The Canadian stock market are about to rally, this analyst says

So far, 2018 has been a largely forgettable one for the Canadian stock market.

But a new short-term rally should be in the cards, says analyst Javed Mirza of Canaccord Genuity, who suggests adding stocks in the industrials and consumer discretionary sectors over the next month while reducing energy stocks.

The Toronto Stock Exchange re-opened on Monday after a technical outage halted trading on Friday, but the market remains in the doldrums with the S&P/TSX Composite Index still unable to get above a six-week high of 15,791.15.

That mark is itself a far cry from the 16421.42 of early January that was followed up by a significant market correction, one from which Canadian equities have yet to recover. Year to date, the TSX Composite is down 3.41 per cent.

But signals are pointing to a short-term rally, says Mirza, who sees industrials reaccelerating relative to the TSX Composite. In a technical comment on Monday, Mirza points to two stocks, in particular: New Flyer Industries Inc. (New Flyer Industries Stock Quote, Chart, News: TSX:NFI) and Transcontinental Inc. (Transcontinental Stock Quote, Chart, News: TSX:TCL.A).

“Both stocks are in intermediate-term uptrends, are seeing relative strength improve versus the TSX Composite, and showing signs of accumulation (buying pressure), all of which are technical positives,” he says.

“We initially suggested adding Energy exposure in mid-March as the Energy sector began to improve on a real and relative basis. The sector is now stalling on a real and relative basis,” the analyst says.

“We highlight the weakening technical profiles of Crescent Point Energy Corp. (Crescent Point Energy Stock Quote, Chart, News: TSX:CPG) and MEG Energy Corp. (MEG Energy Stock Quote, Chart, News: TSX:MEG). Both stocks are showing weakening relative strength versus the TSX Composite, upward momentum is stalling, and volume is showing signs of selling pressure, all technical negatives. For clients able to take advantage of tactical positioning, we would reduce exposure,” he says.

Mirza says that the TSX is above its 50- and 200-day moving averages and is above its 40- and 200-week moving averages, all considered strong technical positives.

“The S&P 500, TSX Composite, Nasdaq 100 and Russell 2000 are all attempting to push higher, consistent with a short-term (two-to-four week) rally phase,” he says.

The analyst says that the sectors in the TSX Composite that are currently on weekly “mechanical buy” signals relative to the TSX Composite include: telcos, utilities, REITS, consumer discretionary, materials, energy and industrials.

The sectors on “mechanical sell” signals relative to the TSX Composite include: financial services, information technology, consumer staples and health care.