have been bear market rallies of 50 per cent which are subsequently given back — or is this the beginning of a new bull market?”

She pointed to a couple of concerns, including the fact that sentiment is very bullish right now, which she called a “classic contrarian indicator.”

Also, Croft observed that a survey of investor intelligence shows the amount of optimism has the highest level since 2007.

And on top of that, the market is headed into September, “which is a notoriously weak month for the market.”

“So I think technical factors are negative, seasonality is negative and the fundamentals, while they are positive, right now I still think there’s a lot of grave concern about what the year ahead looks like,” said Croft.

Croft is looking for more concrete data which would justify further rally gains, signs that the economic recovery can sustain itself without massive government stimulus and that credit is flowing freely, noting a U.S. Federal Reserve loans survey that indicated banks are still reluctant to lend.

“It is getting better, past the worst, there’s no doubt about that — but the banking system is still dysfunctional” she said.

“So I think those two elements are missing and that’s what it takes to declare that this is a bear market and not a bull market rally.”

Optimistic sentiment will be tested at the end of the week when Canada and the United States release jobless numbers for August.

“I think the trend is still one of gradual but steady improvement in the labour market towards fewer job losses — we’re not in the job growth phase yet and that’s going to take a while longer,” said Johnston.

The consensus calls for the loss of another 275,000 jobs in the U.S. during August, slightly worse than July’s jobless number with a rise in the unemployment rate to 9.5 per cent from 9.4 per cent.

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