Canada's TSX: taking a breather or gasping for air?

"How low can you go?" is a frequent war cry of limboing vacationers in the Caribbean.

But these days, Canadian equity watchers might be forgiven for thinking the question better applies to stock valuations.

Since students went back to school on Sept. 2, investors have been dumping Canadian stocks, part of a mini-panic driven by slumping global commodity prices.

After ending August at almost 13,800, the TSX composite index fell out of bed, slipping 6.9 per cent in three trading days and closing just above 12,800 on Thursday.

That has led investors, who were all smiles as the country's main stock index inched above 15,000 in the summer, to now fear where the market is headed in the fall.

"It's been very choppy. There is absolutely no conviction out there," said Irwin Michael, portfolio manager at Toronto-based ABC Funds.

Oil jitters

The firesale on everything Canuck began as the limited fallout from Hurricane Gustav pushed down oil prices. On Sept. 2, crude dipped well below $110 US in New York, the lowest price for a barrel of oil since early April.

That, in turn, spooked nervous investors who had purchased Canadian equities partly to reflect rising oil prices.

Next, U.S. economic data gave the impression that the American economy might be stalling, a situation that could crimp demand for other Canadian commodities.

Equity holders began selling in earnest.

"It's not just the hurricane, but the global economy and all the hot money that got into that sector," said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier.

Drifting downwards

For investors now, riding out the financial hurricane will take a strong stomach, experts said.

For one thing, most indicators point to a negative trend among the world's major economies.

"We see a march to a global slowdown," said Adrian Mastracci, a portfolio adviser with Vancouver's KCM Wealth Management Inc.

World economic growth, hampered by sagging real estate demand in the United States and higher oil prices everywhere, looks to be feeble at best, according to recent figures.

The Organisation for Economic Co-Operation and Development recently cut its growth projections for six of the seven G7 economies. Only the United States, at 1.8 per cent, will see its economy expand faster in 2008 than initially projected, according to the organization.

Overall, the OECD predicted that the G7 countries will grow by 1.4 per cent in 2008.

"That's stall speed," Mastracci said.

In such an uncertain stock-trading world, many investors are now sitting on their hands, adding to the volatility on the Toronto Stock Exchange.

Finding Bottom

The problem for stock-pickers becomes figuring out when equity values will hit bottom and begin to recover.

The old adage "buy low, sell high" is actually hard to follow, according to Michael at ABC Funds.

"We're starting to come across a lot of companies that are dirt cheap," he said. "Buying on the way up, however, is risky because it becomes very crowded."

Right now, few experts are sticking their necks out to pick a path for the TSX for the next four months or so. Negative feelings among investors probably mean equity markets will drift downwards as opposed to plunging precipitously.

Mastracci's models are yielding a trading value for the TSX composite index with a high close to 15,000 and a low of 10,500 depending upon a variety of factors, he said.

The low end of his forecast entails a further drop in the index of 18 per cent below Thursday's close.

If that prediction comes true, what started out as an equity market limbo could wind up putting investors flat on their backs.