Larbi Moumni, CFA October 19, 2018

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1 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Weekly Trends Larbi Moumni, CFA October 19, 2018 Chart Pack This week we look at a series of charts to help us take the pulse of the market and see what has/has not been working: While October seasonally starts strong and ends weak, this year has been different. The MSCI World Index is down 4.2% month-to-date (MTD) on the back of rising rates in the US and slower demand out of China. Canada was also not spared from this bloodbath with the TSX down 3.5% MTD, albeit less bad than global markets. The TSX broke support at the 200-day MA and fell to a low of 15,317 and found support at that level. Following oversold levels the index bounced back and we look for the market to consolidate here before attempting a recovery into year-end. The TSX has lagged its US counterpart over the past four years, but October is showing a slight reversal so far. As trade headwinds are out of the way with the USMCA signed and Shell giving the green light to invest in LNG Canada, things could turn positive for Canada in Q4. The market will now be looking at the NEB s Trans Mountain review process, concluding in Q1/19, and watching the outcome of the midterm elections down south. It is also worth noting that Canada is cheap at the moment considering that the S&P/TSX trades at 15.0x estimated earnings, a discount to its 10-year average of 15.8x and to the S&P 500 currently trading at 16.7x. While Europe has outperformed world markets so far this year on the back of a supportive ECB, issues in Italy and with Brexit have put a lid on more positive performance, causing the index to consolidate relative to the world index. We believe a Brexit deal could give the index direction. S&P/TSX Top 5 Gainers/Laggards* CORUS ENT INC-B GIBSON ENERGY PREMIUM BRANDS H KINAXIS INC COGECO COMMUNICA BAYTEX ENERGY CO NUVISTA ENERGY PARAMOUNT RES -A LUNDIN MINING CO FIRST QUANTUM -11% -8% -8% -8% -9% Source: Bloomberg, Raymond James Ltd; * 5-day price return 7% 9% 7% 7% 19% -35% -25% -15% -5% 5% 15% 25% S&P/TSX Market Internals S&P/TSX Market Breadth Weekly Advance 54 22% Weekly Decline % Advance-Decline -139 New 52 wk high 3 1% New 52 wk low 22 9% No. Stocks Above 50-d 61 24% No. Stocks Above 200-d 78 31% Arms Weekly Index 0.48 Oversold RSI (14-day) 30.5 Neutral 50-DMA 16,088 Downtrend 200-DMA 15,953 Downtrend Equity Market YTD Returns (%) S&P 500 Russell 2000 MSCI World S&P/TSX Comp MSCI Europe MSCI EAFE S&P/TSX Small Cap MSCI EM Canadian Sectors Weight Recommendation Consumer Discretionary 4.3 Market weight Consumer Staples 3.4 Underweight Energy 19.1 Overweight Financials 33.7 Market weight Health Care 2.1 Market weight Industrials 10.5 Overweight Technology 3.8 Market weight Materials 10.7 Overweight Communications 5.5 Market weight Utilities 3.9 Underweight Real Estate 3.1 Market weight Technical Considerations Level Target S&P/TSX Composite 15,557 17,650 17,000 16,000 15,000 14,000 13,000 12,000 11,000 Source: Bloomberg, Raymond James Ltd. 1.5 Sectors are based on Bloomberg classifications S&P/TSX Comp 50-Day MA 200-Day MA Please read domestic and foreign disclosure/risk information beginning on page 16 Raymond James Ltd King St W. Toronto ON Canada M5H 3Y West Georgia Street Vancouver BC Canada V6C 3L2.

2 Weekly Trends Larbi Moumni, CFA October 19, 2018 Page 2 of 16 S&P/TSX Facing a tough October While October seasonally starts strong and ends weak, this year has been different. The MSCI World Index is down 4.2% month-to-date (MTD) on the back of rising rates in the US and slower demand out of China. Canada was also not spared from this bloodbath with the TSX down 3.5% MTD, albeit less bad than global markets. The TSX broke support at the 200-day MA and fell to a low of 15,317 and found support at that level. Following oversold levels the index bounced back and we look for the market to consolidate here before attempting a recovery into year-end. TSX Bouncing off of Lows

3 Weekly Trends October 19, 2018 Page 3 of 16 S&P 500 at Record High, But S&P/TSX Lags The TSX has lagged its US counterpart over the past four years, but October is showing a slight reversal so far. As trade headwinds are out of the way with the USMCA signed and Shell giving the green light to invest in LNG Canada, things could turn positive for Canada in Q4. The market will now be looking at the NEB s Trans Mountain review process, concluding in Q1/19, and watching the outcome of the midterm elections down south. It is also worth noting that Canada is cheap at the moment considering that the S&P/TSX trades at 15.0x estimated earnings, a discount to its 10-year average of 15.8x and to the S&P 500 currently trading at 16.7x. Canada Outperforms the US so far in October

4 Weekly Trends October 19, 2018 Page 4 of 16 US Small Caps at Relative Support US small caps have continued to underperform large caps so far this year, but have reached a level of relative long term support. After testing support, small caps tend to bounce back relative to large caps. Russell 2000 Small Cap Index vs the S&P 500

5 Weekly Trends October 19, 2018 Page 5 of 16 Canadian Sectors in Favour So far this year, health care is been the best performing sector in Canada followed by information technology, industrials and real estate. So far this month, health care is the only sector to continue pushing higher on the back of marijuana legalization on October 17; the materials sector is also in positive territory. While industrials have pulled back on an absolute basis this month, the sector found support at its 200-day MA and has bounced back on oversold levels. Info tech, which has also been a favourite this year broke below its 200-day MA, leading us to watch the sector more closely for further deterioration. Canadian Industrials Still the Place to Be Info Tech breaking below its 200-day MA

6 Weekly Trends October 19, 2018 Page 6 of 16 Canadian Sectors Out of Favour Utilities, consumer discretionary, materials and energy have been the worst sectors so far in While consumer discretionary started the year off strong, the sector reversed its performance from its June peak and continues to trend lower this month. The sector tested support relative to the TSX and bounced on oversold levels, however, the short term moving average crossing below its long term average (death cross) keeps us on the sidelines. Energy continues to slump lower on pipeline delays along with widening oil differentials. Materials continues to trade at the lower end of its short term range with base metals, including copper and zinc, trading down this year on weaker emerging markets and slowing demand out of China. As for utilities, the sector is inversely related to rising rates and has been punished as a result. Consumer Discretionary Under Pressure Materials Within Trading Range

7 Weekly Trends October 19, 2018 Page 7 of 16 Where to Be in Canadian Defensive Sectors Defensive sectors in Canada have been trending positively since mid-summer with real estate leading relative to the TSX so far this year. Canadian Defensive Sectors Relative to S&P/TSX Real Estate the Best of the Bunch

8 Weekly Trends October 19, 2018 Page 8 of 16 Commodities Corner: Oil Oil prices found support at the 200-day moving average in August and subsequently traded higher. So far in October, the commodity is down over concerns that Saudi Arabia could use oil as a way to retaliate against critics over the disappearance of a Saudi journalist in Turkey. We see the commodity trend still going higher as we observe higher highs and higher lows. WTI Oil: Path of Least Resistance is Higher

9 Weekly Trends October 19, 2018 Page 9 of 16 Commodities Corner: Gold Safe-haven gold bounced off its $1,200 support level following a risk off sentiment with markets selling off over the past couple of weeks. Additionally, criticism from Trump saying the central bank rate increases are a threat to the economy caused the commodity to move higher. Bullion continued to face headwinds of higher interest rates, which push yields higher and strengthen the US dollar, putting pressure on gold prices by increasing the opportunity cost of holding non-yielding bullion. Bullion Tests Short Term Support

10 Weekly Trends October 19, 2018 Page 10 of 16 Commodities Corner: Everything Else The Thomson Reuters/Jefferies Commodity (CRB) Index, comprised of 19 commodities, has reversed its downtrend in August on the back of a weakening US dollar. CRB Strengthens on Weak USD

11 Weekly Trends October 19, 2018 Page 11 of 16 Fixed Income: 10-Year Cracking Three Percent The US 10-year treasury yield cracked 3% in September and continued higher in October, up to 3.25% on the back of solid economic data. The most recent jobs report showed the unemployment rate dropping to 3.7%, a level not seen in close to 50 years. The employment report also showed increased average hourly earnings, which could be a worry for the Fed trying to tame inflation. After raising the fed funds rate by a quarter of a percent in September, the expectations are for another rate hike in December, the fourth this year. In fact, in its latest FOMC minutes the Fed anticipates more rate hikes going forward. US 10 Year

12 Weekly Trends October 19, 2018 Page 12 of 16 Around the World in 30 Seconds Chinese mainland shares are down ~30% from their January highs, making it the worst performing index around the world this year. The decline has been driven by trade tensions with the US and a slowing Chinese economy. Investors will be looking to the Annual Economic Work Conference held in December where policy makers are expected to react to the slowing economy by announcing additional measures. China Path Remains Lower

13 Weekly Trends October 19, 2018 Page 13 of 16 Around the World in 30 Seconds - Japan Japanese equities remain above its resistance level relative to the MSCI World Index. Japanese Nikkei Breakout!

14 Weekly Trends October 19, 2018 Page 14 of 16 Around the World in 30 Seconds - Europe While Europe has outperformed world markets so far this year on the back of a supportive ECB, issues in Italy and with Brexit have put a lid on more positive performance, causing the index to consolidate relative to the world index. We believe a Brexit deal could give the index direction. Europe Relative to the World

15 Weekly Trends October 19, 2018 Page 15 of 16 Around the World in 30 Seconds Emerging Markets Emerging markets relative to the MSCI World index may have found a bottom. The strong US dollar, trade protectionist measures and economic slowdown in China have weighed on the region, causing it to test support relative to the world index in October. Emerging Markets: Looking for a Bottom

16 Weekly Trends Larbi Moumni, CFA Important Investor Disclosures Complete disclosures for companies covered by Raymond James can be viewed at: This newsletter is prepared by the Private Client Services team (PCS) of Raymond James Ltd. (RJL) for distribution to RJL s retail clients. It is not a product of the Research Department of RJL. All opinions and recommendations reflect the judgement of the author at this date and are subject to change. The author s recommendations may be based on technical analysis and may or may not take into account information contained in fundamental research reports published by RJL or its affiliates. Information is from sources believed to be reliable but accuracy cannot be guaranteed. It is for informational purposes only. It is not meant to provide legal or tax advice; as each situation is different, individuals should seek advice based on their circumstances. Nor is it an offer to sell or the solicitation of an offer to buy any securities. It is intended for distribution only in those jurisdictions where RJL is registered. RJL, its officers, directors, agents, employees and families may from time to time hold long or short positions in the securities mentioned herein and may engage in transactions contrary to the conclusions in this newsletter. RJL may perform investment banking or other services for, or solicit investment banking business from, any company mentioned in this newsletter. Securities offered through Raymond James Ltd., Member-Canadian Investor Protection Fund. Financial planning and insurance offered through Raymond James Financial Planning Ltd., not a Member-Canadian Investor Protection Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The results presented should not and cannot be viewed as an indicator of future performance. Individual results will vary and transaction costs relating to investing in these stocks will affect overall performance. Information regarding High, Medium, and Low risk securities is available from your Financial Advisor. RJL is a member of Canadian Investor Protection Fund Raymond James Ltd.