September 18th, 2012
Adam Hewison’s Daily Technical Update, updated at 1:00 p.m. each day, provides a clear eyed into daily market activity. Hewison, a seasoned Chicago trader, and founder of MarketClub/INO.com shares his decades of trading and investing knowledge LIVE every weekday, providing insight and technical outlook, into stock indices, equities, currencies, commodities, and precious metals.
June 18th, 2013
by Scott Ronald, Steadyhand Investment Funds
The mining sector has been ravaged over the past two years. Commodity prices have softened, financing has dried up and sentiment has tanked. It’s been a minefield for investors.
Nowhere has the pain been more severe than the Canadian small cap market. Stocks in the Materials sector (which includes metals & minerals, gold, and paper & forest companies) comprise nearly 30% of the BMO Small Cap Index. The sector has declined 45% over the last two years (ending May 31st). Energy stocks make up a further 20% of the index (the sector is down 28%), bringing the combined weighting of resource-focused stocks to 50%.
There have been areas of strength, including technology, industrial, financial and consumer stocks, but because of the market’s tilt towards rocks and oil, the index has fallen 15% since the spring of 2011. The average Canadian small/mid cap equity fund fared better, but still declined 5% over the period (source: globefund.com).
The Steadyhand Small-Cap Equity Fund has avoided much of the carnage. In fact, it’s gained over 25%. This has much to do with the fact that the manager, Wil Wutherich, has largely steered clear of the mining sector (the fund only has one direct holding, Primero Mining).
|BMO Small Cap Index||-15.7%||-8.2%|
|Average Canadian Small/Mid Cap Equity Fund||-4.8%||-2.4%|
|Steadyhand Small-Cap Equity Fund||25.9%||12.2%|
Wil’s investment approach leads him to focus on established companies that generate steady profits and are well-financed, such that they can self-fund their operations and growth. And of course, they have to trade at reasonable valuations. These types of companies are typically not found in the mining sector.
An outcome of Wil’s approach – and all our managers for that matter – is that the fund will often produce returns that are out-of-synch with the market, as illustrated above. They won’t always be on the good side, though. In 2009, for example, the small cap index was up 75% while the fund only gained 14.6%. If the mining sector has a resurgence, the fund will likely lag behind. Since the fund’s inception in 2007, however, Wil’s approach has added considerable value versus the index (with considerably less volatility).
A final note on resources: The manager doesn’t avoid resource stocks altogether. If a company meets his investment criteria, he’ll give it careful consideration. In fact, Wil has a successful record of investing in energy companies and has increased the fund’s exposure to oil & gas producers over the last few quarters (to the point where they make up roughly one-quarter of the fund). As for mining stocks, he’s been kicking around the rocks but still isn’t finding any gems.
Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The annualized rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.
Copyright © Steadyhand Investment Funds
June 18th, 2013
SIA Charts Daily Stock Report (siacharts.com)
The SIA Daily Stock Report utilizes a proven strategy of uncovering outperforming and underperforming stocks from our marquee equity reports; the S&P/TSX 60, S&P/TSX Completion and S&P/TSX Small cap We overlay these powerful reports with our extensive knowledge of point and figure and candlestick chart signals, along with other western-style technical indicators to identity stocks as they breakout or breakdown. In doing so we provide our Elite-Pro Subscribers with truly independent coverage of the Canadian stock market with specific buy and sell trigger points.
Note: Subscribers can screen all Canadian and U.S. stocks and mutual funds, or as components of equally weighted mutual fund sectors indices (e.g. Income Trusts, Precious Metals), and fund groups by issuer (eg. AGF, Dynamic, Franklin Templeton), all Canadian ETFs, ETF Families by issuer (iShares, Horizons, BMO) or as components of Equally Weighted ETF Sector Indices (e.g. 2020+ Target date, Cdn Equity Lg Cap), and create and monitor their own, or SIA’s existing model portfolios. Finally, subscribers benefit from being able to generate BUY-WATCH-SELL Signals on demand with SIA Charts proprietary Favoured/Neutral/Unfavoured, SMAX scoring algorithm (see green-yellow-red graph 1 below).
PENN WEST PETROLEUM (PWT.TO) TSX – Jun 18, 2013 – Newly Favoured
GREEN – Favoured / Buy Zone
YELLOW – Neutral / Hold Zone
RED – Unfavoured / Sell / Avoid Zone
PENN WEST PETROLEUM (PWT.TO) TSX – Jun 18, 2013 – Newly Favoured
SIACharts.com specifically represents that it does not give investment advice or advocate the purchase or sale of any security or investment. None of the information contained in this website or document constitutes an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. Neither SIACharts.com (FundCharts Inc.) nor its third party content providers shall be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon.
Copyright © siacharts.com
June 17th, 2013
Below is a look at the year-to-date percentage change of ten major commodities. As shown, orange juice, natural gas and oil are the only three that are up on the year, while the other seven are down. Orange juice is up the most with a gain of 25.46%, followed by natural gas at +14.20% and oil at 6.88%. Silver leads the way on the downside with a decline of 27.88%, followed by gold (-17.58%), wheat (-14.28%) and coffee (-14.15%). While gold and silver are down big, platinum has held up much better with a YTD decline of just 6.65%.
Below is a look at our trading range charts for the ten commodities shown in the chart above. For each chart, the green shading represents between two standard deviations above and below the commodity’s 50-day moving average. Moves to the top of or above the green zone are considered overbought, while moves to the bottom of or below the green zone are considered oversold.
As you can see, oil has moved to the top of its trading range, and it is looking to break out of a one-year sideways range. The top of oil’s range is right around the $100 level, so watch out if it breaks out to the upside. It could see a big breakout higher in a short period of time.
While oil is at the top of its range, natural gas is at the bottom. Unlike oil, though, which is in a sideways pattern, natural gas remains in a long-term uptrend.
An uptrend is the last word you would use to describe the patterns for gold, silver and platinum. Since last September, these three precious metals have been in severe downtrends. At the moment, they are showing no signs of breaking these downtrends either.
Copyright © by Bespoke Investment Group
June 17th, 2013
by Liliana Castillo Dearth and Bruce K. Aronow, AllianceBernstein
In the hunt for growth in today’s low-growth world, up-and-coming small- and mid-sized companies are a good place to start. But you need to look everywhere, from Indiana to Indonesia.
SMID-cap stocks unite the typically robust growth of small companies with the higher quality of more established mid-cap firms. Smaller companies tend to grow faster than larger ones because they are often nimbler and more niche-focused, or pure plays on an exciting new growth theme.
These days, a major driver of higher SMID-cap growth is exposure to emerging markets—not just the BRIC heavyweights but also the smaller yet comparably vigorous economies in Latin America, Southeast Asia and Africa. Earnings for locally based emerging-market companies and rich-world firms with significant emerging-market businesses have grown many times faster than they have for companies with little or no presence in the developing world (Display). Given shifting global consumption trends, we don’t see this growth gap closing any time soon.
SMID-cap investing is a great way to harness this growth potential. Roughly half of global SMID-cap stocks are listed in emerging markets, and another 7% get more than 30% of sales from those countries. Global large-cap stocks just aren’t as well situated: only 38% have significant stakes in the developing world. Partly reflecting this emerging-market tilt, global SMID-caps have outperformed global large-caps over the long term, with only a slight increase in risk (Display).
So why not just go with a pure emerging-market allocation? Because, by going global, investors also gain access to the many idiosyncratic, domestically driven growth opportunities in smaller developed-market companies—and the diversification benefits that come with them. As the display above also shows, global SMID-caps have outperformed emerging-market stocks, with much less risk.
Adding to their appeal, global SMID-caps are also great sources of alpha potential. Smaller companies everywhere get far less research coverage than large-caps, and next to none in smaller emerging markets. This neglect can make small stocks more volatile, but it also gives active managers more chances to add value, especially if they have the research resources to develop insights on company fundamentals that others are overlooking. Though we focus on earnings growth, we don’t buy growth in a vacuum. Given the risks involved, we pay strict attention to returns on invested capital and other signs of managements’ effectiveness and capital stewardship. We also stay well diversified.
Today, we’re finding SMID growth opportunities across a wide swath of industries:
- European luxury-goods manufacturers gaining popularity among increasingly affluent emerging-market customers
- Innovative US technology companies grabbing share from less focused conglomerate rivals in the rapidly growing global LED market
- Pharmaceuticals, medical technology and healthcare-services firms profiting from surging demand for higher-quality, preventive medical care and the expansion of private and public healthcare programs across the developing world
- Financial-services companies in Southeast Asia as they increase domestic credit penetration from very low levels and expand into new services and geographic markets
- Thai and Indonesian consumer-oriented stocks benefiting from these nations’ continued rapid urbanization, young and growing workforces and recent government efforts to lift minimum wages
Tracking down the best growth ideas today requires casting a wide net over the small- and mid-cap opportunity. For us, that means going global.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Liliana Castillo Dearth is Chief Investment Officer of the International Discovery Equity Portfolio and Co-Manager of the Global Discovery Equity Portfolio at AllianceBernstein. Bruce Aronow is Team Leader and Portfolio Manager of Global Growth Small/SMID-Cap Equity Strategies at AllianceBernstein.
Copyright © AllianceBernstein
June 17th, 2013
by David Templeton, Horan Capital Advisors
All eyes have been on the Federal Reserve recently as talk of tapering of the quantitative easing programs was introduced by some Fed governors. An outcome of reducing the QE influence on the economy would likely be a move higher in interest rates. In fact, the yield on the 10-year Treasury recently moved higher from the 1.60% area to the 2.20% level as a result of the tapering comments. If this gradual reduction in QE is implemented, interest rates are likely to normalize at a higher level. Rising yields are not necessarily bad for the economy; however, higher rates are likely to have an impact on the value of the U.S. Dollar and commodity prices. There are a number of factors that influence the value of a currency, interest rates though, have a direct impact on a country’s currency. As interest rates rise, the dollar tends to strengthen.
With this strengthening, downward pressure is placed on commodity prices. Some commodities, like oil, are impacted more by the strengthening of the US Dollar as oil is transacted in Dollars around the world. As an example, an oil company in say Norway would receive more Krone for every Dollar converted back to the Norwegian currency in a strong Dollar environment. Because the Norwegian oil company is getting a currency benefit in the exchange, downward pressure is placed on the price of oil. Certainly a country’s fiscal situation, along with other factors (Purchasing Power Parity), will impact a currency’s value.
For an investor then, a question becomes what is the impact of a potential rise in interest rates on commodities and commodity centric firms. Also, why is the dollar strengthening? Is the economy strengthening thus resulting in a higher demand for oil? Is this placing downward pressure on energy and commodity supplies which would translate into higher energy prices? The yellow colored line in the above chart represents the energy sector exchange traded fund XLE. It is pretty clear that energy firms are highly correlated with the move in energy prices. If U.S. Dollar strengthening translates into lower oil prices, the energy space could come under downward price pressure.
As the below chart shows from a technical perspective oil prices have moved into a tight pendant pattern. Technically, it isn’t clear from the chart in what direction oil prices might move, only that it could break hard in one direction or the other.
Other direct commodity plays have come under significant price pressures this year as well. Many differing variables are impacting these commodity prices. For the coal related industries (KOL), the significant discoveries of natural gas in the U.S. due to fracking is lessening the demand for coal. Also, lower commodity prices may be indicative of slowing economic growth rates in some of the emerging economies.
Both the materials sector and the energy sector have been some of the weaker performing sectors in the market this year. Up until last month, the better performing sectors had been the more defensive and higher yielding ones like health care and consumer staples. We discussed the potential rotation out of these sectors several weeks back with materials and energy beginning to outperform the broader market at that time.
Be it right or wrong, the market will be laser focused on the Fed’s statement Wednesday in an effort to gain a better understanding of the future direction of interest rate policy. As noted in the link to Scott Grannis’ article at the beginning of this post, higher rates are not necessarily a bad omen for the economy. However, future interest rate policy will likely influence these commodity related sectors.
Copyright © Horan Capital Advisors
June 17th, 2013
There is a potentially new macro paradigm evolving which Saxo’s Steen Jakobsen calls: Reality Hits as the Marginal Cost of Capital Normalizes. The Bermuda Triangle of Economics is that the world, so far, has been kept in artificial equilibrium by the way quantitative easing (QE) and fiscal policies bring support and endless liquidity to the 20 percent of the economy that mostly comprises large and already profitable companies and banks with good credit and good political access.
The premise for supporting these companies is based on the non-existent wealth effect which unfairly culminates in supporting the haves to the detriment of the have-nots. However, as Jakobsen notes below, things are rapidly changing.
The recent increase in yields has happened despite no real improvement in the underlying data and he sees the the next few days as potential major game changers – the bloated VaRs will make people hedge and over hedge, and the normalization process of rising risk premiums due and higher real rates (higher yield plus lower inflation) will lead to more selling off of those trades that have “worked so far”… and increase volatility in their own right.
Just as I felt confident in my new macro model: The Bermuda Triangle of Economics, or BTE, the market cycles are changing again. But this recent potential macro paradigm shift is interesting and can also be explained by the BTE model. I call this new phase in the market: Reality Hits as the Marginal Cost of Capital Normalises.
The world, so far, has been kept in artificial equilibrium by the way quantitative easing (QE) and fiscal policies bring support and endless liquidity to the 20 percent of the economy that mostly comprises large and already profitable companies and banks with good credit and good political access. The premise for supporting these companies is based on the non-existent wealth effect which unfairly culminates in supporting the haves to the detriment of the have-nots.
Meanwhile, the 80 percent of the economy that is composed of productive, innovative, job-creating and less capital intensive small and medium-sized enterprises has been left to fend for itself. This segment is starved of credit and the upshot is the current malaise of low innovation and high unemployment.
Meanwhile, despite the economic distress, we have nothing but silence on the social discontent front, which can only be explained by the “success” of generous entitlements in the developed economies. Indeed, we are the Entitlement Generation. We are not compelled to challenge the government and central bank policies when more than fifty percent of the population benefits from income transfers directly from the state. This is a proof of the old game theory idea that the individual can be rational while the sum of individuals’ behaviour is irrational.
What would upset this equilibrium?
the real tipping point for the old paradigm is only reached via an increase in market volatility – something that appears to be unfolding at the moment.
This is the point at which the market feeds back into the fundamentals by disturbing the false calm of equilibrium through a bloating of Value-at-risk (VaR) models.
When the market gets more nervous, volatility rises and the market jumps back and forth in a discontinuous fashion, moving away from the previous, very long one-way street lower driven by the compression of the risk premium from policy intervention and the resultant yield chasing (combined with benign inflation from the output gap). The culprit for this bout of volatility? Abenomics!
JGB contract historic volatility 50 and 100 days….(Source: Bloomberg LLP)
For all its success in getting the Nikkei higher – and until recently, USDJPY as well, Abenomics also dramatically increased volatility in Japanese government bonds (JGBs), which was certainly not the intention. This increase in JGB volatility had people like me going short USDJPY as this acts as a brake on the simple idea that the USDJPY is a straightforward carry trade driven by the anticipation that Abenomics will have Japan having its cake and eating it too. When bond market volatility jumps, carry trades head south fast. And note how the JGB volatility saw contagion in the US bond market, with the US 30-year mortgage bond yield spiking 76 basis points recently.
The benchmark US 10-year US T-note has moved so much that the world’s most famous bond investor, Bill Gross, has lost 335 bps in his PIMCO Total Return Fund from this year’s high in April. And he is down 169 basis points for the year-to-date in a fund that is known for its stability
30-year US Mortgage rate (Source: Bankrate)
So in short, the dramatic changes to fixed income and overall market volatility probably had 70 percent to do with the failure thus far of Abenomics to perpetuate the themes of QE and easy money. The reason for this (as I have stated several times) is that Japan has come far too late to the party.
What makes Japan’s timing even worse is the fact that risk premiums were already extremely compressed – meaning that they were pushing on a string from the very start as macro players were already gunning for yield and leveraged to the hilt.
Look at corporate and investment yield tickers like HYG and LQD, both of which are down in excess of five percent from the top. So what we are seeing now is also a “normalisation of risk premiums” – which is long-term very healthy and could at best mean that we are moving towards real “price discovery” again in the fixed income market. This will mean that we may begin to know the real price of money both in time and yield – at least in those sectors outside the control of the silly central bankers.
The other major area I want to touch on which makes this move in yield truly alarming is the trend in global current accounts. I have said a few times that the lack of recycling going forward is a major issue not only for the US, but certainly for all current account-deficit countries. (This has been a major drive for the sell-off in emerging market assets and currencies.)
The trend is clear: From surpluses of five to seven percent of GDP – ergo, savings excess that needed to be recycled into US government bonds to avoid currency appreciation, Asia is barely showing a surplus and Brazil, Russia, India and China (the BRICs) will in my estimation move to a collective deficit inside the next 12 months, with Japan joining them on the current account deficit side. This means the biggest traditional institutional buyers of government debt have effectively disappeared, and may begin to even sell their holdings.
Are you worried yet? You should be.
The final straw
Looking at the US economy, the recent increase in yield has happened despite no real improvement in the underlying data. Imagine if the US economy started to slowly pick up from these low levels of activity over the summer due to lower energy prices, a “feel-good factor” in confidence, and a slightly better housing market.
Are you ready for a three percent 10-year yield and a five percent 30-year mortgage rate in an economy with less than two percent real growth?
Probably not, because no one else is either.
I see the next few days as potential major game changers – the bloated VaRs will make people hedge and over hedge, and the normalisation process of rising risk premiums due and higher real rates (higher yield plus lower inflation) will lead to more selling off of those trades that have “worked so far”… and increase volatility in their own right.
I have not even mentioned the constitutional court ruling in Karlsruhe which the Anglo-Saxon press and banks with their usual naïveté of everything German have written off as a non-event. Reading Der Spiegel last night I got concerned about the consensus but judge for yourself. These are very much Decisive days for Euro: High Court considers ECB Bond buys.
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June 17th, 2013
Then: Risk-On/Risk-Off. JPMorgan’s Marko Kolanovic head of Equity Derivatives Strategy explains:
Over the last 5 years, Treasuries and Equities had strong negative correlation. This was the risk-on / risk-off (RORO regime) in which Treasuries were the most broadly used ‘safe haven’ asset. In the RORO regime, investors would hold treasuries and sell them to buy risky assets (and vice versa) while being reassured that Fed will keep the price of Treasuries supported. While we are still on average in a RORO regime, the bond-equity correlation started significantly weakening due to increased risk of Fed tapering and a bond selloff. The effect of the Fed reducing the stimulus could result in lower bond prices as well as lower prices of stocks, commodities and other risky assets whose prices were inflated by the Fed’s stimulus.
Over the past month, in several instances bonds and stocks moved together as investors re-assessed the probability of early tapering. Figure 1 below shows equity-bond correlation (calculated from high frequency intraday data). Correlation turned positive on May 9, 22, and 31 and most recently over the past few days. May 9th and 31st brought better than expected macro data (jobless claims, consumer confidence and Chicago PMI). Ironically, positive data caused equities and bonds to trade lower on increased probability of tapering (good data were bad for stocks). Similarly, on May 22nd, bonds and stocks sold off as Bernanke indicated the possibility of tapering over the next few meetings.
And Now: the “Fed Regime“
A byproduct of these new bond-equity dynamics is that USD is losing its status as a ‘risk off’ currency. As expectations of more (less) stimulus pushes up (down) treasuries and US stocks (both USD denominated), resulting currency flows are weakening the historical negative USD-Equity correlation. Historically, USD had strong negative correlation to equities (i.e. EUR and EM currencies had a positive correlation to equities). This recent relationship is now undermined as treasuries are losing their appeal as a safety asset. This weakening of EM FX and EUR correlation to the S&P 500 (Figure 2) was also helped by investors putting money in US stocks, while avoiding European and Emerging markets in the last leg of market rally.
Fears of Fed tapering the massive QE program is now changing bond-equity correlation from a RORO regime towards a ‘Fed Model’ regime (coincidentally, the name ‘Fed Model’ was crafted in 90s long before invention of quantitative easing). We do not think equity-rate correlation will fully revert back to the ‘Fed Model’ regime, but the recent spikes in rate-equity correlation are worrying signs. Recent bouts of positive correlation of equities, bonds and commodities, suggest that the Fed’s stimulus inflated prices of a broad range of financial assets, and removal of the stimulus could create a tail event in which prices of all assets could go down. While it is expected that the Fed will try to avoid such a scenario by maintaining an appropriate level of stimulus, in the absence of more robust growth, this may turn out to be a difficult task (akin to driving a car without brakes). On this account, we expect more volatility in H2 as compared to the first part of the year. To reduce risk of a bond and equity tail event, investors could diversify ‘safe haven’ assets away from treasuries and into other assets that are at lower risk in case of tapering. For instance investors could increase allocations to cash or Equity Put options.
Helpful. It also appears that Marko and Tom Lee, who sees nothing but smooth sailing from here until S&P 2,000, don’t talk much.
And just so the message of JPM’s derivatives group is clear, they look at the unprecedented (and previously documented) surge in NYSE margin debt, which has risen at the fastest pace ever so far in 2013, and analyze the empirical evidence of what happens after such a radid move. The result is below:
Last month, NYSE published April data on aggregate debt balances in stock margin accounts. This measure shows how much funds were borrowed to purchase securities, and it reached all time high of $384bn. Net margin debt (calculated as a difference of debt in margin accounts and all credit balances) also reached a high level of $106bn, and the pace of net margin debt increase YTD ($87bn) was the highest on record. We have been asked whether this increase in leverage is a sign of an impending market selloff. To analyze the relationship between S&P 500 prices and margin debt we look at their historical levels over the last 15 years. Figure 7 shows a strong correlation between S&P 500 and NYSE net margin debit. Positive correlation between the S&P 500 and net margin debt indicates that clients tend to finance a fraction of their equity exposure with margin debt. We also note that peaks in margin debt are usually followed with a sharp market correction. However, this on its own does not imply that high margin debt leads to market correction (given the positive correlation of net margin debt and S&P 500, highs in margin debt coincide with highs in S&P 500).
To test for a causal relationship we looked at the changes in net margin debt against S&P 500 performance 3, 6 and 9 months afterwards. Figure 8 shows that large increases of net margin debt are indeed on average followed by weak equity returns. Note that the YTD increase of margin debt is the highest on record, as indicated by the arrow.
Another test we performed is to look at levels of margin debt normalized by the level of the S&P 500. Dividing margin debt by the level of the S&P 500 may give a more accurate measure of leverage (by remove the bias coming from correlation of S&P 500 and margin debt levels).
Figure 9 shows the ratio of margin debt to S&P 500 (red) as well as ratio of net margin debt to S&P 500 (blue). One can see that these normalized measures of leverage peaked prior to the tech bubble burst, in H2 2007 and H1 2008, and in H1 of 2011 – in all cases ahead of significant market corrections. While these are effectively only three data points and hence do not amount to a reliable statistical sample, we think that the quick increase of net margin debt, and high ratio of margin debt to S&P 500 do point to an increased probability of a market correction and volatility increase in the second half of the year.
But don’t worry. The Fed is on top of it. All of it.
June 17th, 2013
The Game of Risk
by Jeffrey Saut, Chief Investment Strategist, Raymond James
June 17, 2013
“To be sure, there is no exact definition of what ‘calling’ a market top or bottom involves. In the case of the March 2009 bear market bottom, for example, does ‘calling’ it mean the adviser’s portfolio needs to have moved from being all cash to 100% invested in stocks on the exact day of the bottom? If my analysis had relied on a definition as demanding as this, then it wouldn’t be surprising that no timers called recent market turning points. But my analysis actually relied on a far more relaxed definition: Instead of moving 100% from cash to stocks in the case of a bottom, or 100% the other way in the case of a top, I allowed exposure changes of just ten percentage points to qualify. Furthermore, rather than requiring the change in exposure to occur on the exact day of the market’s top or bottom, I looked at a month-long trading window that began before the market’s juncture and extending a couple of weeks thereafter. Even with these relaxed criteria, however, none of the market timers that the Hulbert Financial Digest has tracked over the last decade were able to call the market tops and bottoms since March 2000. These results add up to perhaps the most important investment lesson of all that: predicting turns in the market is incredibly difficult to do consistently well.”
… Mark Hulbert, MarketWatch (3/10/10)
The above excerpt was penned by Mark Hulbert in an article titled “Fools R Us.” Appropriately, that article ran in a MarketWatch column on the 10-year anniversary of the NASDAQ Composite’s peak of March 10, 2000. Ten years ago the COMP was changing hands around 5132. It is now trading at 3423 for a 13-year loss of some 33.3%. Meanwhile, over that same timeframe, the earnings of the S&P 500 are up 83%, nominal GDP is better by some 57.6%, and interest rates are substantially below where they were back then. If you are a college professor such statistics do not “foot” with your teachings because professors tend to believe stock returns are all about earnings and interest rates. I concur, but would add the caveat, “That is if you live long enough.” As money manager Greg Evans, eponymous captain of Millstone Evans in Boulder Colorado, writes:
“Hey Jeff, I enjoyed your missive on Mr. Market. I use that Warren Buffet allegory quite a bit with clients. One interesting statistic on Berkshire is that its stock price was $38 in 1968 and 8 years later, after trading higher and lower, ended up (again) at $38. Most clients would look at that (performance) and say – it hasn’t done anything for 8 years so I am going to sell. But an astute investor, looking at the underlying growth in book value, would see an average annual growth rate of 14.6% over those 8 years and conclude they should buy more. As to your point that over the long-term stock prices are ultimately determined by their book value, earnings and cash flows, I have often run numbers on stocks over a 25-year time frame to show to clients. For example, Coca-Cola’s stock price in 1983 was $5.10 (midpoint); and, Coke earned $0.30 per share that year. The stock price today is ~$40, and they earned $1.97 last year. That’s about a 15% annualized growth rate on the stock price; and, a ~15% growth rate on earnings – QED.”
Surprisingly, however, if an investor bought Coke shares at their peak price in 1972, over the next 12 years the company compounded earnings at nearly double-digit rates (with only four down quarters), yet said shareholders actually lost money. The reason was “Mr. Market” was unwilling to capitalize that improvement in earnings anywhere near the P/E multiple of 1972. Regrettably, “Mr. Market” is indeed manic depressive, which is why the stock market is truly fear, hope and greed only loosely connected to the business cycle. And that, ladies and gentlemen, is why the successful investor needs to learn how to manage risk. As Benjamin Graham wrote, “The essence of investment management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept.”
Clearly, Warren Buffet understands this “management of risk” concept for he too has learned when to “play hard” and when not to “play.” Decidedly, his insight to hoard cash, and shun internet stocks, in the late 1990s was brilliant, yet it was greeted with catcalls that “the old man has lost his touch and just doesn’t understand the Internet age.” However, investors benefitted handsomely if they heeded his advice. Enter the aforementioned quote from Mark Hulbert espousing the old market axiom, “It’s TIME in the market, not TIMING the market.” Typically such comments are accompanied with the verbiage, “If you missed the 10 best stock market sessions of the year it kills your returns.” To be sure, over the 25-year period ending on 12/31/2011 the buy and hold investor saw returns of 6.81% per year. But, if you missed the 10 best sessions your annualized return falls to 3.67%. Miss the 20 best and you experienced only a 1.65% yearly gain, and missing the 40 best yields a negative 1.62% return. However, miss the 10 worst days and a prescient investor realized a 10.89% per annum gain, while missing the 40 worst shows annualized returns leaping to a 17.74% – according to a study from Hepburn Capital Management – thus proving the management of “risks” is more important than the management of “returns” (see chart on page 3).
That said, while I too don’t believe anyone can consistently “time” the stock market, I do believe in Dow Theory. Dow Theory is like a roadmap for the “primary trend” of the stock market. Recall, Dow Theory gave you a “sell signal” in September 1999 (albeit three quarters too soon), a “buy signal” in June 2003 (a few months too late), and again a “sell signal” in November 2007 (note, it is not Jeff Saut “calling” the stock market, but Dow Theory). More importantly, the Dow Theory “buy signal” of earlier this year remains in force. Nevertheless, I continue to think we are in a short/intermediate “topping” process. The timing models that have worked so well year to date targeted June 11/12th as the days that a feint to the downside would start. While I had thought the convening of the German Constitutional Court would be the causa proxima, it turned out to be Japan and its statement that it would not increase the monetary stimulus operations. Subsequently, in Friday morning’s verbal strategy comments, I said:
“I think we are going to limp around and then try for the reaction high of 1687. If we don’t make a higher high on that attempt, and turn down from there, then the mid-July swoon I have been targeting will arrive prematurely. However, if we do make a higher high it probably means we are still going up to make a new high into the first or second week of July and then start the swoon. Indeed, I have mixed signals into the end of this week (meaning last week), as well as mixed signals into the beginning of next week (meaning this week). So, it would not surprise me to see the upside action fizzle today (last Friday) and have the market limp around with attempts to sell off into early next week. However, there are much more positive timing point signals coming next week (aka, this week), so my hunch is that the SPX limps for a few sessions and then starts to push higher.”
And while Friday’s Fade (-106 points) wasn’t much of a “limp,” Thursday’s upside action surely fizzled.
The call for this week: Nassim Taleb (trader extraordinaire) has 10 rules. Rule number 8 reads: “Always protect the downside. As pointed out ad nauseum, Black Swans do occur. No matter how much you test, there will be a ‘this time is different’ moment forcing your bank account into oblivion. No matter how confident, always protect the downside.” I agree with Taleb’s comments and therefore always try to “look” down before looking up in an attempt to manage the risk. As for the here and now, as I said on Friday, “It would not surprise me to see the upside action fizzle today (last Friday) and have the market limp around with attempts to sell off into early next week. However, there are much more positive timing point signals coming next week (aka, this week), so my hunch is that the SPX limps for a few sessions and then starts to push higher.” And this morning “higher” is the watchword as last week’s “taper tantrum” is fading on rumors of a softer Fed at this week’s meeting, leaving the preopening S&P 500 futures up about 12 points.
Copyright © Raymond James
June 17th, 2013
Pre-opening Comments for Monday June 17th
U.S. equity index futures were higher this morning. S&P 500 futures were up 13 points in pre-opening trade. Index futures moved higher in anticipation of encouraging comments expected to be released by the FOMC on Wednesday.
Equity markets were virtually unchanged following release of the June Empire Manufacturing Index. Consensus was unchanged versus a decline of 1.4 in May. Actual was a gain to 7.84.
BCE (C$44.16) is expected to open higher after Canaccord upgraded the stock from Hold to Buy. Target is $46. Canaccord also upgraded Rogers Communications (C$RCI.B $45.35) to a Buy.
Red Hat (RHT $46.01) is expected to open lower after Susquehanna downgraded the stock from Positive to Neutral. Target was reduced from $65 to $50.
Comcast added $0.78 to $40.52 after Raymond James upgraded the stock from Outperform to Strong Buy.
Chevron is expected to open lower after Jefferies downgraded the stock from Buy to Hold. Target is $135.
Economic News This Week
The June Empire Manufacturing Index to be released at 8:30 AM EDT on Monday is expected to improve to 0.0 from -1.4 in May.
May Consumer Prices to be released at 8:30 AM EDT on Tuesday is expected to increase 0.2% versus a decline of 0.4% in April. Excluding food and energy, May CPI is expected to increase 0.2% versus a gain of 0.1% in April.
May Housing Starts to be released at 8:30 AM EDT on Tuesday are expected to increase to 950,000 from 853,000 in April.
The FOMC decision on interest rates to be released at 2:00 PM EDT on Wednesday is expected to show no change in the Fed Fund rate.
Weekly Initial Jobless Claims to be released at 8:30 AM EDT on Thursday are expected to increase to 340,000 from 334,000 last week.
May Existing Home Sales to be released at 10:00 AM EDT on Thursday are expected to increase to 5.00 million from 4.97 million in April
The June Philadelphia Fed Manufacturing Index to be released at 10:00 AM EDT on Thursday is expected to improve to -1.0 from -5.2 in May
May Leading Economic Indicators to be released at 10:00 AM EDT on Thursday are expected to increase 0.2% versus a gain of 0.6% in April.
May Canadian Consumer Prices to be released at 8:30 AM EDT on Friday are expected to increase 0.4% versus a 0.2% decline in April.
April Canadian Retail Sales to be released at 8:30 AM EDT on Friday are expected to increase 0.2% versus no change in March.
Earning News This Week
Wednesday: FedEx, Jabil Circuit, Micron, Red Hat
Friday: Carnival, Darden
Mr Vialoux on BNN on Friday
Following are links to the show:
The S&P 500 Index fell 16.65 points (1.01%) last week. Trend remains up. Resistance is at its May 22nd high at 1,687.18. Support is at 1,598.23. The Index remains below its 20 day moving average, but bounced once again from near its 50 day moving average. Short term momentum indicators have declined to neutral levels.
Percent of S&P 500 stocks trading above their 50 day moving average fell last week to 59.60% from 67.80%. Percent remains in a downtrend from an intermediate overbought level.
Percent of S&P 500 stock trading above their 200 day moving average slipped last week to 88.20% from 90.60%. Percent remains in a downtrend from an intermediate overbought level.
Bullish Percent Index for S&P 500 stocks slipped last week to 81.20% from 82.00% and remained below its 15 day moving average. The Index continues to trend down from an intermediate overbought level.
Bullish Percent Index for TSX Composite stocks fell last week to 59.41% from 62.76% and dropped below its 15 day moving average. The Index has resumed an intermediate downtrend.
The TSX Composite Index fell 185.94 points (1.50%) last week. Trend remains down. The Index remains below its 20 day moving average and completed a “Death Cross” when its 50 day moving average fell below its 200 day moving average. Tech Talk is not a believer in the Death Cross indicators, but other technical analysts are talking about it. Strength relative to the S&P 500 Index changed from neutral to negative. Technical score based on the above indicators changed from 0.5 to 0.0 out of 3.0. Short term momentum indicators are oversold, but have yet to show signs of bottoming.
Percent of TSX stocks trading above their 50 day moving average fell last week to 31.80% after briefly reaching a low of 24.69%. Historic data shows that the TSX Composite Index frequently bottoms on a recovery by Percent from below the 25% level.
Percent of TSX stocks trading above their 200 day moving average fell last week to 42.68% from 46.86%. Percent continues in an intermediate downtrend.
The Dow Jones Industrial Average fell 177.94 points (1.17%) last week. Trend remains up. Resistance is at its May 22nd high at 15,532.40The Average remains below its 20 day moving average and bounced from near its 50 day moving average. Strength relative to the S&P 500 Index changed from positive to neutral. Technical score based on the above indicators slipped to 1.5 from 2.0 out of 3.0. Short term momentum indicators have declined to neutral levels.
Bullish Percent Index for Dow Jones Industrial Average stocks fell last week to 83.33% from 86.67% and remained below its 15 day moving average. The Index is intermediate overbought and trending down.
Bullish Percent Index for the NASDAQ Composite Index slipped last week to 67.19% from 68.05% and remained below its 15 day moving average. The Index has rolled over from an intermediate overbought level.
The NASDAQ Composite Index dropped 45.66 points (1.32%) last week. Trend remains down. The Index remains below its 20 day moving average. Strength relative to the S&P 500 Index changed from positive to neutral. Technical score slipped from 2.0 to 1.5 out of 3.0.Short term momentum indicators have declined to neutral levels.
The Russell 2000 Index slipped 6.24 points (0.63%) last week. Trend remains down. Support is at 963.88. The Index remains below its 20 day moving average. Strength relative to the S&P 500 Index changed from neutral to positive. Technical score improved from 1.5 to 2.0. Short term momentum indicators have declined ton neutral levels.
The Dow Jones Transportation Average dropped 34.31 points (0.54%) last week. Trend remains up. Resistance is at 6,568.41 and support is at 6,115.02. The Average remains below its 20 day moving average. Strength relative to the S&P 500 Index changed from negative to neutral. Technical score improved from 1.0 to1.5 out of 3.0. Short term momentum indicators are neutral.
The Australia All Ordinaries Composite Index added 46.20 points (0.98%) last week. Trend remains neutral. The Index remains below its 20 and 50 day moving averages. Strength relative to the S&P 500 Index remains negative. Short term momentum indicators are oversold and showing early signs of bottoming.
The Nikkei Average dropped another 191.01 points (1.48%) last week. Trend remains neutral. The Average remains below its 20 and 50 day moving averages. Strength relative to the S&P 500 Index remains negative. Technical score remains at 0.5 out of 5.0. Short term momentum indicators are oversold, but have yet to show signs of bottoming.
Europe 350 iShares slipped $0.34 (0.81%) last week. Trend remains neutral Support is at $41.12. Units remain below their 20 day moving average. Strength relative to the S&P 500 Index changed from negative to neutral. Technical score improved from 0.5 to 1.0. Short term momentum indicators are trending down.
The Shanghai Composite Index dropped 48.86 points (2.21%) last week. Trend changed from neutral to negative on a move below support at 2,161.14. The Index remains below its 20 day and 50 day moving averages and fell below its 200 day moving average. Strength relative to the S&P 500 Index changed from neutral to negative. Technical score fell from 1.0 to 0.0. Short term momentum indicators are trending down.
The Athens Index plunged another 66.94 points (6.79%) last week. Trend is down. The Index remains below its 20 and 50 day moving averages. Strength relative to the S&P 500 Index remains negative. Short term momentum indicators are overbought, but have yet to signs of bottoming.
The U.S. Dollar fell another 1.05 (1.29%) last week. Trend remains neutral. The Dollar remains below its 20 and 50 day moving average and fell below its 200 day moving average. Short term momentum indicators are oversold, but have yet to show signs of bottoming.
The Euro added another 1.24 (0.94%) last week. The Euro remains above its 20, 50 and 200 day moving average. Short term momentum indicators are overbought, but have yet to show signs of peaking.
The Canadian Dollar added US 0.21 cents (0.21%) last week. The Canuck Buck remains above its 20 and 50 day moving averages. Short term momentum indicators are trending up.
The Japanese Yen gained another 3.85 (3.75%) last week. Trend remains neutral. The Yen remains above its 20 and 50 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking.
The CRB Index slipped 1.49 points (0.52%) last week. Trend remains down. The Index remained above its 20 and 50 day moving averages. Strength relative to the S&P 500 Index remains neutral. Technical score remains at 1.5
Gasoline gained $0.02 per gallon (0.70%) last week. Trend remains neutral. Resistance at $2.93 is being tested. Gasoline remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains positive. Technical score remains at 2.5 out of 3.0.
Crude Oil gained another $1.68 (1.75%) last week. Trend changed from neutral to positive on Friday when crude moved above resistance at $97.35 and $97.80. Crude remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains positive. Technical score improved from 2.5 to 3.0. Short term momentum indicators are trending up.
Natural Gas dropped another $0.07 (1.83%) last week. Trend remains negative. Natural Gas remains below its 20 and 50 day moving averages. Strength relative to the S&P 500 Index remains negative. Technical score remains at 0.0 out of 3.0. Short term momentum indicators are oversold, but have yet to show signs of bottoming.
The S&P Energy Index fell 9.98 points (1.67%) last week. Trend remains up. Support is at 580.64. The Index remains below its 20 day moving average. Strength relative to the S&P 500 Index changed from neutral to positive. Technical score slipped to 1.0 to 1.5. Short term momentum indicators have declined to neutral levels.
The Philadelphia Oil Services Index fell 4.69 points (1.82%) last week. Trend remains neutral. The Index remains below its 20 day moving average. Strength relative to the S&P 500 Index changed back to negative from neutral. Technical score slipped from 1.0 to 0.5. Short term momentum indicators continue to trend down.
Gold gained $5.10 per ounce (0.37%) last week. Trend remains down. Gold remains below its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains negative, but showing signs of change. Technical score improved from 0.0 to 0.5. Short term momentum indicators are neutral
The AMEX Gold Bug Index dropped 4.69 points (1.82%) last week. Trend remains down. Resistance is at 284.21. The Index moved below its 20 day moving average. Strength relative to the S&P 500 Index changed from positive to neutral. Technical score fell from 2.0 to 0.5. Strength relative to gold remains negative. Short term momentum indicators are neutral.
Silver gained $0.23 (1.06%) last week. Trend remains down. Silver remains below its 20, 50 and 200 day moving averages. Strength relative to gold remains negative, but has improved from negative to positive relative to the S&P 500 Index. Technical score improved from 0.0 to 1.0. Short term momentum indicators are oversold and trying to bottom.
Platinum fell $56.90 (3.79%) last week. Trend remains up. Platinum moved below its 20 and 50 day moving averages. Strength relative to gold and the S&P 500 changed from positive to negative. Technical score changed from 3.0 to 1.0.
Palladium dropped $30.00 per ounce (3.94%) last week. Trend changed from up to neutral. Palladium fell below its 20 day moving average. Strength relative to gold dropped to neutral
Copper fell another $0.08 per lb. (2.45%) last week. Trend changed from up to neutral. Copper remains below its 20 and 50 day moving averages. Strength relative to the S&P 500 Index changed from neutral to negative. Technical score changed from 1.5 to 0.5. Short term momentum indicators are trending down.
The TSX Metals and Minerals Index fell another 35.21 points (4.43%) last week. Trend remains down. The Index remains below its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains negative. Technical score remained at 0.0 out of 3.0. Short term momentum indicators are oversold, but have yet to show signs of bottoming.
Lumber dropped $26.02 (8.32%) last week. Trend remains down. Lumber returned to below its 20 day moving average. Strength relative to the S&P 500 Index returned to negative from neutral. Technical score returned to 0.0 from 1.0 out of 3.0.
The Grain ETN fell $1.31 (2.51%) last week. Trend remains up. Units fell below their 20 day moving average. Strength relative to the S&P 500 Index changed from positive to neutral.
The Agriculture ETF lost $0.67 (1.25%) last week. Trend remains negative. Units remain below their 20 and 50 day moving averages. Strength relative to the S&P 500 Index remains negative. Technical score remains at 0.0 out of 3.0. Short term momentum indicators are trending down.
The yield on 10 year Treasuries slipped 3.5 basis points (1.62%) last week. Yield remains above its 230, 50 and 200 day moving averages. Short term momentum indicators are overbought and showing early signs of rolling over.
Conversely, the long term Treasury ETF added $0.66 (0.58%) last week. Trend remains down. Units remain below their 20, 50 and 200 day moving averages.
The VIX Index spiked 2.01 (13.28%) last week. It remains above its 20, 50 and 200 day moving averages.
Economic focus this week is on the FOMC meeting announcement on Wednesday. The Federal Reserve will try to allay “tapering” fears. Other economic data is expected to show a stall in economic growth in the May/early June.
Earnings news is expected to have limited impact on equity markets. Focus will be on FedEx on Wednesday, a benchmark for world economic growth. Major companies have just entered into their “quiet period” prior to release of second quarter results. Corporate news becomes less frequent unless second quarter results are a clear miss (one way or the other). Earnings confession season has just started.
The G8 meeting early this week is a major “photo-op”, but is unlikely to have a significant impact on equity markets.
Extreme fluctuations in currencies continue and are a major source for higher than average inter-day volatility in equity markets.
Seasonal performance by North American equity indices during the second half of June is negative. June is the second weakest month of the year for the Dow Jones Industrial Average and TSX Composite Index and third weakest month of the year for the S&P 500 Index.
Short and medium term technical indicators for broadly based equity indices and economic sensitive sectors continue to trend down. Key levels to watch are the 50 day moving averages by broadly based U.S. equity indices. So far, their 50 day moving averages have proven to be confirmed support. A break below these levels on a close will trigger significant technical selling. The 50 day moving average for the S&P 500 Index is 1,614. The 50 day moving average
for the Dow Industrials is 14,991.
International events are starting to have an impact on selected markets, most notably the energy market. The breakout by crude oil on Friday triggered partially by growing tensions in the Middle East is positive for the energy sector, but negative for other economic sensitive sectors.
The Bottom Line
The intermediate corrective phase in North American equity markets remains intact. Short term strength provides an opportunity to reduce equity exposure, particularly in sectors that have a history of moving lower during a summer corrective phase. These sectors included industrials, consumer discretionary, materials and financials.
Selected sectors are setting up for seasonal trades this summer including fertilizers, energy and gold. They already are showing signs of outperformance relative to the S&P 500 Index and the TSX Composite Index. Stay tuned for special sector opportunities as the summer progresses.
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Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.
Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc
Horizons Seasonal Rotation ETF HAC June 14th 2013
June 17th, 2013
Anyone who has been watching the Nikkei over the last month has noticed that the Japanese stock market has routinely been selling off throughout the trading day. Whether or not the index opens higher or lower, more often than not it is closing well below levels that it has touched during the trading day. In fact, over the last twenty trading days (a period going back three days before the index peaked), the Nikkei has closed more than 1% below its intraday high 13 times! We haven’t seen that type of intraday selling in the Nikkei since the Financial Crisis, and before that, December 2001. In the 1990s, there were multiple occurrences where the Nikkei saw this kind of intraday selling, but keep in mind that the 1990s weren’t exactly a good period for the Japanese stock market.
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