Hamilton’s E-Wave Analysis

Earlier this year, on the 21 of March, we opined that this bank would not go much higher and should in fact start a very steep decline.Here is the chart at that time;

At the time the stock had traded as high as $83.31, subsequently it managed to eek another dollar  but then did precisely as expected, dropping a little over 20% to, almost $67, a few dollars shy of the then suggested target.

Today’s earnings were good and that may have given it an extra little push, but the stock might have completed a 5-wave down sequence just a few days ago. The bottom part is a little muddled but with the benefit of hindsight it looks like wave 4 was an irregular flat (on the day the US was downgraded. Then followed a wave 5, more or less equal to wave 1. Waves 2 and 4 alternate and given the proximity to the expected target this makes the most sense (probable with a lot of other stocks as well!). What this means is that we are now correcting the entire wave 1 down, typically one should then expect a 62% retracement, to wave 4 or wave 4 of 3 etc.etc. and that is what is happening. $77.5 would be an ideal target and then the stock should drop, and do so faster than during the last 6 months (see previous blogs).

CM

If there is any bank in Canada that has made a public display of incompetence, is particularly prone to nepotism and is totally a-moral if not immoral, it is the Bank of Commerce. All over Canada we still have their offices like little fortresses in local communities, and of course, HQ in downtown Toronto was , for decades, the tallest building in the British Empire.  They have not been able to shed this mindset and it has cost them big time.

To get to the point, this chart “predicts” in EW terms that the stock may well drop to the 4th wave of previous degree, no different than your daughter getting married at age 27, not that I know here , but that is what 95% of them just happen to do. That is at about $22 As one truly silly investment advisor on BNN said today, “It is not timing the market, but time in the market that counts” .Clearly this guy has never put a foot on a trading floor of any financial institution, preferring to dream on in some sort of moronic isolation. Another $5 and you will have made NOTHING on this stock over a 14 year period, except the dividend! See previous blogs.

CM

On the left is today’s chart; on the right the view earlier this year on the 22nd of March. Apart from the slight throw-over the stock is doing precisely what should be expected after a completed B-wave. The stock is now down $14 from $85 to $71, it should continue to about $43 before finding some support. After that it should go lower.

CM

A month (Feb 18) ago I presented this same chart. Today we are 47 cents higher than then but have been lower most of the time in between. The stock kept hugging the upper trend-line of this wedge formation. RSI and MACD have diverged for the longest time already but something is going to come out of the woodwork that will bring this stock back to the levels of August 2010, just 5 months after the financial meltdown. It should all happen soon and rapidly once it does.

CM

As the head of the largest Quebec based pension fund recently cynically observed, the TSE is one big China play if you take out the banks. Everything goes up 50 points a day for months on end but most of the time the banks do not partake in this feast. The RY has even earned an outright sell rating by one of the better and independent (though ironically affiliated with RY) analyst bureaus , that goes by a name that suggests it is telling the truth, albeit in Latin.

   We have steadfastly maintained that the Royal Bank should trade at around $44 before it does anything else. Despite the fact that it has taken about 4 months longer than originally anticipated nothing has changed that outlook. The first leg down from the all time peak of $63 (and double-top plus a little), was a clear 5-wave move. The correction following that very quickly regained almost 62% but it was only part of a more complex correction. Now the stock is again approaching that level and even though it could go slightly further it is within a few dollars of the target. Then it should drop at least to $44

The Commerce (a longer time frame!) has followed a different path but it is equally clear. The A-B-C from the lows has a very clear (so far at least) wedge formation that is within a single dollar of the upper trend-line. Amazingly the RSI and MACD do not confirm the new highs.

By the way, the CM/RY spread trade would have worked exceptionally well!

CM, RY

First a chart of just about every single one of them;

From top to bottom we have RY, which made a new high and then dropped 10% or so, BNS that not only made a new high but stayed up there, CM (CIBC) that seems to be groping in the dark, BMO, middle of the road, NA National, HCG Home Capital Group (see comments elsewhere) the best of the lot and , ironically, the only sub-prime lender, CWB Canadian Western Bank they finance anything that belches diesel smoke and is yellow, the Laurentian Bank and last the TD.

Notice that despite some , sometimes large, deviations most have done more or les the same thing. All had 5 waves up, then a big drop, and then an attempt to a new high. Some failed others did not. The TD is in the middle of the pack with a simple double top.

All are sells! These banks operate as a cartel, with intended or unintended collusion all over the place, with rotating price setting etc. etc. This is the same all over the world but Canada does it best. They have a huge lobby in Ottawa and usually get what they want (with the notable exception of further mergers). If they want private wealth management to stay that way, as opposed to broadening the CPP, they will get that.

There is one big problem with this. Ultimately ,with globalization , the system will have to be opened to competition when Canadians tire of paying twice as much as the next guy. They already have just about everything. In the mid eighties they took over mortgage lending from the trust companies and now control about 80% of that. A few years later they took over all the  major investment dealers and now control much of that. Gradually the independent mutual fund firms are also taken over and now they control the bulk of that. They have made sizeable gains in insurance and are gaining momentum. There is precious little left other than leasing and travel. So where is the growth going to come from?

    At the same time new rules  (Basel 3, Volcker, Capital requirements etc.etc.) and regulations are crimping their ability to move beyond the straight and narrow. Not that they ever did much of that but even so they will be doing less of it in the future.  Soon, hopefully, they will lose the absolutely enormous benefit bestowed upon them by ridiculously low rates. This is a mature industry, and the next 20 years are not likely to resemble the last. The only thing they still have going for them is the perception that they are safe blue chips. Any broker who is not sure what to do buys bank stock and this artificially keeps a bid under the stocks, but from the charts it is abundantly clear that this can change very fast as in 2008, maybe it will again.

   From a buy low sell high standpoint , none of the above banks are a buy today.

BMO, BNS, CM, CWB, HCG. LB, NA, RY, TD

See Feb. post on CM

CM

We have had our eye on Commerce bank before, usually in the context of a spread trade where you actually by the the one that breaths incompetence and sell short the star performer. The trade worked fabulously but required a certain degree of sophistication. Today the Commerce reported earnings and , of course they outperformed. What many analysts do not seem to know is that banks are not obliged to report like others under GAAP. They have their own rules under the Bank Act which, among other things, allows them , rather arbitrarily, to allocate loan losses over a 5 year period. That is known loan losses, not anticipated ones, which is why most of the loan loss allocation is little more than working the old fashioned cookie-jar. Well today’s euphoria was very much based on that , or perhaps people were simply happy that management did not again give away a few billion unnecessarily as in the case of Enron. Anyway here is the chart;

I am not sure how to count the retracement, probable an a-b-c X a-b-c, but that does not matter given the weight of the other evidence. As pointed out a long time ago, you do not want to own this if and when it gets closer to $78, which is roughly the standard  62% retracement. Already momentum as measured by RSI is failing. Same for MACD, not shown.  Remember also that 5-waves, which this one clearly has from the high of $105, NEVER stand alone. The potential for a severe down turn soon is therefore very real and should not be ignored.

CM