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It's Time to Bet Against One of Last Year's Big Winners

By Brett Eversole
Thursday, January 5, 2017

2016 was a surprising year...
 
It was the eighth year of this bull market. But that didn't slow things down.
 
U.S. stocks jumped 12%. Oil prices soared by 45%. And gold had a wild ride, eventually ending the year up 9%.
 
With all that happening, you might have missed the major boom that happened in our neighbor to the north... Canada.
 
Canadian stocks had a fantastic 2016... rising 22%. But history says that boom has gotten out of hand. Double-digit losses are likely this year. And that means now is time to bet against one of 2016's big winners.
 
Let me explain...
 
Canadian stocks were a stealth winner last year. The iShares MSCI Canada Fund (EWC) went up 22%... And it soared an incredible 40% from its January low to the end of 2016.
 
The problem is that Canada's stock market is now incredibly overbought... And that means lower prices are likely.
 
The idea of a market being "overbought" is simple. It happens when investments get ahead of themselves... when they move too far, too fast.
 
In this case, I'm talking about EWC's relative strength index (RSI).
 
The RSI is a measure of an investment's recent gains compared with its recent losses. It turns the market action into a 0-to-100 reading... with 0 being oversold and 100 being overbought.
 
When the RSI hits overbought conditions – usually more than 70 – it's generally a bad thing going forward. And that's what happened in Canadian stocks recently.
 
EWC hit an extreme overbought level last month – an RSI of 80. That has only happened one other time in the past decade, in 2014. And it coincided with a major top in Canadian stocks. Take a look...
 

Canadian stocks staged a major crash the last time they were this overbought. Shares of EWC fell 41% over the next 19 months.
 
That was only one instance. But if we look at less extreme examples, we still see the same thing.
 
I checked every RSI reading of 75 or more over the last decade for shares of EWC. It turns out that Canadian stocks consistently fall after the RSI rises above and then falls below 75. This table has the full returns...
 
 
6-Month
1-Year
After Extreme
-7.0%
-9.5%
All Periods
0.3%
0.6%

Canadian stocks haven't performed well over the past decade. But after hitting an overbought extreme, they perform even worse. Similar overbought extremes led to 7% losses in six months and 9.5% losses over the following year.
 
Canadian stocks were a big winner last year. But if history is any indication, shares of EWC are due for a correction. And double-digit losses in 2017 are possible.
 
If you're interested in shorting stocks, history says now is the time to bet against Canadian stocks. Shorting shares of EWC is the simplest way to benefit from a likely correction.
 
Good investing,
 
Brett Eversole

Editor's note: While Canadian stocks look poised for a tough year ahead, Steve Sjuggerud recently identified six huge investment opportunities in the coming year. You can gain instant access to Steve's "2017 blueprint" with a risk-free trial to True Wealth – at half the usual price. Click here to learn more.



Further Reading:

Brett recently outlined why oil prices could soar in 2017. "We could see $70-a-barrel oil over the next year," he writes. "And 41% gains are possible over the next two years." Read more here.
 
"Gold and silver are down since the election," Brett writes. "But another group of metals has soared..." Find out what companies are poised to profit from Donald Trump's presidency right here: A 30% Upside Opportunity in the 'Masters of the Universe'.

Market Notes


THIS ENTERTAINMENT GIANT IS TAKING OFF

Today's chart highlights the dominant force in entertainment...
 
Two years ago, the movie industry raked in more than $11 billion for the first time. Last year – after a strong holiday season – the industry broke that record with $11.4 billion in ticket sales. Even with the increase in at-home entertainment options, more people are going to the movies each year. One company benefiting from this trend is media giant Disney (DIS).
 
The $170 billion company's film division owns its namesake Walt Disney Studios, Pixar Animation, Marvel Studios, and Lucasfilm. Last month, Disney announced that its movie businesses will become the first ever to reach $7 billion in sales at the global box office.
 
Sealing the deal was its latest Star Wars blockbuster hit, which brought in nearly $300 million in the first weekend. Shares are responding, up nearly 20% from their February 2016 lows... and they just hit a fresh 52-week high. With multiple blockbuster movies expected this year, it should be a strong year for Disney shares...
 

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