My market message from Thurs, Jan 26th, argued for the inclusion of Canada in a foreign stock portfolio. I'm going to expand on Canada's unique role in the global intermarket picture in this message. In my view, Canada is unique for at least three reasons. First, it's very highly correlated to the U.S. stock market. That shouldn't be a surprise because Canada is the biggest trading partner with the U.S. It also means, however, that the two markets need to be charted together to ensure that they're sending the same messages. Another reason why Canada is important is because it's highly correlated to the Canadian Dollar. And the Canadian Dollar is closely tied to the trend of commodity markets. That's because Canada is one of the world's biggest exporters of natural resources. The Canadian markets, therefore, tell us a lot about the direction of global stocks, commodities, and currencies. Chart 1 compares the Toronto Stock Index (red line) to the S&P 500 (blue line) since 2000, and is simply intended to show the close correlation between the two markets. Over most of that time, the correlation coefficient (below chart) fluctuated between .75 and 1.00. One exception was during the first half of 2008 when Canadian stocks kept rising while the U.S. market plunged (see circle). That was due to the fact that commodity prices kept rallying into the middle of 2008 before peaking. Canadian stocks peaked with commodities.
