Canadian Banks.

So now that we have a prototype how does this fit with the Canadian Banks? First a bit more about B-waves. They can be regular, or irregular which simple means that they climb above the starting point of the A wave. Their are no hard and fast rules but I believe it is more or less accepted that irregular B-waves should not exceed the top of the A-wave by more than about 30 t0 35%. Here is an example, CWB, Canadian Western Bank, they pride themselves on financing anything that is yellow (think CAT) and belches diesel smoke;

cwb june 29 2015

You can clearly see the B-wave. This one just happens to be at the edge of the 30 to 35% or so limit, but in every other respect it is perfectly clear. Target $8 or lower. If that sounds ridiculous than keep in mind that it last traded there just 10 years ago.

An error crept into the chart, the 4th of previous degree line should be lower, at $6!

The next two big banks that have the clearest B-waves are CIBC, CM and BMO;

CM june 29 2015bmo june 29 2015

Commerce is of particular interest as it managed to double top, the last big bank to do so much to the surprise of many that work there and thought they would never see the day. In any event, nice B-waves and terrible targets. BNS and National Bank have B-waves that are borderline but still acceptable given the channels they are in;

bns june 29 2015Na june 29 2015

Royal appears to follow the triangle scenario a little better and TD is unclear, perhaps because the Canada Trust part changed the company to such an extent that it simple cannot be looked at on a continues basis;

ry june 29 2015td june 29 2015

Royal sticks to it’s channel quite nicely. It would fit either of the two scenarios equally well, in fact it probably fallows the path of JP Morgan the best despite the fact that it has outperformed it by a long shot. TD must fall into the B-wave scenario given the otherwise not acceptable overlap. Putting it all together, including the insurance companies we have the XFN, the TSX capped financial ETF;

XFN june 29 2015

There can be no question that this is a B-wave, AND that it is complete. This chart has less time on it as the ETF did not exist prior to 2002. Fortunately, we can still see where the wave 4 of previous degree, that is on the way up, is. $11 and that is where we should go under EW rules and guidelines.

We have left out HCG, Home Capital Group. It is by far the best performer and fundamentally runs a sound business model. It does not fit easily in either scenario but with a little imagination we can make the triangle – distorted though it may seem to be – work quite well. The top is even perfectly above the apex! Here is that chart;

HCG june 29 2015

The conclusion must be that you do not want to be in the financials, period. By the way, this negative outlook is in no way predicated on what happens in Greece. If the timing seems to coincide it would be just another one of those fallacies, after this, therefore because of this.

NA , National Bank

This bank has done exceptionally well; together with the TD it is one of the few Canadian banks that is trading at levels above what they were prior to the second great recession. It trades at a p/e of almost 10 so,by that measure at least, it is not even overvalued. Today’s action by the Fed and half a dozen other Central Banks, boosted bank stocks all over the world except parts of Asia where the news came out too late. The market took comfort in the idea that at least the world banking system was not going to come to a screeching halt due to lack of liquidity (this came as a surprise, most were expecting QE3, but the writing was on the wall. Our own CB Governor Mr. Carney only a few days ago, remarked that the situation was “barely contained”. A level of frankness that is unheard of in those circles. He should know given his new side job). We will probable never know quite how dire the situation really was, but the message that a chain is only as strong as it’s weakest link, was brought home rather abruptly a week earlier when the Germans could not sell a government issue. All of a sudden they are all in the same boat, and not just the Euro zone , but the world at large.

There is just one little problem which is best illustrated by the following example. Suppose you go out for a night on the town with 17+ friends and forget to make arrangements about who pays what and when. It is 3 o’clock and most of your friends have left. You are presented with a huge bar bill that you really do not want to pay. The barkeeper offers you credit for a few days. Does this solve the problem? Obviously not. The problem is not liquidity, but solvency, something the central banks have little or no influence over. I suspect that in EW terms we are looking at part of a wave 2 of C as shown with the National Bank charts.

National Bank of Canada, nov 2011 b

It is near impossible to be absolutely sure that the leg up from the 09 lows was a B wave. However if you look at TD bank that has followed a similar trajectory and you stop to consider that the C part is an almost exact 62% of the A, it is a very plausible assumption. On top of that it really is rather academic as, if this was a fifth wave, you would still fall  to $25 (4th of previous degree) instead of $15. Here it is in greater detail;

NA nov 2011 mNA nov 2011 s

You can always enlarge the chart by clicking on it. First the B-wave. Clearly it is divided in two almost equal parts and it is almost impossible to construct a 5-wave move out of this. Then looking at the short term chart, it too is quite clear. The triangle is a wave 4 of 3, the only proviso would be that the 5th wave may not even be over as it is hard to subdivide into 5 waves, even though it’s length is more than adequate. Also, though unlikely, we could still be in a wave 4 triangle, having completed the a and b and now in c with d and e still to go. The sheer size of the second leg in the triangle makes it very unlikely, certainly relative to the channel. Time will tell.

NA, National Bank ; HCG, Home Capital Group

Both these banks are outside the mainstream, one because it is primarily Quebec based and therefore less Anglo so to speak and the other because it chooses to do what the others will not do, that is extend credit without a lien on the first born, mom & pops cosigning and a collateral coverage of at least 3x. Perhaps the resulting charts could better reveal where we are;

NA 2011 l NA 2011 s

In the big picture National Bank probable topped at the first top, in purple. But even if it is the second top, in blue, one more down leg could still be in the cards. So far we still have a good way to go to reach the initial target of about $53 (the B-wave level within the larger B-wave).

HCG l 2011 HCG s 2011

Home Capital is behaving a little better in that it is already much closer to the first initial target of about $37. Also it has a far narrower channel adding credibility to the count. A single additional wave down could complete the first move, but this one could already be complete! If wave 3 (in blue) is shortend, waves 3 and 4 in blue would become 3 and 4 in purple and the first 5 down would be complete. All the other banks have equally mixed signals so buy only at the bottom if it occurs close to the b-wave level.

The Canadian Banks.

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

RY banks BNS banks

cm banks bmo banks

na banks hcg banks

cwb banks  LB banks

TD 2011

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.