TORONTO (CP) -- Canadian investors should brace for further losses in the near future as markets suffer a crisis of confidence triggered by slowing economic growth, rising inflation and profit disappointments - conditions made worse by record oil prices.
''I would say for the month of July, investors should be preparing themselves for this market to head lower only because, from a technical point of view, we've gone through support, now we have to go find the next floor,'' said Andrew Pyle, investment adviser at ScotiaMcLeod in Peterborough, Ont.
He sees the past week's disconnect between the price of oil, which hit new highs, and oil company shares, which declined, as ''a leading clue as to what you might expect from the TSX during this process.''
The Toronto market's main index ended the week down about two per cent, but it was the commodity stocks that took the biggest hit as investors worries that slowing economies won't need as much oil and metals.
The TSX energy sector, after soaring 53 per cent from the lows of January to the record high composite index close just above 15,000 on June 18, fell 2.6 per cent last week.
The move came even as the price of crude oil rose 3.5 per cent last week, posting a new intraday trading peak of US$145.85 a barrel.
''Either the market doesn't believe where oil prices are going, they don't believe this whole runup we've seen this week above US$145 a barrel, or the spreads, profit margins are getting squeezed to the extent now that a lot of the energy companies that are in the gasoline business for example are not going to perform as you would expect,'' Pyle said.
Worries about slowing demand also slammed base-metal stocks with the sector sliding more than seven per cent during the week.
''The demand effects are starting to show through and the more you push this, the greater the potential decline in oil prices, as we're seeing with base metals,'' said Pyle.
This sea change adds up to a Toronto market that is down about 1,000 points or seven per cent from its peak on June 18.
Analysts say this slide was overdue as the TSX was one of the very few indexes in the world to rack up a strong gain during the second quarter.
''You lose oil right now and you don't get any confidence in the States, you can lose another 1,000 points off the TSX very easily. This bad news is just not going to go away because we're just catching up with the rest of the pack,'' Pyle said.
July will also test investor patience as second-quarter earnings estimates have been falling sharply from earlier this year, when many analysts were banking on a short U.S. economic downturn followed by a rapid recovery in the second half of the year.
But that was before global economies started to slow and soaring oil prices started to bite.
To top it all off, investors who have become used to central banks riding to the rescue with lower interest rates in times of economic slowdowns are now sensing that central bankers are more likely to hike rates to deal with energy-fuelled inflation.
''Central banks are basically walking out of the room and saying, 'Deal with it, because we're not there anymore,''' said Pyle.