Technical Talk: Market Recovers, but Risk Aversion Building

Wednesday, February 6th, 2013

Upcoming US Events for Today:

1. Weekly Crude Inventories will be released at 10:30am.

Upcoming International Events for Today:

1. German Manufacturer’s Orders for December will be released at 6:00am EST. The market expects a year-over-year decline of 0.7% versus a decline of 1.0% previous.
2. Canadian Ivey PMI for January will be released at 10:00am EST. The market expects 53.8 versus 43.1 previous.
3. Japan Machine Orders for December will be released at 6:50pm EST. The market expects a year-over-year decline of 3.8%, consistent with the previous report.
4. Australia Labour Force Survey for January will be released at 7:30pm EST. The market expects the unemployment rate to remain stable at 5.4%. Employment is expected to increase by 8,000 versus a decline of 5,500 previous.

The Markets
Due to a prior obligation, comments will be brief today.

Markets rallied back on Tuesday, erasing much of the losses realized on Monday, which amounted to the largest one day decline for the major US Equity indices so far this year. For the second time in three sessions, the S&P 500 Index hit resistance at 1515, declining from this peak into the close. Support remains apparent around 1496. A break below 1496 could open the door for a retest of recent breakout levels between 1450 to 1475.

Underlying what seemed to be strong momentum on the session was strength in the defensive sectors. The Consumer Staples and Health Care sectors topped the leader-board, outperforming cyclical sectors (Materials, Industrials, Energy, Financials), which posted returns below that of the S&P 500. A trend of outperformance is becoming apparent in defensive equities as investors show signs of risk aversion. This is typically a warning sign for equity market weakness ahead as investors prepare for the much anticipated pullback. Longer-term momentum and risk sentiment suggest that any dips presented within equity markets will offer buying opportunities to investors that missed the substantial surge to start the year.

Sentiment on Tuesday, as gauged by the put-call ratio, ended close to neutral at 0.95.

S&P 500 Index

Chart Courtesy of StockCharts.com

TSE Composite

Chart Courtesy of StockCharts.com

Horizons Seasonal Rotation ETF (TSX:HAC)

• Closing Market Value: $13.41 (up 1.06%)
• Closing NAV/Unit: $13.39 (up 0.67%)

Performance*

* performance calculated on Closing NAV/Unit as provided by custodian

Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.

Tags: ETF, ETFs, TechTalk
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Technical Talk: Dow Cracks 14,000, Risk Aversion Becoming Evident

Monday, February 4th, 2013

by Don Vialoux, Tech Talk

Upcoming US Events for Today:

1. Factory Orders for December will be released at 10:00am. The market expects a month-over-month increase of 2.4% versus no change (0.0%) previous.

Upcoming International Events for Today:

1. Euro-Zone PPI for December will be released at 5:00am EST. The market expects a year-over-year increase of 2.1%, consistent with the previous report.
2. China HSBC Services PMI for January will be released at 8:45pm EST.
3. Reserve Bank of Australia Rate Decision will be released at 10:30pm EST.

The Markets

Equity markets surged higher on Friday following a series of upbeat economic reports. Payrolls for the month of January were reported to have increased 157,000, which actually missed estimates calling for an increase of 175,000. Significant revisions to data from 2012, however, had investors reassess their view of the economy. Econoday.com notes the following:

“The upward revisions are from annual revisions and indicate that job growth has been somewhat stronger than earlier believed. In 2012, employment growth averaged 181,000 per month. Most of the upward revisions were in the latter part of the year. Prior to the annual revisions, monthly gains averaged 153,000 for 2012.”

Stronger than expected consumer sentiment, ISM manufacturing, and construction spending rounded off the positive data points on the session, pushing the Dow Jones Industrial Average above the psychologically important 14,000 level for the first time since October of 2007. Overbought indications amongst the major equity benchmarks remain quite prominent, which increases the risk of a near-term pullback. The month of February has averaged a loss of 0.57% over the past 20 years, positive in 11 of those 20 periods. Could February provide the pullback that has been widely anticipated?

With equity benchmarks achieving significant highs, a “risk-on” sentiment could immediately be implied. However, signs of risk aversion are becoming evident. Defensive sectors (consumer staples, health care, and utilities) have recently shown signs of outperforming the market (S&P 500), while cyclicals are starting to underperform, including Materials and Industrials. Outperformance in the defensive sectors is typically a leading indicator of equity market weakness ahead. The trend for the market remains on a long-term positive trend, therefore recent rotation could just be a short-term phenomena as investors books profits following the strongest start of the year since 1997. Consumer staples, health care, and utilities seasonally underperform the market through to the Spring.

Earnings season continues with full force this week, starting on Monday with Clorox, Humana, Royal Caribbean Cruises, Anadarko Petroleum, Edwards Lifesciences, Gilead Sciences, Leggett & Platt, Life Technologies, and Yum Brands.

Sentiment on Friday, as gauged by the put-call ratio, ended bullish at 0.90.

S&P 500 Index

Chart Courtesy of StockCharts.com

TSE Composite

Chart Courtesy of StockCharts.com

Horizons Seasonal Rotation ETF (TSX:HAC)

• Closing Market Value: $13.43 (up 1.13%)
• Closing NAV/Unit: $13.38 (up 0.69%)

Performance*

* performance calculated on Closing NAV/Unit as provided by custodian

Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.

Tags: ETF, ETFs, TechTalk
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Technical Talk: An Update on Seasonal Trades – Take Profits on Agriculture and Home Builders

Friday, February 1st, 2013

by Don Vialoux, TechTalk

Comments for Friday February 1^st

U.S. equity index futures are higher this morning. S&P 500 futures are up 10 points in pre-opening trade. Index futures responded to news that China’s January Purchasing Managers Index slipped from 50.6 to 50.4 but remained above the 50.0 level indicating growth. The Shanghai Composite gained 1.4%.

Index futures moved higher following release of the January employment report. Consensus for January Non-farm Payrolls was 180,000 versus revised December report at 196,000. Actual was 157,000. Consensus for Private Non-farm Payrolls was 193,000 versus revised December report at 202,000. Actual was 166,000. Consensus for the January Unemployment Rate was a decline to 7.7% from 7.8% in December. Actual was an increase to 7.9%. Consensus for January Hourly Earnings was a gain of 0.2% versus an increase of 0.3% in December. Actual was a gain of 0.2%.

Fourth quarter reports continue to pour in. Companies reporting overnight included Merck, Exxon Mobil, Tyson Foods, Ingersoll-Rand, Newell Rubbermaid, Chevron and Mattel.

Master Card added $1.60 to $520.00 despite a downgrade by Wells Fargo from Outperform to Market Perform.

Oracle improved $0.29 to $35.80 after BMO Capital upgraded the stock from Market Perform to Outperform.

UPS fell $0.35 to $78.94 after Citigroup downgraded the stock from Buy to Neutral.

Verizon gained $0.33 to $43.94 after Piper Jaffray upgraded the stock from Neutral to Overweight.

Constellation Brands added $0.21 to 32.57 despite a downgrade by Goldman Sachs from Buy to Neutral.

Buffalo Chicken Wings gained $0.47 to $74.02 after KeyBanc upgraded the stock from Hold to Buy. ‘Tis the season!

Don Vialoux on BNN

A discussion why the TSX Composite Index is expected to outperform the Dow Jones Industrial Average and S&P 500 Index between now and the end of the first week in March!

Following is a link to the interview at 4:50 PM yesterday:

http://watch.bnn.ca/#clip855892

Editor’s Note: The last time that the TSX Composite exceeded the Dow Jones Industrial Average was April 2010. From April 2010 to August 2012, the Dow Jones Industrials exceeded the TSX by 1,350 points. Subsequently, the spread narrow (i.e. the TSX outperformed the Dow Jones Industrial Average) to 1,143 as of yesterday. If history repeats, the spread should continue to narrow between now and the end of the first week in March.

Keith Richards’ Blog

I just posted a blog on a seasonal strategy incorporating a low-volatility ETF. Many thanks to BMO ETF’s and Brooke Thackray for their data. Read the results of this strategy at www.smartbounce.ca

Update on Sector Seasonal Trades

Seasonal trades preferably have a technical score of 3 based on (1) uptrend, (2) trading above its 20 day moving average and (3) outperforming the market (S&P 500 for U.S. holdings, TSX for Canadian holding). Scores moving lower than 3 are warning signs. A score of 0-0.5 is a sell signal.

Technical score on the forest product ETF changed from 3 to 2 when strength relative to the S&P 500 turned negative. Technical score is about to drop to 1 on a break below its 20 day MA. Seasonal influences end in mid-February, but can extend to April

Technical score for the Industrial SPDR remains 3. The Index closed at an all-time high earlier this week. Seasonal influences are positive until early May.

Technical score for the Consumer Discretion SPDR remains 3. The Index closed at an all-time high earlier this week. Seasonal influences are positive until mid-April

Technical score for the Retail SPDR (a subsector of Consumer Discretionary sector) is 3. Units closed at an all-time closing high yesterday. Seasonal influences are positive until mid-April.

Technical score for the Agriculture ETF changed from 3 to 2 when strength relative to the S&P 500 Index turned negative. Its period of seasonal strength has passed. Take profits.

Technical score for the Semiconductor ETF is 3. Seasonal influences are positive until the first week in March.

Technical score for the Materials SPDR fell from 3 to 1 when units fell below their 20 day moving average yesterday and showed underperformance relative to the S&P 500 Index. Warning signs have appeared. Seasonal influences turn more positive near the end of February.

Technical score for the Home Builders ETF is 3, but relative strength shows early signs of under-performance. Seasonal strength ends next week. A drop in technical score is a sell signal.

Copper’s technical score increased from 2 to 3 when strength relative to the S&P 500 Index turned positive. Seasonal influences are positive until May.

Silver’s technical score is 2.5, down from 3.0 last week. Strength relative to the S&P 500 Index changed from positive to neutral.

Platinum’s technical score is 3. Seasonal influences are positive until the end of May.

Ditto for Palladium! Technical score is 3. Seasonal influences are positive until the end of May.

Technical score for the TSX Energy iShares is 3. Seasonal influences are positive until early May with a possible extension to mid-June.

Technical score for the U.S. Oil and Gas Exploration and Development ETF is 3. Units broke to a new high on Wednesday. Seasonal influences are positive until the end of April

Technical score for the Philadelphia Oil Services Index is 3. Units touched a 12 month high yesterday. Seasonal influences are positive until the end of April.

Technical score for the Energy SPDR is 3. Seasonal influences are positive until the end of April.

Thackray’s 2013 Investment Guide

Thackray’s 2013 Investor’s Guide is here. Order through www.alphamountain.com , Amazon, Chapters or Books on Business.

Special Free Services available through www.equityclock.com

Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.

To login, simply go to http://www.equityclock.com/charts/

Following is an example:

Retail Industry Seasonal Chart

FP Trading Desk Headline

FP Trading Desk headline reads, “Earnings have little to do with growing interest in stocks”. Following is a link to the report:

http://business.financialpost.com/2013/01/31/earnings-have-litte-to-do-with-growing-interest-in-stocks/

Eric Wheatley’s Listed Options Column

Hello good readers,

In this season of schizophrenic weather (it’s currently 9° out and raining like crazy as I write this. In a much earlier and carefree incarnation of my life, I’d dated ladies who reminded me of my city. Emotional whipsaws are like our winters and after certain outbursts, you can’t believe that you’re dealing with this… stuff; but goshdarnit, you’re quickly reminded of her charms and can’t leave), I guess it’d be relevant to continue our discussion of volatility.

As mentioned last week, the VIX is historically underpriced. It’s not that people aren’t expecting volatile markets, it’s just that yield-hungry investors are massively selling options because they can’t get sufficient returns elsewhere. Two corollaries can be derived from this fact: a) options writers (such as myself with our clients) have to be very attentive to what they are doing. We don’t want to give up too much on the upside without being properly compensated; b) options buyers are probably buying cheap volatilities.

We’ll discuss path-dependency and delta-hedging next week. Here, I’ll just define a couple of low-risk, direction-neutral strategies which could be used by those who wish to have fun and possibly profit from singularly odd market circumstances.

Not to baby this too much, but I do need to start from the beginning: options come in two varieties, calls and puts. Calls give their holder the right to buy shares at a given price, and puts give their holder the right to sell shares at a given price. This means that if you own a call and the underlying stock’s price rises, your call will become more valuable. Conversely, if you own a put, it’ll become more valuable if the stock’s price drops.

The fun thing about options is that you can combine them in any number of weird ways to create funky new positions your parents never dared tell you about. This Mr. Potato Head-like characteristic scares away lots of neophytes; options seem crazy complicated and most people don’t dare touch them. This makes me sad, much like some sort of misunderstood monster banished to the deepest woods by the townsfolk. It was an accident. I just wanted a hug.

Anyhoo, If you think options are underpriced, you would like to buy them, right? Now, you have to decide whether to buy calls or puts. What if you don’t really have a strong opinion on the medium-term direction of the markets? This is where things get fun: you don’t NEED an opinion! You can buy both calls AND puts. Why limit yourself?

The basic strategy of buying both calls and puts is called either a “straddle” or a “strangle”. There is no beneficial difference between the two; a straddle means that the calls and puts share the same strike price, whereas with a strangle the strike prices are different. Here are some graphs (quickly downloaded off of the web) to illustrate:

This is a straddle:

…and this is a strangle:

(I need to mention, as I always do when I include graphs, that there are NO straight lines in options trading. Ever. This is simply to get the concept across, but the images you see in every options manual are inherently fictitious; though I’m just being fastidious).

As you can see, you are paying money out to buy the options, so if the stock doesn’t move, you’re in the hole for the amount you paid. If the stock moves big in either direction, you can profit.

Given that options prices are relatively cheap, your potential losses are lower. Furthermore, since you’re paying relatively less to set up the position, you need less of a move in the underlying for the trade to be profitable.

Of course, this all sounds great in theory, but in practice you have to pay fees to your broker and the bid-ask spread. I’m never comfortable in discussing multiple-legged transactions for these reasons, so if I may add a little piece of advice: make sure you do this on very liquid options. Liquidity, unfortunately, is a rare thing this side of the 49^th parallel, so perhaps it would behoove you to do the trade down below where people like to characterise our country as being their head adornment.

Cheers!

Éric Wheatley, MBA, CIM

Associate Portfolio Manager, J.C. Hood Investment Counsel Inc.

eric@jchood.com

514.604.2829; 1.855.348.2829

*****************

Little known fact about John Charles Hood #59

Ohhhh… straddles? Yeah, this week’s little known fact should be easy to come up with. Sure. I just have to be subtle about it.

…aaaaaannd there’s no way to be subtle.

Seasonality for equity markets and sectors in the month of February

Thackray’s 2013 Investor’s Guide notes that from 1950 to 2011, February was the second worst performing month for the S&P 500 Index. The month also ranked fourth worst for the Dow Jones Industrial Average and the NASDAQ Composite Index. The TSX Composite Index performed much better. February was the fifth best performing month for the TSX Composite with an average return per period since 1985 of 0.9%.

Economically sensitive sectors were the best performers in February during the past 20 periods. Energy was the top performer followed by Materials and Consumer Discretionary. Weakest sectors were Telecom and Utilities. Best performing subsectors were Silver, Metals & Mining, Chemicals and Retail. Worst performing subsectors were Biotech, Pharmaceuticals and Software.
Upcoming US Events for Today:

1. Motor Vehicle Sales for January will be released throughout the day. The market expects Total Vehicle Sales to show 15.3M versus 15.4M previous.
2. The Employment Situation Report for January will be released at 8:30am. The market expects Non-farm Payrolls to increase by 165K versus 155K previous, while Private Payrolls are expected to increase by 185,000 versus 168,000 previous. The Unemployment Rate is expected to tick lower from 7.8% to 7.7% previous.
3. PMI Manufacturing Index for January will be released at 8:58am. The market expects 55.5 versus 54.0 previous.
4. Consumer Sentiment for January will be released at 9:55am. The market expects 71.5 versus 71.3 previous.
5. The ISM Manufacturing Index for January will be released at 10:00am. The market expects 50.7, consistent with the previous report.
6. Construction Spending for December will be released at 10:00am. The market expects an increase of 0.8% versus a decline of 0.3% previous.

Upcoming International Events for Today:

1. German PMI Manufacturing for January will be released at 3:55am EST. The market expects 48.8 versus 46.0 previous.
2. Euro-Zone PMI Manufacturing for January will be released at 4:00am EST. The market expects 47.5 versus 46.1 previous.
3. Great Britain PMI Manufacturing for January will be released at 4:30am EST. The market expects 51.0 versus 51.4 previous.
4. Euro-Zone Consumer Price Index Estimate for January will be released at 5:00am EST. The market expects a year-over-year increase of 2.1% versus an increase of 2.2% previous.
5. Euro-Zone Unemployment Rate for December will be released at 5:00am EST. The market expects 11.9% versus 11.8% previous.

The Markets
Markets drifted lower on Thursday as investors reallocated portfolios on the last trading day of the month. Gains for January were substantial with the S&P 500 posting a return of 5.04%, the Dow Jones Industrial Average with a return of 5.77%, the NASDAQ with a return of 4.06%, and the TSX Composite with a return of 2.02%. Best performing sectors for this first month of the year were Energy, which gained 8.30%, and Health Care, which gained 7.60%. Energy typically enters a period of seasonal strength in the month of January with positive influences increasing into the month of February as the price of Oil moves higher, on average, between February 25th and May 9th. The strong performance in the Health Care sector in January is not the norm as gains for the month average a flat result. The sector typically weakens into the month of February as investors shed defensive assets in favor of cyclical exposure. Health Care stocks customarily bottom in March and move higher from April through to June as investors once again become defensive around the notorious “Sell in May” date. Technology was the weakest sector in January as the period of seasonal strength came to an end. Energy and Materials are seasonally the best performing sectors in the month of February, each producing average gains topping 1%. The returns for the S&P 500 in this second month of the year have averaged a marginal loss of 0.15%.

Now that January is over, it is worth taking a look at the monthly chart of the S&P 500 Index to get a long-term view of the market. A trend of higher-highs and higher lows remains clearly evident from the March 2009 low, implying that the long-term bull market trend remains intact. Major moving averages are pointed higher supporting the positive move in equities. The 50-month and 200-month moving average initially had appeared on track to chart a bearish crossover, the first ever in the history of the index. However, this gloomy technical event was averted in recent months as the 50-month average curled higher, halting the over 4 years of declines. Support over the last year and a half has become apparent at the 20-month moving average. A change in the long-term trend has typically resulted when the benchmark crosses below this 20-month average. Although stochastics indicate that the market is overbought, momentum sell signals have yet to be generated. The trend of momentum indicators, including RSI and MACD, remain flat to positive, a scenario that is not suggestive of any significant declines in the immediate future. The index has yet to get to overbought territory with regards to RSI (a reading above 70), an event that has preceded previous significant market peaks. Despite any short-term gyrations, the longer-term picture remains quite positive, certainly not suggesting any bearish outcomes in the months ahead.

Earnings on tap today include Aon, Berkshire Hathaway, Chevron, Exxon Mobil, Imperial Oil, Ingersoll-Rand, Legg Mason, Mattel, Merck, National Oilwell Varco, Newell Rubbermaid, and Tyson Foods.

Sentiment on Thursday, as gauged by the put-call ratio, ended bullish at 0.91.

S&P 500 Index

Chart Courtesy of StockCharts.com

TSE Composite

Chart Courtesy of StockCharts.com

Horizons Seasonal Rotation ETF (TSX:HAC)

• Closing Market Value: $13.28 (up 0.15%)
• Closing NAV/Unit: $13.29 (down 0.08%)

Performance*

* performance calculated on Closing NAV/Unit as provided by custodian

Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.

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 January 31^st 2013

Copyright © TechTalk

Tags: energy, ETF, ETFs, Gold, Outlook, TechTalk
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Technical Talk: Rotation from Bonds to Stocks Continues – Markets Nearing All-Time Highs

Wednesday, January 30th, 2013

Upcoming US Events for Today:

• ADP Employment Report for January will be released at 8:15am. The market expects 172K versus 215K previous.
• Preliminary GDP for the Fourth Quarter will be released at 8:30am. The market expects a quarter-over-quarter change of 1.0% versus 3.1% previous. The GDP Price Index is expected to increase by 1.7% versus an increase of 2.7% previous.
• Weekly Crude Inventories will be released at 10:30am.
• The FOMC Rate Decision will be released at 2:15pm.

Upcoming International Events for Today:

• Spain GDP for the Fourth Quarter will be released at 3:00am EST. The market expects a year-over-year decline of 1.7% versus a decline of 1.6% previous.
• Euro-Zone Economic Sentiment for January will be released at 5:00am EST. The market expects 88.3 versus 87.0 previous.
• The Reserve Bank of New Zealand Rate Decision will be released at 3:00pm EST.
• Japan PMI Manufacturing for January will be released at 6:15pm EST.
• Japan Industrial Production for December will be released at 6:50pm EST. The market expects a month-over-month increase of 4.1% versus a decline of 1.7% previous.

The Markets
Equity markets continued to show resilience on Tuesday, adding to the strong gains that have pushed benchmarks to new recovery highs. The Dow Jones Industrial Average is now a mere 1.7% off of the all-time high of 14,198.10, while the S&P 500 has another 4.5% to go until the high of 1576.09 is surpassed. The rotation from bonds into stocks continues as the fixed income market shows significant indications of unwinding after a multi-decade bull run. Yesterday we highlighted the head-and-shoulders topping pattern in the 7 – 10 year Treasury Bond Fund (IEF), which is suggesting a decline of around 3% from present levels. Looking at the weekly chart of the same ETF, the bond market still has a long way to fall just to get back to the long-term trendline that has remained intact over the last seven years. It would only take a fraction of these assets that are flowing out of the bond market to come into stocks in order to continue influencing stocks higher.

And within the bond market, investors are flocking toward the higher yielding (riskier) investments, liquidating the low yielding safe-havens, which acted as a hiding place throughout the extreme fundamental uncertainties over the past few years. As long as this risk-on trade continues, equity market strength can be implied.

If you recall, a while back we presented a long-term chart of the S&P 100 index, the constituents of which “tend to be the largest and most established companies in the S&P 500”, according to Wikipedia. It should go without saying that this benchmark would present a reasonable proxy of the economy, or rather investors expectations of it. For over ten years the benchmark has been consolidating following the substantial five year run from 1995 to 2000. Early indications of a breakout from this pattern are starting to be realized as the benchmark pushes above long-term resistance presented by the declining trendline. It continues to remain possible that the over decade-long consolidation is part of a bull flag pattern, with the activity prior to 2000 acting as the pole and the flag portion resulting thereafter. This bullish setup could imply substantial upside still remains, assuming the breakout does not fail. The breakout in equity prices would correlate well with a correction of bond yields back to their long-term trendline.

Earnings season continues today with Boeing, Hess, Marathon Petroleum, Northrop Grumman, Rockwell Automation, Southern Co., Align Technology, Ameriprise Financial, Citrix Systems, ConocoPhillips, Facebook, JDS Uniphase, Las Vegas Sands, Murphy Oil, Owens-Illinois, and Qualcomm.

Sentiment on Tuesday, as gauged by the put-call ratio, ended unchanged from the day prior at 0.97.

S&P 500 Index

Chart Courtesy of StockCharts.com

TSE Composite

Chart Courtesy of StockCharts.com

Horizons Seasonal Rotation ETF (TSX:HAC)

• Closing Market Value: $13.37 (up 0.60%)
• Closing NAV/Unit: $13.34 (up 0.43%)

Performance*

* performance calculated on Closing NAV/Unit as provided by custodian

Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.

Tags: Economy, ETF, ETFs, Outlook, TechTalk, US Economy
Posted in Markets | Comments Off

Technical Talk: A Pullback is Most Likely Following Earnings Season

Monday, January 28th, 2013

by Don Vialoux, TechTalk

Upcoming US Events for Today:

• Durable Goods Orders for December will be released at 8:30am. The market expects an increase of 1.6% versus an increase of 0.7% previous. Excluding Transportation, the increase is expected to be 0.4% versus an increased of 1.6% previous.
• Pending Home Sales for December will be released at 10:00am. The market expects a decline of 0.3% versus an increase of 1.7% previous.
• Dallas Fed Manufacturing Survey for January will be released at 10:30am. The market expects 4.0 versus 6.8 previous.

Upcoming International Events for Today:

• New Zealand Trade Balance for December will be released at 4:45am EST. The market expects –105M versus –700M previous.

The Markets
Markets ended higher on Friday, boosted by positive earnings results from Procter & Gamble, Microsoft, AT&T, Halliburton, and Starbucks. According to Factset, “of the 134 companies that have reported earnings to date for the fourth quarter, 69% have reported earnings above estimates,” which is in-line with the recent average beat rate. Technology and Materials have shown the largest percent of earnings beats thus far. For the week ahead, 380 companies are expected to report, just less than a third (104) of which are S&P 500 companies. Earnings season peaks during the week following with 439 companies issuing their quarterly results. Reaction to earnings reports has been very positive, pushing equity benchmarks to the highest levels in over 5 year, some of which have even charted new all-time highs. It remains questionable as to whether the rally can sustain itself with such little volatility once earnings season winds down at the end of the next two weeks. Companies reporting on Monday include Biogen, Caterpillar, Ryanair, Crane Co., Seagate Technology, Steel Dynamics, VMWare, Yahoo, and Zions Bancorporation.

From a seasonal perspective, during post-presidential election years the market has shown losses on average once earnings season concludes into the start of February. Losses top 2% between the end of the first week of February through to the last couple of days of the month. From there, the market typically bottoms between the end of February and into March, rebounding higher in April and May. Given the extent to which equity markets are overbought, some sort of pullback seems likely into February once the earnings season catalyst comes to an end. This seasonal weakness during post-election years results from the president implementing much of the tough decisions according to his campaigned-upon mandate. With deficit reduction talks continuing over the months ahead and the two key political parties remaining firm on varying degrees of balance between revenues and spending, politics could once again influence the market according to the average tendency during equivalent years.

Friday’s equity market gain was the eighth straight session that the S&P 500 ended with a positive return, an event that was last realized in November of 2004. During that period in 2004 it was not until the 10th day that the market actually realized a declining session. The loss for the session was a mere 0.11%. The market went on to gain an additional 4.5% over the seven weeks that followed, even though the benchmark was overbought following the tremendous eight day run. Back in 2004, the large cap benchmark broke out of a significant reverse head-and-shoulders pattern that suggested an approximate 80-point move from the neckline of around 1140; this 1220 target came close to being achieved in just less than two months following neckline breakout. A similar reverse head-and-shoulders pattern is obvious on the present day chart with an almost similar 90-point move targeted from the neckline around 1440, implying the bullish pattern will be completed around 1530. Negative momentum divergences back in 2004 gave indication that some kind of intermediate peak was being realized following the completion of the bullish pattern; the present day chart has yet to realize a similar divergence.

2004 Chart:

2012/2013 Chart:

While funds continue to flow into stocks, money continues to move away from the bond market, particularly treasuries that have seen yields spike almost 400 basis points since the start of December. Treasury yields have broken firmly above a long-term declining trendline that had remained intact for almost two years, diverging from the positive trend of equity markets over the same period. The correlation of yields to equity market activity looks to be returning as the cost of borrowing retraces the significant declines that have occurred amidst an equity market rally. Rising yields is, in fact, healthy for equity markets as it is indicative that investor fear/risk aversion is lessening and confidence is growing, forcing a reallocation away from fixed income assets and into stocks. Further bond market participation in the equity market rally could fuel the next leg higher in stocks. Treasury bond prices remain seasonally weak between now and the end of April, meaning that yields customarily increase, on average, over this period.

Sentiment on Friday, as gauged by the put-call ratio, ended bullish at 0.88. The ratio remains in a bullish trend as investors become less cautious with the use of put options.

S&P 500 Index

Chart Courtesy of StockCharts.com

TSE Composite

Chart Courtesy of StockCharts.com

Horizons Seasonal Rotation ETF (TSX:HAC)

• Closing Market Value: $13.32 (up 0.30%)
• Closing NAV/Unit: $13.32 (up 0.33%)

Performance*

* performance calculated on Closing NAV/Unit as provided by custodian

* performance calculated on Closing NAV/Unit as provided by custodian

Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.

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How Are ‘Seasonal’ Investment Positions Performing?

Friday, January 25th, 2013

by Don Vialoux, TechTalk

Editor’s Note: Don Vialoux is scheduled to appear on BNN Television at 4:50 PM EST on Monday)

Pre-opening Comments for Friday January 25^th

U.S. equity index futures are higher this morning. S&P 500 futures are up 5 points in pre-opening trade. Index futures are responding to higher than consensus fourth quarter results by Starbucks, Halliburton, Procter & Gamble, Kimberly Clark, KLA Tencor and TempurPedic.

Other companies to report fourth quarter results included AT&T, Microsoft, Juniper, ETrade, Samsung, Honeywell and Hasbro.

Canada’s December Consumer Prices were significantly lower than expected. Consensus was a decline of 0.2% from November. Actual was a decline of 0.6%. On a year-over year basis, Canada’s Consumer Price Index increased 0.8%.The Canadian Dollar dropped 0.45 cents U.S. on the news.

Goldman Sachs slipped $0.80 to $144.16 after Citigroup and Deutsche Bank downgraded the stock from Buy to Hold.

Ford eased $0.01 to $13.86 after Barclays downgraded the stock from Overweight to Equal Weight.

Canadian Pacific dropped $0.40 to $112.67 after Canaccord downgraded the stock from Hold to Sell.

JP Morgan added $0.54 to $46.91 after Deutsche Bank upgraded the stock from Hold to Buy.

Oracle (ORCL $34.94) is expected to open lower after Goldman Sachs downgraded the stock from Conviction Buy to Buy.

Amgen added $0.71 to $83.33 after Argus upgraded the stock from Hold to Buy.

EBay improved $0.71 to $55.90 after Susquehanna initiated coverage with a positive rating.

Rentech Nitrogen, Agrium and CF Industries are expected to open higher after Dahlman Rose upgraded them from Hold to Buy based on improving nitrogen pricing.

Technical Watch

Halliburton Co. (NYSE:HAL) – $39.59 added 4.7% after reporting higher than consensus fourth quarter results. The stock has a positive technical profile. Intermediate trend is up. The stock broke above resistance at $37.90 on Wednesday and is expected to break above resistance at $38.76 at the opening to reach a 14 month high. Next resistance at $39.88 is about to be broken. The stock has formed a massive reverse head and shoulders pattern. The stock remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index has been positive since mid-November. Short term momentum indicators are overbought. Seasonal influences have just turned positive for a move into May. Preferred strategy is to accumulate the stock at current or lower prices.

Interesting Charts

Despite major U.S. equity indices closing at new highs (Dow Industrials, Dow Transports, Russell 2000, S&P 500), selected sectors are struggling on a real and relative basis.

Gold equities are leading the Mines and Metals sector on the downside.

The Technology sector also is leading on the downside thanks mainly to weakness in Apple.

Updates on Sector Season Trades

Seasonal trades preferably have a technical score of 3 based on (1) trending up, (2) trading above its 20 day moving average and (3) outperforming the market.

Technical score for the forest product equity ETF is 3.0. End of the period of seasonal strength is mid-February and (if extended) the first week in April.

Technical score for the TSX Mines and Metals sector fell from 1.0 to 0.0 when the Index closed below its 20 day moving average yesterday. Short term traders are taking profits. The sector has a history of underperformance between now and mid-February.

Technical score for the Industrial sector is 3.0. The Index and its related ETF closed at another all-time high yesterday. Seasonal influences are positive until early May.

Technical score for the Consumer Discretionary sector and related ETFs is 3.0. The Index closed at an all-time high yesterday. Seasonal influences are positive until mid-April.

Technical score for the Agriculture ETF is 3.0. The period of favourable seasonality has passed, but technical remain strong. Hold until technical scores start to decline.

Technical score for the Semiconductor sector is 3.0, but strength relative to the S&P 500 is close to turning negative for a possible downgrade to 2.0. Seasonal influences are positive until the first week in March.

Technical score for the Materials sector is 3.0. Seasonal influences currently are favourable, but turn more positive at the end of February. The Index is heavily weighted in chemical stocks.

Technical score for the Homebuilders ETF remains 3.0. Its period of seasonal strength ends in the first week in February.

Copper maintains a technical score of 2.0. Relative strength has yet to turn positive. Seasonal strength is positive until May.

Silver maintained its technical score of 3.0 despite weakness yesterday. Its period of seasonal strength is positive until at least the first week in March.

Ditto for Platinum! Technical score is 3.0.

Ditto for Palladium! Technical score is 3.0

Technical score for Canada’s energy sector changed from 2.0 to 3.0 thanks to confirmation that strength relative to the TSX Composite has turned positive. Seasonal influences are positive until at least early May and possibly mid-June on an extension.

Technical score for the U.S Oil & Gas Exploration and Development sector is 3.0. Seasonal influences are positive until the end of April.

Technical score for the Oil Services sector is 3.0. Seasonal influences are positive until May 9^th

Thackray’s 2013 Investment Guide

Thackray’s 2013 Investor’s Guide is here. Order through www.alphamountain.com , Amazon, Chapters or Books on Business.

Special Free Services available through www.equityclock.com

Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.

To login, simply go to http://www.equityclock.com/charts/

Materials Sector Seasonal Chart

Eric Wheatley’s Weekly Column

Hello to all you as-yet unthawed readers,

I remember when the VIX was still a new and extremely esoteric index. Volatility is a vague concept at its simplest (the standard deviation of a randomly chosen data set), so a 30-day annualised implied volatility index – actually based upon a variance swap, which is important to know – shouldn’t intuitively have become a cornerstone index for market commentators everywhere. Yet here we are: you can now buy or sell numerous ETFs and futures on the index and you can even buy or sell options on the products based upon an index which measures options prices [which pretty much just resembles the pivotal scene from Being John Malkovitch in terms of circular reasoning].

Given that Mr. Vialoux has always granted me editorial freedom in this forum, I’ll take a stab at formulating my opinion of the VIX and its application to regular people: it’s like planning your summer 2015 wedding and choosing the date based upon average temperatures and rainfall in Winnipeg over the past ten years. To wit: the VIX measures implied volatility in the first two expiries of S&P 500 index options. If you own the S&P 500 or its proxies (e.g. SPY or XSP), it’s like living in Winnipeg in our example; that is, the data can be a little relevant. If your holdings are geographically diversified, focused on certain industries or hedged, then it would be like living in Halifax and using Winnipeg data. Not to say that the information has NO relevance, but it certainly isn’t ideal.

As long as you understand that index options are different animals from stock options (Reference: I used to trade index options and futures primarily and stock options off of our index positions) and that the data come from a small corner of the markets, then yes, the VIX can be relevant. Since it is based on one of – if not the – most liquid options classes in the world and is used by most every type of market participant, it can give you some insight into whether people are buying or selling options more generally. This, in turn, can help you get some instinctive feel for market sentiment. What I get a little bent out of shape about is that people place just a little too much credence in the number.

To get back to our previous weeks’ subject, on December 31^st the VIX spiked. This was a very good coincident indicator of the market’s going a little goofy ahead of the uncertain fiscal situation in the States. Since then, the index has dropped back into its regular dozy little underpriced groove. For many months now, people have been stating quite confidently that this means that the market is about to experience a major reversal of fortune, because the VIX is KNOWN to be a contrarian indicator and it’s at record lows. In fact, the market has been quite volatile (or at least it was a few months ago), but yield-hungry options sellers are keeping volatilities particularly low, much like bond or dividend yields which are also extremely unyielding nowadays.

As with everything else, you have to get to know what you’re studying and understand its behaviour. On a charting website, I’ve no lessons to give to people who, by their very nature, understand the subjectivity and ambiguity of certain indicators and their occasional false signals.

*****************

In this week’s French-language blog: gods in machines, Algerian memories and the seventh circle of hell.

Cheers!

Éric Wheatley, MBA, CIM

Associate Portfolio Manager, J.C. Hood Investment Counsel Inc.

eric@jchood.com

514.604.2829; 1.855.348.2829

Twitter: @jchood_eric_en

Blogue en français : gbsfinancier.blogspot.ca

*****************

Little known fact about John Charles Hood #58

John Charles Hood is well acquainted with Dante’s œuvre. Luckily, he’s remained extremely limber and will do well in limbo.

Tech Talk’s Weekly ETF Column

(Published yesterday at www.globeandmail.com )

Headline reads, “Beat the U.S. indexes with these Canadian ETFs”. Following is a link to the report:

http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/beat-the-us-indexes-with-these-canadian-etfs/article7784752/

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 January 24^th 2013

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