The TSX Composite index has moved sideways in the past few months as investors watch the deteriorating Canadian and Chinese economies. The index, which tracks the biggest publicly traded companies, was trading at C$20,400, a few points above last month’s low of C$19,675.

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Bank of Canada decision

Canadian stocks have underperformed their American peers this year. While the TSX Composite has risen by ~6% this year, the Nasdaq 100 and S&P 500 indices have jumped by double digits.

Canadian stocks have lagged for several reasons. First, the Canadian economy is not doing well as interest rates remain at an elevated level. Canada is more sensitive to interest rates because of the elevated level of household debt. Household debt has jumped to above 7% of the GDP, making it the biggest in the G7.

The impact of this crisis is becoming clear as delinquencies rise. Recent data showed that mortgage and other personal delinquencies have been rising. FOr example, RBC has warned that they will rise by 30% this year.

Recent economic numbers showed that the economy is weakening. As I wrote here, Canada’s economy contracted by 0.2% in Q, signaling that the situation is not doing well. The unemployment rate rose to 5.2% in June.

Meanwhile, the rising interest rates have led to a higher yield on risk-free assets in the country. The yield of 10-year Canadian government yield has risen to 3.70% while the 5-year stands at almost 4%. Therefore, a rotation from stocks to bonds has been happening.

Third, there are signs that a rotation is happening from Canadian equities to the high-performing American ones. Finally, commodity prices have been under pressure as the Chinese economy stalls.

The next important catalyst for the TSX index will be the Bank of Canada interest rate decision. Analysts expect it to leave rates unchanged as it attempts to engineer a soft landing. 

The best performing TSX constituents this year are Celestica, Shopify, Blackberry, Cameco, and Athabasca Oil. All these shares have soared by over 60% this year.

TSX Composite index forecast

The daily chart shows that the TSX index has been in a tight range in the past few months. It is now consolidating slightly below the 61.8% Fibonacci Retracement level. Most importantly, the index has formed a symmetrical triangle pattern that is shown in green. This triangle has a long way to go to reach its confluence level.

Therefore, I suspect that its underperformance will continue for a while. The key support and resistance levels to watch will be at C$20,800 and C$19,665.

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