TORONTO - The Toronto stock market will face a difficult start to the trading week after losing ground for a third week in a row as investors look for a good reason to push an 11-month old rally even further.
They could find it at the end of the week when January employment data for Canada and the United States is released. In the meantime, it could be tough to find something that will encourage investors to buy amid worries about the global economy
"There's a lot of things and people say: 'There's a lot of noise, maybe I need to take some money off the table'," said John Johnston, chief strategist, the Harbour Group at RBC Dominion Securities.
The S&P/TSX composite index fell 2.2 per cent last week, adding up to a 5.5 per cent loss for January, its biggest one month decline since February 2009. The drop came amid generally positive fourth-quarter corporate earnings and economic data at the end of last week pointing to strong economic growth at the end of 2009.
Statistics Canada reported that the economy grew by 0.4 per cent during November, which beat economists expectations of an increase of 0.3 per cent.
And in the U.S., fourth quarter gross domestic product grew at a 5.7 per cent annual rate - marking the second straight quarter of growth - and better than the 4.5 per cent rate that economists had expected.
But, the TSX is up about 70 per cent from the lows of last March and the main index finished 2009 up 31 per cent as investors counted on an end to the recession.
Those conditions have come to pass and investors are now looking to how conditions will unfold during this year, especially as governments move to end their stimulus spending.
Also, historical data points to the indication the market is ready to consolidate the big gains of the past several months.
"When you look at past cycles coming off of a big bear market low, you get strong gains in the first 12 months and in the second 12 months, they tend to be more mixed - and more moderate on average," observed Johnston.
"We're rolling into year two now and the market was starting to roll over, starting to see some signs the rally was getting extended. The economic news in general has been pretty good, earnings news has been pretty good but I think a lot of that was already anticipated by the marketplace."
The 2009 rally went practically straight up, with the TSX undergoing a short, sharp decline of about 10 per cent from mid-June to mid-July. And while it is looking tired right now, that doesn't mean the TSX is in for steep declines.
"You look at technical charts today and it's not indicating that we're in for a huge correction. I think what we're going through right now is some consolidation," said Serge Pepin, director of investments at BMO Investments.
"And you need consolidation in the market and that just tells you that it's a healthy market."
Hopes are high for the January jobless numbers, particularly in the United States, where economists expect about 20,000 jobs were added last month.
Investors were disappointed with the last round of job data, expecting an end to job losses. Instead, another 80,000 Americans lost their jobs during December.
"You may get a bit of a pleasant lift if you get the number we thought we might get last month and maybe get some upward revisions. And if it stays negative, there will be quite a bit of disappointment," said Johnston.
In Canada, investors are hoping to see that the economy added around 15,000 jobs.
Meanwhile, the investment community will be taking in another slew of earnings reports during the coming week. Fourth-quarter earnings reports have generally been positive but not enough to send indexes higher.