Canada is seeing a fourth wave of the pandemic that is stalling the growth of recovery stocks. Canada’s chief public health officer, Dr. Theresa Tam, in a press conference, said, “The latest national surveillance data indicate that a fourth wave is underway in Canada and that cases are plotting along a strong resurgence trajectory.” This comes when Canada and other countries started reopening schools and offices, easing international travel restrictions, and phasing out stimulus. The rising cases have created uncertainty around the return to normalcy.
To get uncertainty out of the way, you should understand the impact of the fourth wave on the economic recovery and the stock market.
How the fourth wave will impact the stock market
Many health experts explained that the nature of the virus is to mutate, and some of its variants are more contagious, like the Delta variant. The vaccine only prevents serious illness but does not stop transmission. In layman terms, it means you can be tested Covid positive even after both the doses and transmit the virus to an unvaccinated population.
Public health practitioners are concerned about the spike in hospitalization rates and the fast mutation of the virus as its spread. The only feasible solution is vaccination and social distancing to break the transmission. Waves will keep coming until 90% of the global population is vaccinated. But they won’t be as severe as the previous one.
The University of Toronto epidemiologist Dr. Colin Furness believes there won’t be any mass outbreaks of COVID-19 in Canada, but they would “occur in clumps.” If the fourth wave brings lockdowns and restrictions, it can be more targeted, like closing a factory or a building to prevent transmissions and severe illness.
Even businesses have factored in sudden restrictions and closures. But as an investor, the fear of decline should not prevent you from looking at the opportunity recovery brings. Most recovery stocks have breached their 100-day moving average and entered an oversold category on the news of the fourth wave.
How to ride the fourth wave and make the most of the dip
This is a good time to trade recovery stocks that have significant growth potential as things normalize. To identify which recovery stock to buy, look at their stock price chart. Search for any breakouts, and if they were supported by high trade volumes. If a stock dips below its support levels with low volumes, it shows not many traders are interested in the dip, and the share would return to growth. But if there are high volume trades, the stock might continue to dip as many traders are in sell mode.
Three Canadian stocks have breached their 200-day moving average support but with low trading volumes. This opens a window to buy the dip.
Air Canada stock dipped below its 200-day moving average support and is trading under $24. This is the first time since November 2020 the stock breached its support. However, the share did not see any above-average trading volume, and its Relative Strength Index (RSI) is skewed towards the oversold category.
The last two times the stock hit the 200-day moving average, it jumped 9.8% and 5.2%, respectively. There is a high possibility it will jump back up to its support of $24.76. These were the technicals. On the fundamental front, AC has sufficient liquidity ($9.77 billion) after the government bailout to withstand restricted travel throughout 2021 and the first half of 2022.
Moreover, the rising Delta variant cases did not stop the Canadian government from easing travel restrictions for vaccinated foreign travelers. The airline does not expect a significant recovery before 2022 and is prepared for it.
Air Canada’s stock momentum moves in tandem with the pandemic. In the second wave, the stock dipped 27.5% and recovered 48.5%. In the third wave, it dipped 22% and surged 21%. In the fourth wave, it has dipped 17% so far and could fall a little more. But don’t wait for it to bottom out because when the stock recovers, it could surge 22% to $29-$31 and beyond.
Cineplex stock has dipped 22% since July and is trading around its 200-day moving average. This is the first time since January the stock has touched its support level. However, there is no heavy trading volume in this decline. If the breakout theory holds, Cineplex stock could bounce back to its current levels.
But the stock has significant recovery upside, and a glimpse of it is visible in its second-quarter earnings. On July 17, Cineplex opened all its 160 theatres across Canada. In three weeks of running in full capacity, it served over two million guests, more than the guests it received in the entire first half of 2021. This figure pushed the stock up 12%, but the rising Delta-variant cases pulled the stock down 9.46%. A recovery will drive the stock to its 52-week high of $16 and beyond, representing an upside of 28%.
Restaurant Brands International is popularly known as the parent of Burger King. This fast-food chain also owns Popeyes Louisiana Kitchen and Tim Hortons coffee shop chain. Restaurant Brands stock dipped below its 200-day moving average support on August 18 after breaching its support for a brief period in July. Its July dip was not backed by trading volume, but its August dip is. The dip came after the company’s earnings on July 30.
Tim Hortons, which represents roughly 60% of Restaurant Brands’ overall revenue, was the slowest to recover because of slow vaccination and stringent restrictions in Canada. The earnings showed that the recovery is going in full swing. Its second-quarter revenue surged 37.2% year-over-year (YoY) after falling 21% in the second quarter of 2020.
The stock has already recovered to its pre-pandemic level. But this time, it has digital sales under its armor. Restaurant Brands is tapping the omnichannel potential and will benefit from the reopening of the global economy. This dip may continue for a while until the stock hits the bottom with an RSI below 30. Just keep an eye on the stock as you might want to buy this dip and enjoy the rally towards the year-end.
The bad news is the investor’s best friend as you get to buy good stocks at heavy discounts. Make the most of the fourth wave and buy the dip.