Financial Update

· TSX fell -86.80 as profit-taking cooled the energy sector even though oil prices hit
another record high
· Dow -120.90
· Dollar recovered over a full cent +1.12c to $ $99.44
· Oil continues upward +$2.27 to $125.96US per barrel breaking new records daily
· Gold recovered another+$3.90US to $884.50US

Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html

TSX could break out into record territory this week; then what?

By Malcolm Morrison, The Canadian Press

TORONTO - The Toronto stock market is poised to break through its old closing high set last July during the week as commodity stocks, particularly oil, run ahead.

As it was the TSX came within a whisker of moving past the 14,625.76 level last Thursday thanks to yet another in a string of record high closes for crude.

The market then pulled back Friday, at the end of a week of sharp gains, largely fuelled by energy stocks, that saw the TSX up 1.77 per cent for the week.

Breaking past that July record represents a stunning 20 per cent surge in the index since hitting its most recent low Jan. 21 - but some analysts are uncomfortable with how narrowly based the advance has been.

"Obviously it's being supported by the resource sector yet again, which is basically the story for the past three or four years," said Andrew Pyle, investment adviser at Scotia McLeod in Peterborough, Ont.

"I mean, if you look at the divergence between the S&P 500 and the TSX, that gap has widened and widened in relation to the strength we've seen in resources and obviously that's what's pulling the TSX higher now."

The energy sector has roared ahead 40 per cent since January while the base metals sector jumped 29 per cent as crude oil jumped from about US$90 a barrel to the US$125 mark.

The gold sector hasn't done so well, down about four per cent as bullion slipped away from the US$1,000 an ounce level.

This is the third time the TSX has tried to break above that 14,626 level and Pyle thinks this will be equally unsuccessful since "there is no underlying fundamental reason for the TSX to break above a new record high."

In fact, he said "there are a lot of reasons for this index to buckle and to experience a sharp pullback like we have seen in the past."

For one thing, he points to weakening economic conditions which should curb oil prices.
"Things work for the lag," he said.

"Oil at $120 doesn't show up tomorrow morning in terms of European Gross Domestic Product numbers, it'll show up in the summer, in July and August and demand factors alone will be enough to pull oil back."

But Pyle also pointed to a healthier U.S. dollar, which has been mending in particular since the U.S. Federal Reserve signalled last month that the long string of interest rate cuts are over.

"And I think if people start to really accept that the U.S. dollar recovery is real - it might be very slow - that to me is the death knell for commodities near term," he said.

"Near term, if the dollar recovery is perceived as real, I think commodities have to fall back here and when I look at the TSX again, it's very thinly based and I would say right now there's a lot more risk to the TSX today at these levels than there was last year when we were looking at record highs in July."

At least at that point, most sectors were participating in the run up.

A notable exception to the charge ahead this time has been the financial sector, up only about six per cent since late January. Share prices in banks really only started to improve after mid-March when JPMorgan Chase picked up rival investment bank Bear Stearns, with the backing of the U.S. Federal Reserve.

"But even if financials hold ground here, and we get this split, financials doing OK, resources falling back, there's not enough weight in financials to keep this index from falling back," said Pyle.

"There's not going to be enough support... to push this index far into new record territory in my opinion."

Pyle's advice to investors if the TSX can't stage a convincing breakthrough past the 14,626 level is beware.

"I think you have to seriously look at a more defensive position going into the summer because you could be looking at a 10 per cent correction in the index."

In the meantime, "don't be greedy. If you're up, this has been great, look at a nice move of 2,000 points on the TSX, that's helped people a lot. Don't blow it. Don't have that in vain, take some of it off the table."