The Scotiabank Canadian hedge fund asset weighted index, which tracks hedge funds that have been around for at least a year and have $15-million or more under management, was up 4.5 per cent as of the end of April, beating the S&P/TSX composite index, which returned 4 per cent.MARK BLINCH/Reuters
The S&P/TSX composite index was deep in the red today, with bears taking command of all 10 industry sectors. The index closed down 213.8 points, or 1.4 per cent, at 14,743.33. The decline was led by energy stocks, which were down 2.25 per cent. Seven of the 10 sectors declined more than 1 per cent.
The slide came amid much smaller losses in the U.S., with the S&P 500 only down 0.46 per cent and the Dow Jones industrial average down 0.65 per cent. Year-to-date gains for the DJIA were erased today as the index's return retreated into negative territory. Here in Canada, the S&P/TSX composite index is clinging to its positive year-to-date gains, with a 0.76 per cent return - not including dividends.
This morning's Canadian economic data were positive. Canadian housing starts came in well above expectations, rising to an annualized rate of 201,700 in April compared to expectations of 185,000, and building permits figures were also better than expected.
So why the downdraft in the market?
The July crude oil contract in New York closed down 1.7 per cent at $58.14 (U.S.) per barrel - a pivotal point, as it's hovering near its 50-day moving average. If oil breaks below $58.00, charts suggest a quick swoop down to $56.
But other than crude, there simply seems to be a lack of buyers. There is little fresh breaking news.
A key measure to watch when volumes are making a large move, either up or down, is volume. Volumes are relatively low today, at 154 million compared to the one-year average of 196 million, so this slide appears to be a function of a lack of buyers, and some profit taking, rather than panic selling or capitulation. The Chicago Board Options Exchange Volatility Index, commonly referred to as the VIX, is a measure of fear in the marketplace. We are seeing the VIX percolate; however, it is no-where near concerning levels.
There are a number of issues that could be an overhang on the market over the near-term. Seasonality is one factor. "Sell in May and Go Away" is a theme that may play out this year given lack of buyers and the high valuation of the S&P/TSX composite index. The index is currently trading at 17 times forward earnings, high relative to the long-term average of 14.5 times. In addition to valuation, investors may opt to wait on the sidelines until we have a resolution on the situation in Greece, which may not come until the end of June. We also have the overhang of the Fed – when will the U.S. central bank raise interest rates is a question on investors' minds.
With a lack of clarity and high valuations, the market may stay volatile, at least in the near term, and be unable to achieve positive, sustainable momentum.
Investors are waiting to see the U.S. retail sales report due out on Thursday to see if Friday's strong U.S. employment report is translating into higher consumer spending.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market.