A Shift Favoring Canadian Equities

Since last August traders have been showing a strong preference for U.S. equities over Canadian stocks. But this trend appears to be ending as the relative performance of the two markets has begun showing signs of a shift favoring Canada.

In September ’14 I wrote a post for See It Market titled Trouble Ahead For Canadian Stocks? as I outlined the bearish chart I was seeing for $EWC, the Canadian ETF. A double top had formed and was accompanied by a bearish divergence in momentum. Price ultimately broke support of the prior high and fell roughly 18% over the next five months before finding a low in January of this year.

While it seems the theme has been U.S.-focused over the last several months, that may be changing. J.C. Paret’s wrote a good post on this topic with his expectations for the second quarter of 2015. It seems Canada may also be showing some signs of positive relative strength. I first mentioned this ratio and the bullish divergence in momentum on Twitter in early February. However, price continued to favor the S&P 500 as Canada continued to lag our markets for another two months.

Below is daily chart of the relative performance of $EWC and $SPY. When $EWC is outperforming $SPY the line rises, when the opposite is true the line goes down. This can occur by $EWC rising more or even just falling less than the S&P 500 ($SPY). As you can see, the relative performance has been in a down trend since August while the Relative Strength Index (RSI) momentum indicator has been in a bearish range for the same period of time.

But as of late the tides have begun to turn. The ratio between these two markets has begun to rise and the declining trend has been broken. We can also see that momentum has broken above its resistance that helped define its range. This is a positive sign for $EWC that momentum may begin supporting the thesis of Canadian stocks taking the reins.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.