Canadian Banks No Longer Leading US Banks. Trouble Ahead For The Canadian Economy?

The Canadian banks (XFN) have outperformed their US counterparts (XLF) since 2009.  They have been placed on a global pedestal due to their reluctance to participate in the subprime mortgage debt and collateralized debt obligations that precipitated the Great Recession.  Their balance sheets remained extremely healthy and their stock prices reflected this to this day.  But that was then...

Two of the 4 wheels have blown on the car that is the Canadian economy.  Precious metals and material stocks are down some 70% since 2011.  Now stocks of energy producing companies are free falling in tandem with the price of oil which seems to be in global abundance despite the fact that the opposite view held the public consensus only 6 years ago.  Don't get me started on the Canadian housing market.

Banks and financial sectors reflect the overall health of a country's economy.  Their relative performance is predictive of the relative performance of a given country's economy.  The chart above would suggest that growth in the US economy will continue to outpace that of the Canadian economy.  If the Canadian bank index is unable to post new 52-week highs and/or trends lower trouble is ahead.

Small Cap Stocks To Lead Long Term

Everyone knows that small cap stocks are the canary-in-the-coal mine for the economy.  One can assess the strength of the overall global economy based on the performance of small cap stocks relative to large cap stocks.  They tend to outperform when business conditions are good (i.e. consumers are spending, fear is moderate, lenders are lending, interest rates are low, etc.)  During bear markets, small cap stocks underperform.  During bull markets, they outperform.  We are currently witnessing the beginning of long term small cap stock outperformance.

From a technical perspective, IWM which tracks the Russell 2000 small cap index, has broken out of a large ascending triangle pattern and is on its way to new highs.  We're just getting started...