(Repeats Sunday's column)
* Fair chance seen of October pullback, not crash
* Risks include data, earnings, Europe, U.S. politics
* Medium term outlook for TSX still strong
By Claire Sibonney
TORONTO, (Reuters) - Canadian investors defied
September's track record as the worst month for stocks, but
they may be too scared to lift Toronto stocks much further in
the historically treacherous month of October.
The TSX rallied to a two-year high last month, wrapping up
its best quarter of the year so far. But strategists and fund
managers say a drop of a few percentage points is now a strong
"If markets are overbought, if we've had a fabulous run,
particularly in the U.S. in September, then all of that does
suggest a pullback in October," said Patricia Croft, retiring
chief economist at RBC Global Asset Management.
Spooky stories about October don't help matters, she said.
October typically ekes out modest gains for equities, but
it's also a volatile month, and has been marked by the biggest
crashes, including the catastrophic meltdowns of Black Tuesday
1929 and Black Monday 1987.
Most recently, the TSX plunged 17 percent in October 2008
when the global financial crisis was at its peak.
Closing at 12,363.08 Friday, the Toronto Stock
Exchange's S&P/TSX composite index is now well above
the median year-end forecast of 12,225 in a recent Reuters
But markets face a number of near-term risks. These include
more deterioration of economic data out of the United States
and the chance that third-quarter U.S. and Canadian earnings
reported later this month could disappoint.
"The psyche of investors is still fragile," said Garey
Aitken, Calgary-based chief investment officer at Bissett
Investment Management, a unit of Franklin Resources Inc.
"I don't think there's a lot of conviction on the part of
investors that we're setting the stage for big sustained
Also weighing this month is uncertainty over extending
George W. Bush-era tax cuts as U.S. midterm elections loom as
well as the likelihood of more bad economic news out of
Stephen Wood, chief market strategist at Russell
Investments in New York, noted that while the U.S. Federal
Reserve is prepared to embark on a second round of quantitative
easing, Europe is still withholding stimulus.
"Where Bernanke is kind of like 'paddles, adrenaline needle
to the heart,' Europeans are still talking austerity,
sterilization of central bank intervention," he said.
Wood added that further debt downgrades in the euro zone --
of which Spain is the latest casualty -- will be less
surprising, but could still rattle the market.
There is some weakness from a technical perspective as
well. Ron Meisels, technical analyst and president of Phases
and Cycles in Montreal, said mid-October presents the next
major window for this. The maturing of the 21-day, 70-day and
the 39-week cycles could all culminate into a mild pullback,
which he said should be taken as a signal to buy.
"There is a lot of money on the side...people will start
waking up," he said.
STOCKS MISTRUSTED, UNLOVED
While analysts and investors are talking about a pullback,
few foresee a full-blown correction of 10 percent or more.
"For the market to take a pretty significant downturn,
we're going to have to see the economic data turn south as well
as earnings," said Youssef Zohny, associate portfolio manager
at Van Arbor Asset Management in Vancouver.
Many strategists are also encouraged by a key contrarian
indicator -- retail investors have been shunning stocks in
favor of low-yielding fixed income.
"Last time we saw such lopsided flows ... was when everyone
rushed into stock funds in '99 and 2000," said Kate Warne,
Canadian market strategist at Edward Jones in St. Louis.
March 2000 marked the climax of the dot-com bubble,
followed by relatively low returns for equities for a decade.
"The next 10 years it's much more likely you're going to
see stocks outperform bonds, particularly if we begin to see
rising interest rates," she said.
Converging spreads between the dividends paid on stocks and
government debt yields are also seen as supportive. In recent
decades bond yields have been higher than dividends because
stocks were seen having greater potential for price
appreciation. But in many cases, this relationship has flipped.
Royal Bank of Canada, the country's largest lender,
has a dividend yield of about 3.73 percent. A 10-year Canadian
government bond yields just 2.8 percent.
"People obviously have been scarred by what we've lived
through in the past decade but particularly the last couple
years," RBC's Croft said.
"Stocks are just so mistrusted, so unloved, that I think
there is an opportunity here."
(Editing by Jeffrey Hodgson and Janet Guttsman)
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