Market Analysis | 1 12 December 2013

Market Analysis – TSX Under Pressure, Breadth, and Switch Ideas

Shawn Chopra

1. 416.869.7924

[email protected]

TSX COMPOSITE / MARKET BREADTH / SWITCH IDEAS In the first week of December we highlighted two reports that observed weakness in global markets that was translating into the TSX. In this report, we observe continued selling in the TSX and monitor market breadth. We offer a few hedging instruments, TSX support levels, and switch ideas. In the back half of the report, we technically rank the 10 TSX GICS and note that the Financials/Industrials indices are moving from an overweight to neutral technical ranking month over month. Two negative breadth observations and a technical target on the TSX: The TSX Advance/Decline line has been trending lower since Oct/13 and trading below its 20day MAVG (Figure 1) Percentage of stocks above the 50-day moving average has been trending lower since Oct/13 and broken a key upward trend line (Figure 2) Technically, the TSX looks to be appoaching 13,000 and potentially 12,700 on a spike lower (Figure 3) What is causing the sell-off? Sectors that have led the rally, Banks/Industrials, have started to sell off (we highlight CNR/CP/MG/BMO as examples of stocks under pressure) Year-end profit taking QE tapering expectations increasing, thus expectations of higher interest rates in the coming months When does the selling end? We would suspect that as we approach next week’s Fed meeting on Dec 18/13, the FED may offer some level of comfort with respect to interest rates and potentially help fuel a “modest” rally into year-end. BUT what stocks to buy? What looks good technically? (Figure 8-11) Switch into CM from BMO. Relative to BMO, CM trades above 50/100/200-day moving averages, a strong technical sign Poor action in the MACD/RSI has not corresponded to poor price action in CM versus BMO, another strong technical sign

Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX | CF. : LSE) The recommendations and opinions expressed in this research report accurately reflect the Investment Analyst’s personal, independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important information,

please see the Important Disclosures section in the appendix of this document or visit Canaccord Genuity’s Online Disclosure Database.

Market Analysis | 2 12 December 2013

Buy MFC/SLF -> Expectations of higher interest rates and getting close to support levels. MFC at $19 to $19.50 offers a great entry point, in our view. Rising uptrends in 50/100/200day MAVG confirming bull thesis is still intact. RSI/MACD are extended to the downside, expecting a reversal soon SLF back at support on the 50-day MAVG, $35.50. Rising uptrends in 50/100/200-day MAVG confirming bull thesis is still intact. RSI/MACD are extended to the downside, expecting a reversal soon Buy CNQ/CPG for energy exposure. Both have broken out of bullish ascending triangle patterns. CNQ targets $40. CNQ was down 0.78% vs. TSX Energy Index down 1.38%. Great relative strength CPG targets $44. CPG was down 0.72% vs. TSX Energy Index down 1.38%. Great relative strength How to protect your portfolio? Hedge market/sector exposure with ishares ETF’s (TSX 60 – XIU, Financials – XFN, Energy – XEG) Use Proshares UltraShort 20+ Year Treasury ETF (TBT) to hedge against higher interest rates

Market Analysis | 3 12 December 2013

S&P/TSX Advance/Decline Line Short-term trending lower, bearish signal. Since Oct/13, more stocks declining than advancing. Trading below 20-day moving average Figure 1: S&P/TSX Advance/Decline Line

Source: Bloomberg

Percentage of stocks above 50-day moving average & TSX Solid line, % of stocks above 50-day MAVG has broken key trend line dating back to June 2013 Dotted line: recently the TSX has started moving lower and in same direction as the percentage of stocks >50-day MAVG Figure 2: % of stocks above 50-day moving average & TSX

Source: Bloomberg

S&P/TSX Composite MACD/RSI trending lower Next target is 13,000 … but 12,700 in sights (corresponds to 200-day MAVG and entry point)

Market Analysis | 4 12 December 2013

Figure 3: S&P/TSX Support Levels

Source: Bloomberg

NOTABLE BREAKDOWNS. Magna International (MG) Momentum indicators MACD/RSI trending lower Support at $80, maybe gets to $75 which corresponds with 200-day moving average. At $75, would be a great buying level in our view. Figure 4: Magna International (MG)

Source: Bloomberg

Market Analysis | 5 12 December 2013

Canadian National Railway (CNR) Momentum indicators MACD/RSI trending lower, Broken support at $57.75, break below 50-day MAVG would target $55 Figure 5: Canadian National Railway (CNR)

Source: Bloomberg

Canadian Pacific Railyway (CP) Similar to CNR, MACD/RSI trending lower, Support at $150 Figure 6: Canadian Pacific Railway (CP)

Source: Bloomberg

Market Analysis | 6 12 December 2013

Bank of Montreal (BMO) Momentum indicators MACD/RSI trending lower Break of 100-day MAVG would target $65 Figure 7: Bank of Montreal (BMO)

Source: Bloomberg

Candian Bank of Commerce (CM) CM behaves better than BMO, buyer at $88 level Trading comfortably above 50-day moving average, a key uptrend. Poor action in the MACD/RSI has not corresponded to signigicant price deterioation. Figure 8: Canadian Imperial Bank of Commerice (CM)

Source: Bloomberg

Market Analysis | 7 12 December 2013

Manulife Financial (MFC) MFC be buyer on dips, $19.50 would be a good entry point, in our view. Trading well above 50/100/200-day MAVG. Correction in RSI/MACD are not affecting MFC, price action supports a technical buy. Exposure to higher interst rate trade. Figure 9: Manulife Financial (MFC)

Source: Bloomberg

Sunlife Financial (SLF) Back to rising 50-day MAVG, which is support at $35.50. Good buying point, in our view. MACD/RSI is extended to the downside, offering room for improvement. Exposure to higher interest rate trade. Figure 10: Sunlife Financial (SLF)

Source: Bloomberg

Market Analysis | 8 12 December 2013

Canadian Natural Resources (CNQ) Bullish ascending traingle pattern targets $40. Was down yesterday 0.78% vs. TSX Energy Index down 1.38%, great relative strength $34 should be used as accumulation opportunties. Figure 11: Canadian Natural Resources (CNQ)

Source: Bloomberg

Crescent Point Energy (CPG) Behaves technically great, $40 should be used as accumulation opportunities. Bullish ascending triangle pattern targets $44 Down 0.72% vs. TSX Energy Index down 1.38%, great relative strength Figure 12: Crescent Point Energy (CPG)

Source: Bloomberg

Market Analysis | 9 12 December 2013

Below is table with MTD, QTD, and P/E valuations for the TSX composite and its 10 GICS sectors. Most notably, last month we had Financials/Industrials as having positive technical ratings, now they have moved to a neutral rating. Figure 13: TSX Price Performance, Valuation and Technical Rating S&P/TSX C omposite Financials Energy Materials Industrials C onsumer Discretionary Telecomm C onsumer Staples Healthcare Utilities Information Technology Average Source: Bloomberg

MTD (%) -0.5 -1.6 0.6 -0.7 0.1 0.4 -0.2 -0.5 -0.1 -0.2 -1.2 -0.4

QTD (%) 4.2 6.3 2.6 -5.1 14.7 5.1 6.8 2.7 5.3 2.0 2.7 4.3

YTD (%) 7.2 16.0 7.5 -32.4 33.6 36.6 9.2 20.3 59.0 -8.4 30.7 17.2

Trailing P/E 17.6 12.6 23.2 21.2 21.9 18.5 15.7 17.5 #N/A N/A 41.9 31.7 22.7

C urrent P/Y 15.8 12.7 19.9 15.6 20.3 15.9 15.8 17.0 18.6 18.9 27.9 18.3

Nex t Year P/E Short-term Technical Rating 14.0 11.6 Neutral 16.8 Positive 14.8 Neutral 16.1 Neutral 13.7 Positive 14.7 Neutral 15.1 Neutral 13.4 Neutral 17.6 Negative 20.1 Neutral 15.4

S&P/TSX Financials Index Financials weakening led by weak Canadian bank earnings MACD/RSI declining, break of 50-day MAVG, would target 1,900 in the index Figure 14: S&P/TSX Financials Index

Source: Bloomberg

Market Analysis | 10 12 December 2013

S&P/TSX Energy Index Energy index behaving much better than rest of the TSX GICS sectors 50-day moving average at ~2,832 holding up well vs. MACD which is trending lower. Figure 15: S&P/TSX Energy Index

Source: Bloomberg

S&P/TSX Industrials Index Led by CP/CNR rail, the industrials index is under pressure Expect a move to the 50-day MAVG at ~1,900 MACD/RSI trending lower Figure 16: S&P/TSX Inudstrials Index

Source: Bloomberg

Market Analysis | 11 12 December 2013

S&P/TSX Consumer Discretionary Index Consumer discretionary stocks behaving better than rest of the sector Momentum indicators MACD/RSI trending lower, but index is holding the 50-day MAVG Figure 17: S&P/TSX Consumer Discretionary Index

Source: Bloomberg

S&P/TSX Consumer Staples Index Potential head and shoulders top in the index Momentum indicators MACD/RSI trending lower Figure 18: S&P/TSX Consumer Staples

Source: Bloomberg

Market Analysis | 12 12 December 2013

S&P/TSX Telecomm Services Index Broke upward trend line, look to next level of support at 50 or 200-day MAVG Momentum indicators MACD/RSI trending lower Figure 19: S&P/TSX Telecomm Services Index

Source: Bloomberg

S&P/TSX Health Care Index Head and shoulders top, break of the neckline targets 1300 Figure 20: S&P/TSX Health Care Index

Source: Bloomberg

S&P/TSX Utilities Index Defensive sector that has poor price trends and lower momentum (MACD/RSI) At the momentum, would stay away from the sector

Market Analysis | 13 12 December 2013

Figure 21: S&P/TSX Utilities Index

Source: Bloomberg

S&P/TSX Information Technology Index Resistance at 140 Momentum indicators MACD/RSI trending lower Figure 22: S&P/TSX Information Technology Index

Source: Bloomberg

Market Analysis | 14 12 December 2013

S&P/TSX Materials Index Trading below bearish descending triangle pattern Momentum indicators MACD/RSI trending lower Figure 23: S&P/TSX Materials Index

Source: Bloomberg

Market Analysis | 15 12 December 2013

APPENDIX: IMPORTANT DISCLOSURES Analyst Certification:

Each authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) the recommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the research. Market analysis disclaimer: The opinions expressed in this report are based upon a methodology that examines the past trading patterns and trends of a security, financial instrument, commodity or currency for various technical/quantitative and broader market indicators in an effort to forecast future price movements. Technical analysis is one of many analytical tools that may be useful in making an informed investment decision. However, the opinions expressed herein, including technical levels of trading trends, price resistance and/or support, are not intended to serve as precise “fundamental price targets” and should not be relied upon as such. Due to the nature of technical/quantitative analysis, the securities discussed or recommended in this report are not continuously covered and the authoring analysts’ opinions may change without notice. Investors should regard this report as providing stand-alone analysis and should not expect continuing analysis relating to the referenced issuers and/or securities. Canaccord Genuity does not undertake, and specifically disclaims, any obligation to update or revise any opinions, whether as a result of new information, future developments or otherwise. The information contained herein has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made by Canaccord Genuity, its affiliated companies, the authoring analyst or any other person as to its fairness, accuracy, completeness or correctness. Canaccord Genuity may engage, for our customers or for our own accounts, in trading strategies or hold positions in the security(ies), financial instrument or commodity discussed in this report and may abandon such trading strategies or unwind such positions at any time without notice. Canaccord Genuity may also publish [equity] research reports on the issuers discussed herein that may communicate different or contradictory opinions, recommendations and price targets based upon a “fundamental” analysis of their businesses. We recommend that clients contact their Canaccord Genuity representative to request copies of relevant [equity] research reports published by our fundamental analysts for further information. “Canaccord Genuity” is the business name used by certain wholly owned subsidiaries of Canaccord Genuity Group Inc., including Canaccord Genuity Inc., Canaccord Genuity Limited, Canaccord Genuity Corp., and Canaccord Genuity (Australia) Limited, an affiliated company that is 50%-owned by Canaccord Genuity Group Inc. The authoring analysts who are responsible for the preparation of this research are employed by Canaccord Genuity Corp. a Canadian broker-dealer with principal offices located in Vancouver, Calgary, Toronto, Montreal, or Canaccord Genuity Inc., a US broker-dealer with principal offices located in New York, Boston, San Francisco and Houston, or Canaccord Genuity Limited., a UK broker-dealer with principal offices located in London (UK) and Dublin (Ireland), or Canaccord Genuity (Australia) Limited, an Australian broker-dealer with principal offices located in Sydney and Melbourne. In the event that this is compendium research (covering six or more relevant issuers), Canaccord Genuity and its affiliated companies may choose to provide by reference specific disclosures of the subject companies or its policies and procedures regarding the dissemination of research. To access this material or for more information, please refer to http://disclosures.canaccordgenuity.com/EN/Pages/default.aspx or send a request to Canaccord Genuity Corp. Research, Attn: Disclosures, P.O. Box 10337 Pacific Centre, 2200-609 Granville Street, Vancouver, BC, Canada V7Y 1H2 or [email protected]. The authoring analysts who are responsible for the preparation of this research have received (or will receive) compensation based upon (among other factors) the Corporate Finance/Investment Banking revenues and general profits of Canaccord Genuity. However, such authoring analysts have not received, and will not receive, compensation that is directly based upon or linked to one or more specific Corporate Finance/Investment Banking activities, or to recommendations contained in the research. Canaccord Genuity and its affiliated companies may have a Corporate Finance/Investment Banking or other relationship with the issuer that is the subject of this research and may trade in any of the designated investments mentioned herein either for their own account or the accounts of their customers, in good faith or in the normal course of market making. Accordingly, Canaccord Genuity or their affiliated companies, principals or employees (other than the authoring analyst(s) who prepared this research) may at any time have a long or short position in any such designated investments, related designated investments or in options, futures or other derivative instruments based thereon. Some regulators require that a firm must establish, implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of research. This research has been prepared in accordance with Canaccord Genuity’s policy on managing conflicts of interest, and information

Market Analysis | 16 12 December 2013

barriers or firewalls have been used where appropriate. Canaccord Genuity’s policy is available upon request. The information contained in this research has been compiled by Canaccord Genuity from sources believed to be reliable, but (with the exception of the information about Canaccord Genuity) no representation or warranty, express or implied, is made by Canaccord Genuity, its affiliated companies or any other person as to its fairness, accuracy, completeness or correctness. Canaccord Genuity has not independently verified the facts, assumptions, and estimates contained herein. All estimates, opinions and other information contained in this research constitute Canaccord Genuity’s judgement as of the date of this research, are subject to change without notice and are provided in good faith but without legal responsibility or liability. Canaccord Genuity’s salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desk that reflect opinions that are contrary to the opinions expressed in this research. Canaccord Genuity’s affiliates, principal trading desk, and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. This research is provided for information purposes only and does not constitute an offer or solicitation to buy or sell any designated investments discussed herein in any jurisdiction where such offer or solicitation would be prohibited. As a result, the designated investments discussed in this research may not be eligible for sale in some jurisdictions. This research is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. This material is prepared for general circulation to clients and does not have regard to the investment objectives, financial situation or particular needs of any particular person. Investors should obtain advice based on their own individual circumstances before making an investment decision. To the fullest extent permitted by law, none of Canaccord Genuity, its affiliated companies or any other person accepts any liability whatsoever for any direct or consequential loss arising from or relating to any use of the information contained in this research.

For Canadian Residents:

This research has been approved by Canaccord Genuity Corp., which accepts sole responsibility for this research and its dissemination in Canada. Canadian clients wishing to effect transactions in any designated investment discussed should do so through a qualified salesperson of Canaccord Genuity Corp. in their particular province or territory.

For United States Residents:

Canaccord Genuity Inc., a US registered broker-dealer, accepts responsibility for this research and its dissemination in the United States. This research is intended for distribution in the United States only to certain US institutional investors. US clients wishing to effect transactions in any designated investment discussed should do so through a qualified salesperson of Canaccord Genuity Inc. Analyst(s) preparing this report that are not employed by Canaccord Genuity Inc. are resident outside the United States and are not associated persons or employees of any US regulated broker-dealer. Such analyst(s) may not be subject to Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

For United Kingdom and European Residents:

This research is distributed in the United Kingdom and elsewhere Europe, as third party research by Canaccord Genuity Limited, which is authorized and regulated by the Financial Conduct Authority. This research is for distribution only to persons who are Eligible Counterparties or Professional Clients only and is exempt from the general restrictions in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the United Kingdom only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) (High Net Worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. This material is not for distribution in the United Kingdom or elsewhere in Europe to retail clients, as defined under the rules of the Financial Conduct Authority.

For Jersey, Guernsey and Isle of Man Residents:

This research is sent to you by Canaccord Genuity Wealth (International) Limited (CGWI) for information purposes and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This research has been produced by an affiliate of CGWI for circulation to its institutional clients and also CGWI. Its contents have been approved by CGWI and we are providing it to you on the basis that we believe it to be of interest to you. This statement should be read in conjunction with your client agreement, CGWI's current terms of business and the other disclosures and disclaimers contained within this research. If you are in any doubt, you should consult your financial adviser. CGWI is licensed and regulated by the Guernsey Financial Services Commission, the Jersey Financial Services Commission and the Isle of Man Financial Supervision Commission. CGWI is registered in Guernsey and is a wholly owned subsidiary of Canaccord Genuity Group Inc.

For Australian Residents:

This research is distributed in Australia by Canaccord Genuity (Australia) Limited ABN 19 075 071 466 holder of AFS Licence No 234666. To the extent that this research contains any advice, this is limited to

Market Analysis | 17 12 December 2013

general advice only. Recipients should take into account their own personal circumstances before making an investment decision. Clients wishing to effect any transactions in any financial products discussed in the research should do so through a qualified representative of Canaccord Genuity (Australia) Limited. Canaccord Genuity Wealth Management is a division of Canaccord Genuity (Australia) Limited.

For Singapore Residents:

This research is distributed pursuant to 32C of the Financial Advisers under an arrangement between each of the Canaccord Genuity entities that publish research and Canaccord Genuity Singapore Pte. Ltd who are an exempt financial adviser under section 23(1)(d) of the Financial Advisers Act. This research is only intended for persons who fall within the definition of accredited investor, expert investor or institutional investor as defined under section 4A of the Securities and Futures Act It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. Recipients of this report can contact Canaccord Genuity Singapore Pte. Ltd. (Contact Person: Tom Gunnersen’s tel # is +852 3919 2561) in respect of any matters arising from, or in connection with, the analyses or report.

For Hong Kong Residents:

This research is distributed in Hong Kong by Canaccord Genuity (Hong Kong) Limited who is licensed by the Securities and Futures Commission. This research is only intended for persons who fall within the definition of professional investor as defined in the Securities and Futures Ordinance. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. Recipients of this report can contact Canaccord Genuity (Hong Kong). Ltd. (Contact Person: Tom Gunnersen’s tel # is +852 3919 2561) in respect of any matters arising from, or in connection with, the research. Additional information is available on request. Copyright © Canaccord Genuity Corp. 2013. – Member IIROC/Canadian Investor Protection Fund Copyright © Canaccord Genuity Limited 2013. – Member LSE, authorized and regulated by the Financial Conduct Authority. Copyright © Canaccord Genuity Inc. 2013. – Member FINRA/SIPC Copyright © Canaccord Genuity (Australia) Limited 2013. – Participant of ASX Group, Chi-x Australia and of the NSX. Authorized and regulated by ASIC. All rights reserved. All material presented in this document, unless specifically indicated otherwise, is under copyright to Canaccord Genuity Corp., Canaccord Genuity Limited, Canaccord Genuity Inc. or Canaccord Genuity Group Inc. None of the material, nor its content, nor any copy of it, may be altered in any way, or transmitted to or distributed to any other party, without the prior express written permission of the entities listed above.