The activities of the TSXV in the past six months needs to be outlined. The index had been tracking in the top of 500 ranging from 575 to 595. However, on September 23 2019, a significant break occurred. The TSXV crashed from those levels to 521.63 on November 19 2019.
This movement is significant because a) it broke S2 for the period and b) this level has not been seen since February 2006. More importantly, the move did not comes in isolation and is a stark contrast to what has happen on the TSX and the DJI. How material you ask? Below are some correlations:
In relation to the TSX, the correlation for the last two months is -0.82. This mean that the TSXV loss are inversely proportional to the TSX gains.
In relation to the DJI, the correlation for the last two months is -0.90. This mean that the TSXV loss are inversely proportional to the DJI gains.
Indeed, there is a pattern but is it a big deal? Yes, a perfect correlation is 1 or -1 so these numbers imply a strong association between the indices.
One way of interpreting this would be that for the last two months money has left the TSX Venture for greener pastures (i.e. TSX, DJI). Whether it was anticipating an interest rate cuts and/or expected strong earnings, it is clear that large brokerage allocations have an impact on the TSX Venture.
Ironically, Schwab's acquisition of TD Ameritrade today is not a good sign for TSX Venture investors. It speaks to the accelerating trend of brokerage consolidation which will undoubtedly impact coverage, especially for TSX Venture companies. And, yes, there is also empirical evidence for this.
Guest and Kim (2019) have confirmed this trend in the paper: On the Interplay among Information Intermediaries: How Does Analyst Coverage Affect Media Coverage? The findings were significant and the abstract provides a good synopsis.
Whether the current situation is sustainable remains to be seen. However, there now is clear evidence of cannibalization of the TSX Venture Index.
Some examinations of how brokerage (especially large ones) operate in the TSXV will need to be addressed. In a very near future, it is not unimaginable that fewer brokers will have a higher level of control which clearly will not be in the interest of the exchange. Something will need to be done. However, as The MacroTourist says: "remember that your job as an investor is not to forecast what should be but rather focus on what will be".
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