Based on my observation over the years, the Canadian stock market (TSX Index) seems to be pulled by:
- The U.S. stock market. Canada’s economy is heavily reliant on the U.S. economy.
- Commodity prices. Canada’s exports and economy are heavily reliant on commodities. A commodities bull market = bullish for Canadian stocks. A commodities bear market = bearish for Canadian stocks.
Canada’s stock market has a strong correlation with the U.S. stock market. U.S. financial markets account for 40-43% of global financial markets. As the elephant in the room, U.S. financial markets affect all other financial markets.
I’ve demonstrated that you can beat buy and hold in the U.S. stock market by using simple fundamental trading models (see here). But can you do the same for other countries? Can you beat buy and hold in ex-U.S. stock markets by using fundamental/economic data-driven trading models?
That answer is YES for Canada’s stock market.
Buy and hold the Canadian stock market
If you bought and held the Canadian stock index TSX from February 1980 – present, you would have achieved an average annual return of 5.42%. As you can see, this is less than the U.S.’ average annual return of 7-8%.
You can achieve an average return of 7.09% in the Canadian stock market using the strategy that I demonstrate below (without any leveraged ETFs). More importantly, you avoid the big stock market crashes such as 2008.
Trading model for Canadian stock market (TSX)
Buy and hold a TSX ETF unless the TSX falls below its 10 month moving average (monthly CLOSE $) AND Canada’s unemployment rate rises above its 10 month moving average.
Shift into 100% cash when the TSX falls below its 10 month moving average AND Canada’s unemployment rate rises above its 10 month moving average.
In other words, buy and hold the Canadian stock market unless the stock market starts to trend downwards and Canada’s economy starts to deteriorate. Then shift into cash.
Click here to download the model in Excel.
As we’ve said before, a country’s stock market and its economy move in the same direction in the medium-long term.
This model yields an average annual return of 7.09% vs. Canada’s average of 5.42%. As you can see, this clearly outperforms buy and hold.
This is what the chart looks like when you overlap Canada’s stock market with Canada’s unemployment rate.
The inverse relationship between the unemployment rate and stock market becomes very clear when you flip the unemployment rate on its head.
Here is when this model states that you should be long the Canadian stock market. Be long during the orange shaded eras.
Click here for more free trading models.