The TSX lost some
momentum on Monday as gold and crude oil backed off a bit and base metals stocks
cooled a bit too. Some fast money investors were taking money off the table
yesterday in front of this week’s events. For the TSX, the expectation of Fed QE
is likely priced in and the risk of a disappointment is reasonable. While we do
not expect a major correction at this point, a pullback in the overbought
precious metals stocks seems reasonable. But with the Fed standing ready to
provide an unlimited QE commitment, corrections are likely to be somewhat
shallow relative to the declines of the past year.
The big message for
the gold stocks is to buy on dips. If the Fed does not deliver a massive QE
package this week, we do not think we will see one until early 2013. At this
point, gold should not correct below 1630-1650 support. Anything deeper would
signal a more material setback in the sector.