bmo dec 29 2016xfn dec 29 2016

Banks, all of them and not just the Bank of Montreal, constitute a large sector of the investible Canadian market. In Canada, when you are not sure what to do, which for the past seven or so years  must be just about all the time, you buy a bank. Not any bank, but one of the big five as the small ones usually turn much earlier as some already have, a few years ago, see HCG and CWB.

     As always there is some ambiguity in the EW counts but the alternative is pretty draconian. Theoretically BMO could drop back to the level of the 4th wave of previous degree, say at $20. The same holds for the capped financials. Ergo it is time to lighten up or even sell the whole lot.

Below are charts of HCG and CWB. They peaked quite a while ago and are precariously holding on to recent corrective gains. After that they should continue down.

hcg dec 29 2016cwb dec 29 2016

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.

XFN, Capped Financials, again

XFN july 19 2013

This ETF contains both the banks and insurers. The banks really shot up during the 1993 to 2000 period after which the insurers started to do the same as a result of their de-mutualisation. The top in 2006 therefore marks the end of a lengthy period of prosperity here in the Canadian financial sector. The question now is , was this an extreme or part of a normal progression. In the States there is hardly any doubt that when banks accounted for , give or take, 40% of all corporate earnings that they had grown a bit too much. Here the numbers were not that extreme but nevertheless it is difficult to understand why these institutions collectively trade at $26, just $2 below their all time peak , unless one assumes that their oligopoly position will continue to allow them to extort unlimited “rents” in the future. Here are a few points to contemplate;

1. Contrary to public perception the Canadian financial institutions did receive comparable bail-out packages even if the word bail-out would be somewhat of a misnomer. A total of $125  bln. was pumped into the system, rates were dropped sharply (initially good for lending institutions) and , over time, the CMHC ended up insurer about $600 bln+ of mortgages , which is about as much as the entire public debt and on a par with Fannie and Freddie in the US. This will end.

2. Regulation is increasing and the rules for certain financing activities have become less relaxed. Clearly this should have a detrimental impact on future business and the cost of doing business.

3. In an environment where borrowing is considered to be the cause of much of world’s setbacks it is difficult to see how banks, Canadian or otherwise, can grow that part of their businesses. Fee related things like credit cards etc. will be the name of the game.

4. It is doubtful that things like “wealth management” or going overseas are going to pick up the slack elsewhere. Going after insurance business and or car financing often cannibalizes other players in this group.

5. Trading is no doubt becoming more difficult, particularly if you are not part of the “inner circle” as with JPMorgan, Goldman etc.

The list goes on but the point is essentially that there is no good reason why these institutions should trade $2 below their peak. The EW count suggest they won’t and could, in fact, go down dramatically any moment now.