Worst is yet to come for hard-hit Canada stocks

Canada's sliding stock market may not hit bottom for months as weakening economic growth and an unresolved debt crisis in Europe turn off more investors before a modest year-end rebound.

The majority of more than 20 strategists and fund managers polled by Reuters over the last two weeks expect the Toronto Stock Exchange's S&P/TSX composite index <.GSPTSE> to fall further from its close of 12,908.89 on Friday.

Many think it could slip another 5 to 10 percent between July and October, before a modest recovery begins later this year.

"The worries are not over, particularly with the concerns about when the euro zone and the IMF help provide Greece with its money," said Kate Warne, Canadian market strategist at Edward Jones.

"There are probably a few more glitches between today and the resolution of the current Greek debt crisis."

The St. Louis, Missouri-based strategist said other potential difficulties for the stock market include cooling economic growth in North America and China.

Canada's benchmark stock market index has fallen about 4 percent this year and 10 percent since the 2011 high reached in March.

Many market watchers see it tumbling to anywhere between 11,500 and 12,500. The index hasn't touched 11,500 since last August.

If the most pessimistic forecasts are right, this would mark a pullback of nearly 20 percent, a common definition of a bear market.

Douglas Rowat, senior equity specialist at HSBC Canada, said another 5 percent correction is certainly possible given the U.S. Federal Reserve's decision to end the second round of its quantitative easing program, in which it created money to buy U.S. government debt.

"That's largely been telegraphed to the market, but still, when it actually happens, you could see some volatility," he said.

An August speech by Fed Chairman Ben Bernanke at Jackson Hole, Wyoming, in which he flagged the launch of the stimulus program -- dubbed QE2 -- helped drive the TSX's turnaround from a 10 percent correction last year.

TECHNICAL SIGNALS WATCHED

The technical picture also points to further medium-term weakness, said Don Vialoux, a technical analyst at JovInvestment Management, who sees support at the November low around 12,500.

While second-quarter results in July are expected to be solid, he cautioned that the outlook from companies in the second half of the year tends to be less upbeat. Seasonal factors could also weigh this September and October -- typically bad months for stocks, said Vialoux.

Still, not everyone thinks Canadian stocks have much more to fall.

Ron Meisels, a technical analyst and president of Phases & Cycles in Montreal, thinks the TSX's seven-month low of 12,763.54, reached on June 20, will hold.

He said that, historically, the market has often bottomed on the Monday following the day options expire, in this case June 17.

The fact that more than 75 percent of stocks are trading below their 200-day moving average is in fact a bullish sign, said Meisels, indicating an oversold market.

Looking further out, Canadian stocks are widely expected to reverse year-to-date losses and eke out low single-digit returns in 2011, helped by a second-half pickup in economic growth and diminishing global headwinds.

Some analysts are speculating the U.S. Federal Reserve may even launch a third round of quantitative easing this year in a bid to further stimulate the economy, though Bernanke did not signal this at a recent appearance.

"In fact, it will be QE3," said Gavin Graham, president of Graham Investment Strategy. Until then, he expects more weakness, especially for resource stocks, which are particularly sensitive to global growth.

The energy and materials sectors have seen the steepest corrections from highs this year, skidding more than 15 percent. Yet many expect them to eventually lead the market higher.

The two sectors, which combined make up about half of the index, include resource giants like Suncor Energy and Potash Corp .

Financials, the most influential sector with nearly a 30 percent weighting on the TSX, have tumbled a more moderate 7 percent, and are also seen supporting a year-end recovery. The sector's biggest names include Royal Bank of Canada and Toronto-Dominion Bank .

Analysts said steeper declines in coming months would ultimately cheapen stocks and lure cash-heavy investors back into the market.

"While there is no shortage of headwinds, the selloff has been quite steep and has improved market valuations," said Elvis Picardo, a strategist with Global Securities in Vancouver.