March 7th, 2010
As far as I know there is no precise definition of a bull market. Ned Davis Research define a bull market to be: A Bull Market requires a 30% rise in the Dow Jones Industrial Average after 50 calendar days or a 13% rise after 155 calendar days. This is an important benchmark for all market participants because there are still investors and portfolio managers out there who are just now getting invested having missed all of the great 2009 advance. I know of one local portfolio management firm that actually managed to lose money in 2009!
The Ned Davis definition is important but I think an easier way to identify the bull is to firstly identify the bear. So if we can ID the bear then we know the bull because you can’t have both operating at the same time. I would define a bear market to be a market as measured by the S&P500 or the S&P/TSX60 that posts a new 52-week low within a 26 week window.
Our chart is the weekly closes of the S&P500 spanning about 4+ years. We can clearly see the great 2007-2008 bear and the subsequent 2009 – 2010 bull. Of course this is easy with the benefit of hindsight but when you overlay the weekly or intermediate cycle you can clearly ID the bear which flashed a new 52-week low within the 26-week window in Q3 of 2007. The new 52-week lows within the 26-week window persisted until March 2009.
The failure of the bear to post a new 52-week low by late July through early August 2009 signalled an “official” departure of the bear and so with the bear gone – we must have a bull. When we have a bull we get invested pronto – investing is not a spectator sport – you have to participate. It is all well and good to buy-and-hold and know when to sell – but to miss the next bull market is portfolio damage that cannot repaired
Tags: To know and not act - is to not know
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March 1st, 2010
A bellwether is an important stock that is a component of a bull market. If the bellwether is healthy, so is the broader market. If the bellwether gets into trouble – run. A bellwether should be a component of a key sector such as the Financial, Industrial or Technology sectors. Rarely do we find bellwethers in the Consumer, Energy, Health Care and Materials sectors
The term bellwether is derived from the Middle English Bellwether which refers to the practice of placing a bell around the neck of a castrated ram – (a wether) in order that this animal might lead its flock of sheep. The sheep in this example would be the investment sheep that tend to follow the shepherd to safety or slaughter. Shepherds can be found in the business dailies and on business television. The problem is the investment sheep have no idea who the good and bad shepherds are and so the best strategy is for the sheep to follow the bellwether.
In the U.S. market one important bellwether is the technology component Cisco Systems, Inc. Cisco is a proxy for to-day’s global technology space and a healthy Cisco is a condition for a bull market in global equities.
Our chart is the weekly closes of Cisco spanning about 8-years. I have overlaid the two important stock cycles – the longer term bull & bear cycle and the shorter term weekly or intermediate cycle. Here is how to read the two. Firstly note the importance of cycle summation which occurs when the longer and shorter cycles are running in the same direction. So when the monthly and the weekly cycles are turned upward we tend to get a big advance and when the longer monthly and the weekly cycles are turned downward we tend to get big declines. The other trick is to count the weekly cycles in a monthly bull (5) and the weekly cycles in a monthly bear (3). So far we are looking good with a monthly up cycle and a pending 2nd weekly up cycle.
Tags: Investment Sheep
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February 18th, 2010
Back in December 5 2009 I authored an item in the Toronto Star entitled the January Effect. Now according to seasonality bible, The Stock Trader’s Almanac, the January Effect is the period from mid-December through the following January when smaller companies may outperform larger companies. A weak January Effect is a bad omen, and could be a negative for the next 12 months because smaller companies tend to be more sensitive to the domestic economy, while larger companies or multi-nationals tend to be more sensitive to the global economy.
We are assuming that for the most part, the smaller companies will lead the way down into a local bear market and lead the way up on a local bull market
In the U.S. market our proxy for the smaller companies will be the Russell 2000 index and for larger companies, either the Dow industrials or the Russell 1000 index. In Canada, our proxy for smaller companies is the S&P/TSX Small Cap Index and for larger companies, the S&P/TSX60 (XIU) Index.
The problem here is the S&P/TSX Small Cap Index or the related iShares CDN S&P/TSX SmallCap Index Fund (XCS-T) unlike the Russell 2000, is in no way a proxy for our domestic economy. Our Canadian small cap sector is basically a basket of 183 tiny companies most of which are in the Materials and Energy sectors. The CDN Small Caps are strictly a measurement of risk. When appetite for risk improves the CDN Small Caps out perform the larger companies and when risk appetite subsides – the CDN Small Caps under perform the larger companies
Our chart is the weekly XCS over the XIU where the XCS traces out a bullish set up (positive divergence) relative to the XIU in March 2009. The confirmed “buy” of movement to risky assets occurred on April 24, 2009 when the XCS broke above the January 9, 2009 recognition point. Now there is danger as the XCS completes a wave (3) advance and is setting up a possible wave (4) swing failure. Clearly this appears to be the early stages in the movement of capital away from risky assets
Tags: To risk - or not to risk
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February 15th, 2010
They say the definition of insanity is when you do the same thing over and over expecting a different result. Do you ever wonder why the financial media keeps asking industry experts to recommend a “solid diversified” equity portfolio using exchange traded funds (ETFs) and expecting some kind of new concept or breakthrough analysis?
The recommendations are usually to own some Canada along with mix of “currency hedged” global exposure such as U.S., Europe, Asia Pacific, Emerging Markets & Japan ETFs and maybe some speciality theme like AGRA or Green Energy. The idea is to own a basket of assets that have some degree of non-correlation but the problem is – thanks to Globalization – all of the global bourses have a high degree of correlation. In other words all of the global markets rise and fall at the same time admittedly with some difference in magnitude.
Today the only way we can achieve any degree of diversification is by global currency exposure. That means we should avoid currency hedged investment products. You see if we diversify by country or region and wrap it all in currency hedges – we may as well just own one security – our own S&P/TSX60 Index. One example of an “avoid” product would be the iShares CDN S&P 500 (XSP) Hedged to Canadian Dollars Index Fund seeks to provide long-term capital growth by replicating, to the extent possible, the performance of the S&P 500 Hedged to Canadian Dollars Index. This product was introduced in May 2001 and adopted the dollar hedge in November 2005 in reaction to the 2003-2005 run up in the Canadian dollar. Remember in order to increase market share the manufacturers of ETF products have to create sexy add-ons such as currency hedging and managed products in order to “excite” retail investors.
Back to investing reality – our CDN dollar model displays two material hedging problems. The CDN dollar hedge is a wash since mid 2007 (it actually backfired in 2008) and our CDN $ model is about to generate a “sell” signal. Also something to keep in mind if your over-weight in commodities
Tags: More investment myths
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February 9th, 2010
A few weeks ago I examined a seasonality clip from DVTechtalk January 18, 2010 – promoting Thackray’s 2010 Investor’s Guide and highlighting Seasonality in the Energy Sector. According to Thackray’s 2010 Investor’s Guide, seasonal influence on the U.S. Energy sector is from February 25th to May 9th. Brooke also has completed other studies in the sector and has found that seasonality in the Canadian energy sector, U.S. Oil Services sector and the U.S. Oil Exploration and Production sub-sector are slightly different. Their period of seasonal strength is from January 30th to May 9th.
I back tested the seasonal trades and discovered the seasonal Energy calls simply never worked over the last 10-years. A simple buy-and hold from January 2000 to date returned 315% and the seasonal trades generated 179% over the same period. The worst period was during the great 2000-2006 advance when the seasonal trades had us sell high and buy back even higher.
I also found that when traditional and legitimate technical studies are used, better performance is achieved with much lower trading activity and the associated costs. Now “traditional and legitimate technical studies” can be long term moving averages, primary trend lines or simple weekly or monthly momentum studies. In the study pictured I used simple relative averages (RA) or the relative performance of the TSX Energy vs. the large cap S&P/TSX60 Index – monthly data. I have also laid on a True Range Price Channel to illustrate a supporting study using totally different math. In each case we were out during the bumpy 1998 – 2000 window and were long through the great 2001-2007 advance during which the seasonal strategy generated 12 in and out trades.
At this time our simple RA model has us long on July 31, 2009 following a sell on October 31,2007. Most notably is the low trading activity with only 5-trades over 11-years. The last sell is to be ignored because we only have a partial February bar.
Tags: Using traditional and legitimate technical studies
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As far as I know there is no precise definition of a bull market. Ned Davis Research define a bull market to be: A Bull Market requires a 30% rise in the Dow Jones Industrial Average after 50 calendar days or a 13% rise after 155 calendar days. This is an important benchmark for all market participants because there are still investors and portfolio managers out there who are just now getting invested having missed all of the great 2009 advance. I know of one local portfolio management firm that actually managed to lose money in 2009!
