Sunday, December 30, 2012

Dow Theory Bearish Setup

Technically there are several problems with the tape with one issue being the failure of the NYSE advance / decline line to hold above the breakout of early December and the other being the current bearish setup of a pending Dow Theory “sell” signal.

There is a lot of components to Dow Theory but I will just focus on the averages must confirm part. Take a look at our Dow Industrials over the Dow Transports chart where I have marked the mid 2012 peaks at (A). Now note the subsequent rally to new highs by the Industrials to (B) and the failure of the Transports to confirm at the lower plot (B). That alone is not a Dow “sell” signal because while it sets up a negative divergence condition we still need the two averages to confirm the “sell” by subsequently dropping below the lows at (C) which is 12400 on the Industrials and 4850 on the Transports. If we get the “sell” adopt a low risk strategy through 2013.

Thursday, December 27, 2012

Point & Figure Charting

I will be a guest on BNN’s Market Call at 1:00 pm December 31, 2012. The host will be Michael Hainsworth who has developed some good technical skills over the past several seasons. I hope I don’t get too many requests for Vancouver penny stocks because they do not chart well with the main driver being the “compelling story”. I am sure that most of us have been burned by those compelling stories that seem to expand in proportion to the growing losses when holding the losers.

The technical analyst will try to accumulate a stock before the story is compelling and then sell to the investment sheep when the storey is compelling. I have learned from experience that point & figure charts should always be used when bottom fishing among those out of favour stocks. A few weeks ago I accumulated some Bombardier at the $3.05 level based on the lack of a compelling story and several positives on a point & figure chart. Can you spot them?

Monday, December 17, 2012

Andrew McCreath is a Natural Gas Bear

I was business channel flipping last mid week (CNBC & BNN) and happened the catch BNN’s scrappy little Andrew McCreath proclaim “the natural gas bulls are wrong again” in reaction to a down day on natural gas prices.

I gather McCreath is strictly a fundamentals guy because I have never known him to refer to a chart. I gather he did not see that natural gas had put in a spike low in April and then rallied to be followed by a quick May correction which did not make a new low. Also the relative perform vs. crude broke to the upside and all that remained to confirm a new bull was small overhead at the mid May pivot point or as Elliott would say, the recognition point which was overcome about 6-weeks later.

Later the same day we learned that a Chinese state-owned company is ploughing another $2.2 billion into the Canadian oilpatch. Natural gas giant Encana Corp. (TSX:ECA) and a subsidiary of PetroChina announced last Thursday they have reached a deal to work together in the Duvernay, a promising shale natural gas formation in west-central Alberta. So who is right, McCreath or the Chinese?

There may be opportunity in alternate energy plays because I also see the coal, solar and uranium stocks are attracting some bids.  

Friday, November 30, 2012

U.S. Sector Topping Phase

These are some extracts from a recent Getting Technical Market letter

The Equity Markets: Now Range Bound”

“We are now cautions through year-end due to investor confusion over the U.S. fiscal issues. There is also a big contrarian concern due to a broad based belief among too many investors that a period of seasonal strength in the equity markets runs from November through March. Another major concern is the topping momentum phase of many of the Canadian and U.S. sectors – see the sector tables on page 2 and page 3

The TSX Composite could be range bound through Q1 2013.

See chart top left.

Risk Avoiders - LONG TERM new for Q4 of 2012 – we see the U.S. sectors sorted by monthly change at Oct 31, 2012. The expansion of the Stationary Topping sectors suggests a topping phase in the broader indices through Q1 2013.”

Most of these comments are from different pages and so are out of context – but I am sure you get the message

Wednesday, November 28, 2012

More Useless ETFs

According to SHIRLEY WON INVESTMENT FUNDS REPORTER — The Globe and Mail Last updated Friday, Sep. 14 2012, a record number of ETFs are shutting down

I quote - Some delisted ETFs came from providers “throwing spaghetti on the wall to see what is going to stick,” said John Gabriel, an ETF strategist with Morningstar Inc. “They learned the hard way that it is not so easy.”

I guess she was correct, in a press release TORONTO, Nov. 16, 2012 /CNW/ - Horizons Exchange Traded Funds Inc. ("Horizons ETFs") and its affiliate Horizons ETFs Management (Canada) Inc. (the "Manager") announced today that they will be terminating certain exchange traded funds ("ETFs") effective at the close of business on Friday, January 18, 2013 (the "Termination Date").  The ETFs being terminated (collectively, the "Terminated ETFs") are as follows:

ETF                                                                                                     Ticker
Horizons BetaPro S&P/TSX Capped Financials TM Inverse ETF     HIF
Horizons BetaPro S&P/TSX Capped Energy TM Inverse ETF          HIE
Horizons BetaPro S&P/TSX Global Gold TM Inverse ETF                HIG
Horizons COMEX® Copper ETF                                                        HUK

It was only a week weeks ago these classics were closed
Horizons BetaPro NYMEX® Natural Gas Inverse ETF                      HIN
Horizons BetaPro NYMEX® Crude Oil Inverse ETF                          HIO
Horizons BetaPro NYMEX® Long Natural Gas/Short Crude Oil Spread       HNO
Horizons BetaPro NYMEX® Long Crude Oil/Short Natural Gas Spread       HON

Here are a few other gems that should be put down – they can’t be charted for lack of volume due to zero investor interest – the volume to-day on each was ZERO

Horizons Active North American Growth                                HAW
Horizons S&P/TSX 60 130/30 Index                                       HAH
Horizons Active North American Value                                   HAV
Horizons Universa Canadian Black Swan                              HUT
Horizons BetaPro S&P/TSX Capped Energy Inverse            HIE

Here is clip from the Horizon’s web site – I had to read it twice and I quote “Canadian Dollar Exposed Assets” and “Horizons Seasonal Rotation ETF (HAC :TSX) Portfolio Exposure as of October 31st, 2012”
Name                                                                       Portfolio weight
ZEB BMO S&P/TSX Equal Weight Banks Index (ZEB)          2.0%
BNS Bank of Nova Scotia (BNS)                                            2.0%
BMO Bank of Montreal (BMO)                                                2.0%
TD Toronto-Dominion Bank/The (TD)                                    2.0%
Canadian Imperial Bank of Commerce (CM)                         1.0%
RY Royal Bank of Canada (RY)                                             1.0%

Can it be the fund acquired the BMO S&P/TSX Equal Weight Banks Index ETF (ZEB) which holds an equal weight in six Canadian banks also bought directly five of the same holdings?
Is that not like getting married twice to the same person?

Last but not least is the Horizons BetaPro S&P 500 VIX Short-Term Futures Bull Plus ETF (HVU) which according to the TSX just posted a new 52-week low of $5.36 down from a 52-week high of $355.80.

According to Horizons Exchange Traded Funds the “Horizons BetaPro S&P 500 VIX Short-Term Futures™ Bull Plus ETF (the “HBP Double VIX ETF”) is designed to provide daily investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to twice the daily performance of the S&P 500 VIX Short-Term Futures Index™. Any U.S. dollar gains or losses as a result of the HBP Double VIX ETF’s investment will be hedged back to the Canadian dollar to the best of its ability”

Our chart displays the success of this “thing” or whatever you wish to call it. 

Sunday, November 25, 2012

Lumber is the next big thing

Sometimes the next big thing doesn’t work out. Nobody made a buck on green energy such as solar, uranium and turbines. Food is now disappointing along with the transportation and infrastructure plays generating nixed returns.

The lumber stocks are on fire (bad joke)

Plum Creek Timber (PCL)  
Canfor Corporation (CFP)
Norbord Inc.(NBD)
Acadian Timber Corp (ADN)
West Fraser Timber Co. Ltd. (WFT)
Weyerhaeuser Co. (WY)

The chart of Norbord is typical of the group. Norbord almost went bust in 2008 and is just beginning a 2nd up leg advance – or an Elliot Wave (3) advance. Anyway a picture is worth a thousand words.

Thursday, November 22, 2012

The BMO Industrial ETF (ZIN)

It was not too long ago that North American investors had no way to own any of the ten S&P distinct or primary sectors because they were not investable. In other words you can’t buy an index. The investable problem was addressed by the mutual fund industry and the exchange traded fund manufacturers who manufactured investable clones that replicate most of the major stock indices and their related sector indices.

In North America Standard & Poor's (S&P) has divided the major stock indices into ten distinct (primary) stock groups. They are Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Telecom Services and Utilities.

Last summer some of the industry professionals I work with had an investment dilemma with regard to the S&P/TSX Capped Industrials Index. We decided there was investment opportunity in the TSX industrial sector only to discover S&P/TSX Capped Industrials was still ignored by the Canadian ETF manufactures.

Note the TSX sector table below sorted by the number of components in each sector. Note also the TSX Industrials rank fourth in components and index weight and yet as of only a week ago not one Canadian ETF manufacturer covered this important sector. 

I suspected the innovated folks at BMO Asset Management would be first to solve the investable problem. In a press release dated Nov. 20, 2012, BMO introduced a bold new ETF offering; the BMO S&P/TSX Equal Weight Industrials Index ETF (ZIN). I use the term bold because this is not another “me too” product that is so common in the Canadian ETF landscape.

The perceived investment opportunity in the TSX industrial sector was based on the strong performance of the sector relative to its nine (primary) sector peers. We also know that in North America no bull market can operate without the participation from the economy sensitive technology, industrial and the cyclical materials sectors.

Our chart is of the monthly closes of the S&P/TSX Capped Industrials Index plotted above the broader S&P/TSX 60 Index spanning about 6-years. The lower study is the price history upper plot relative to the price history of the lower plot. A technical analyst would rank the TSX Industrials to be a relative out perform vs. the broader TSX 60 large cap index.

Monday, November 19, 2012

The post election correction

Last Thursday at mid day I took a quick look at the S&P500 currently about 1347 and was trying to see just where this correction would attract some bids

Our S&P500 weekly chart displays the 5-wave Elliott Wave advance of mid 2010 through mid 2011. This was then followed by a sharp A-B-C correction – otherwise known as a normal intermediate cycle correction. This was followed by another 5-wave Elliott Wave advance (not numbered)

Technically there is support at the 3rd Elliott Wave peak of Nov 2010 (3) and the subsequent recovery wave (B) in June 2011. Note also the 1345 level is also where the rebound from (C) stopped. I also note the NYSE Advance / Decline line never broke down to confirm the break in the S&P500. I think the post election correction is over,

Wednesday, November 14, 2012

Currency Hedging Myth

Canadian ETF manufacturers reacted to the great Canadian dollar bull of 2004 through 2007 by attaching a currency hedge to most of their global and international offerings. One example is the iShares S&P 500 Index Fund (XSP) which seeks to replicate the performance of the S&P 500 Hedged to Canadian Dollars Index. According to iShares Canada “The S&P500 Hedged to Canadian Dollars Index is the S&P500 index with US dollar currency exposure removed, so that the returns of the S&P 500 stocks will not be impacted by changes in the US/Canadian dollar exchanges rates.

The ETF guys are responding to Canadian investor demand for currency hedging because of the great Canadian dollar bull of 2003 through to 2007. Basically a 4-year pop preceded and followed by years of flat price congestion which could drag of for several more years.

This is a clip from Nancy Woods (who used to be a GT letter subscriber), The Globe and Mail Published Friday, Aug. 19 2011, “If you invest in a gold ETF that is not hedged and the U.S. dollar strengthens (rises in value versus the Canadian dollar) you would lose some of your investment. If the US dollar weakens then your investment will gain simply from the currency change. Both these examples are irrespective of a change in the actual price of the ETF.”

This is a clip from Investoedia: “consider the performance of the S&P/TSX Composite during the second half of 2008. The index fell 38% during this period - one of the worst performances of equity markets worldwide - amid plunging commodity prices and a global sell off in all asset classes. The Canadian dollar fell almost 20% versus the U.S. dollar over this period. A U.S. investor who was invested in the Canadian market during this period would therefore have had total returns - excluding dividends for the sake of simplicity - of -58% over this six-month period.

Clearly since the Canadian dollar price peak of $1.10 in November 2007 there has been no benefit to owners of Canadian dollar hedged products over the past five years. Our chart is the monthly closes of US$ RIMM vs. the CDN$ RIM. Note in the period of 2003 through 2007 local U.S. investors in RIMM had better returns than did local Canadian investors in RIM due to the weaker US$. Note during the 2008 to date during a period of relatively flat CDN$ both CDN and US investors lost equally in terms of local currency. The lesson here is when we diversify by country was also need to diversify by currency

Monday, November 5, 2012

Saved by Elliott Wave

Once again I remind you that if you're ever lost and on a deserted road without a cell phone, grab paper and pen and begin an Elliott Wave count. Within seconds, a stranger will appear to correct your wave count. Ask this guy for a ride. The problem has always been where to begin the wave count.

Students of Elliott Wave will try to identify the bull phase of three advances (impulse waves) that are separated by two corrective waves to be a perfect five-wave Elliott bull market. The completed bull is then followed by a three wave A-B-C bear phase.
Our chart is a long term monthly plot of crude spanning about 15 years displaying the entire 1998 through 2011 secular crude bull. The first advance or wave (1) ran from the late 1998 low to peak at about mid year 2000. The first short corrective wave bottomed at (2) in early 2002. The second advance or wave (3) ran from the 2002 lows at (2) to the mid 2008 peak at (3). Note the 5-wave subdivision of the wave (3) advance.

The second corrective wave (3) to (4), while deeper than corrective wave at (1) to (2), never entered the space of the first impulse wave (!). The final advance or wave (5) ran from the 2008 lows to the final peak in early 2011 at (5).

The completion of the 1998 – 2011 crude secular bull is not likely the end of the world for the crude energy complex, but rather just a sign that the easy money has been made. Stock pickers will likely do better than sector indexing over the next few years. Next post we look at the precious metals complex.

Thursday, November 1, 2012

The 100-Year Dow

The Dow Jones Industrial Average (DJII) is one of the oldest continual stock groups in the modern investing world. Actually the Dow Jones Transportation Average is the oldest (1984). The DJII was founded by Charles Dow in 1896 and represented the dollar average of 12 stocks from leading American industries. The original group of 12 stocks ultimately chosen to form the Dow Jones Industrial Average did not contain any railroad stocks, but purely industrial stocks. Of these, only General Electric currently remains part of that index.  Today the Dow is among the most closely watched U.S. benchmark indices tracking targeted stock market activity. Although Charles Dow initially compiled the index to gauge the performance of the industrial sector within the American economy the evolution of the modern multinational corporation has now made the Dow a global economic barometer.

Our chart is that of the yearly closes of the Dow Jones Industrial Average (DJII) spanning about 110-years. The lower histogram is a simple 10-year rate-of-change and the upper cycle overlaid on the Dow is the Coppock Curve which is a long-term price momentum or long cycle indicator used primarily to recognize major bottoms in the stock market. Very long term cyclic analysis displays important cyclic troughs in 1942 and 1982 along with a pending trough somewhere during the 2013–2014 time period.

These cyclic troughs tend to occur at the end of a secular bear of which we can identify the three as experienced by the Dow over the past 110 years. Most notable is the chirping of the professional bears that use the business media to preach their doom and gloom nonsense usually at the mid point of a secular bear. A doom and gloom message always attracts crowds.

The pending cyclic trough would effectively end the current 2000-2014 secular bear and introduce a long secular bull such as investors enjoyed during the 1942-1968 and 1982-2000 advances. Now is the time to be a long term investor and acquire quality growth companies and forget about that buy-and-hold is dead crap.

Sunday, October 28, 2012

A compelling story

Last Tuesday at mid-day the Dow and the TSX Composite were down over 200 points on earnings disappointments from several large U.S. multinationals, but there were some positive technical conditions in place at the week end.

The Dow, the S&500, the Russell 2000 and the TSX Composite are all trading above their 200 day MAs and, all their respective 200 day MAs are still pointed upward. The NYSE advance / decline line is still in trend. Important stocks like INTC, MSFT, YHOO, ORCL, TXN & AMZN have bounced above their 20 day MAs. Bellwether ETFs like the SMH and the PPA bounced above their 20 day MAs.

I still think lumber is tuning out to be the next-big-thing. (Toronto Star business October 27, 2012) The following is an interesting opinion of The Campbell Group, LLC which is a vertically integrated, full-service timberland investment advisory firm. They acquire and manage timberland for investors. “Timberland investment offers many attractive benefits to institutional investors including, risk/return payoff, portfolio diversification, and solid cash flows. (and) Timberland has a low correlation to other major asset classes, including stocks and bonds, and is negatively correlated to real estate.” Common sense would suggest that the bullish opinion on timberland is conflicted but, compelling enough not to ignore.

Our chart is that of the monthly closes of the TSX listed West Fraser Timber Co. Ltd. (WFT) spanning about 12-years, plotted above the monthly closes of the S&P/TSX Composite Index. West Fraser Timber is a North American integrated wood products company which produces lumber and would be sensitive to lumber prices and the returns on timberland. The S&P/TSX Composite Index represents the long term performance of the broader stock market.

A quick examination of the respective trading peaks and troughs of West Fraser Timber are quite different for the most part, than the trading peaks and troughs of the S&P/TSX Composite Index. This apparent lack of correlation is indeed too compelling to ignore. 

Tuesday, October 23, 2012

Doom and Gloom always attracts crowds

Author Harry Dent had a full venue at last weeks World MoneyShow in Toronto. Doom and Gloom always attracts crowds. The topic was The Great Crash Ahead: Strategies for a World Turned Upside Down. Dent shows how the perfect storm of aging Baby Boomers, the greatest debt bubble in history and China’s massive overbuilding bubble will overwhelm continued stimulus programs and we see a deeper downturn and debt deleveraging crisis, likely between late 2012 and early 2015. More important he shows why deflation will be the trend, not inflation and that changes investment strategies completely. The most likely trigger: Spain’s bailout forces a crisis in Europe that spreads to North America and then to China and then to commodity prices and exports of emerging countries. Hence, this will be a global financial crisis and like late 2008, there will be few places to hide.

Apparently the Dent Tactical ETF (DENT) ETF was not one of the few places to hide.

Dent like Gartman, Meisels & Vialoux all had their own ETFs which usually end up being a disappointment for unit holders. The Tactical ETF (DENT) was closed last summer by AdvisorShares, which announced that the AdvisorShares Dent Tactical ETF (DENT) will be closed rather than reorganize into the AdvisorShares Meidell Tactical Advantage ETF (MATH) in a measure aimed to benefit shareholders

As far as Dent is concerned there is a big difference between talking the talk and walking the walk.

Today at mid-day the Dow and the TSX Composite are down over 200 points on earnings disappointments from several large U.S. multinationals, but there are some very positive technical conditions occurring right now. Can you spot them?

I will detail them on a post tomorrow after the close

Sunday, October 14, 2012

Timing the Market

One again I caution that market timing implies that investors should dump their investments when they get a “sell” signal from some seasonal or black box strategy and then buy them back when a “buy” signal is generated. Caveat: No timing model works all the time. No market timing model should ever be used by investors to jump in and out of the stock market. A prudent investor should never sell a good investment based on any timing model but rather to maybe tone down the risk on a sell signal and than take on a little more risk when a buy signal is generated. Risk in the portfolio could be too much sector concentration or too much leverage or too little diversification.

A few posts ago I commented on CIBC`s asset allocation strategy that claims since 1998, every time bond yields fell, stock prices fell, and every time bond yields rise, in general, stock prices also rise in lockstep. CIBC used this analysis to detect and act upon a buy signal for equities in 1998, a sell signal at the beginning of 2000 during “the peak of the tech mania,” a buy signal in October, 2002, and a sell signal again in June, 2007. CIBC also sent out a buy signal in January of 2009.

I assume we are talking about is basic spread or relative analysis between a major stock index like the S&P500 and the price of the 10-year US T-Bond.

Today’s chart is a relative weekly spread between the S&P500 and the 10-yr US T-bond price with the lower plot of a relative spread. The spread displayed is a simple plot1/plot2 spread with a 20 week smoothing line. I bought and sold the S&P500 on the cross. I got the best results when I slowed them both and came up with a 9-yr total batting average of 66% - not bad. Can you guess the two smoothing numbers I used? For more on this model visit me at the World MoneyShow Metro Toronto Convention Centre Friday, October 19, 2:45 pm -3:45 pm EDT

Thursday, October 11, 2012

VectorVest Challenge

I see VectorVest and the dynamic trading duo of Cole and John Stevens are back in our face in yet another round of TV commercials. VectorVest sells a software package that claims in its commercials, “better results than any broker, adviser or TV expert.”

“My son and I have both been winners” claims the older Stevens and then he proceeds to caution us nervous business TV viewers, “when they (VectorVest) suggest to “sell” or advocate not to not buy stocks at this time – you should listen.”

A few posts ago about July 12, 2012 I challenged Cole and John Stevens, let us see their summary of trades. After all when you go on national television and claim something works – prove it!

To date I have had no response from VectorVest or from the dynamic trading duo.

So let us move on to plan “B”. I note that VectorVest are displaying their software stock analysis and portfolio management system at the World MoneyShow – Toronto Metro Convention Centre from October 18 through October 20.

The plan: I assume at the MoneyShow interested investors & traders will listen to the VectorVest claims of “better results” etc. BUT – before you commit – ask for proof of “winning” as claimed by the dynamic trading duo of Cole and John Stevens in national television. If they refuse this reasonable request – walk away.

Monday, October 8, 2012

Simple Market Timing Models

On my last post I suggested market timing implies that investors should dump their investments when they get a “sell” signal from some seasonal or black box strategy and then buy them back when a “buy” signal is generated. Caveat: No timing model works all the time. No market timing model should ever be used by investors to jump in and out of the stock market. A prudent investor should never sell a good investment based on any timing model but rather to maybe tone down the risk on a sell signal and than take on a little more risk when a buy signal is generated. Risk in the portfolio could be too much sector concentration or too much leverage or too little diversification.

Over the next few weeks I will illustrate some simple market timing models that I use with some degree of success.
This simple timing model is 30 week price channel with the upper band being the highest moving high over the past 30-weeks and the lower band is the lowest moving low over the past 30-weeks, This model assumes that a bull market is technically a series of higher highs and higher lows with the rising peaks and troughs usually about twenty six weeks or less apart. In other words a bull needs to make a series of new highs every six months and a bear market will usually do the opposite and make a series of new lows every six months.

Today’s chart displays a 30-week price channel on the S&P500 – the model runs from March 1990 to date and has generated 6 signals to date with the last being a “buy” on March 16, 2012 @1404 on the index.. It bats 100% on the long trades and 67% on the sell trades. A very simple tool, I have used it for years so enjoy.

Friday, October 5, 2012

How the big boys time the market

This is a portion of an annoying item that appeared in the Globe ROB 
PAUL BRENT - Special to The Globe and Mail - Published Thursday, Oct. 04 2012

Quote: “the chart and data-heavy approach of Peter Gibson, CIBC’s top-ranked head of portfolio strategy and quantitative research, provides both a guide to portfolio balancing and market timing.

The basis of CIBC`s asset allocation strategy is deceptively simple. Since 1998, every time bond yields fall, stock prices fall, and every time bond yields rise, in general, stock prices also rise in lockstep. What CIBC tries to do is predict the ceilings for the 10-year U.S. treasury bonds.

“The bond yield ceiling right now is 3.65 [per cent],” Mr. Gibson said. “If the bonds were to rise to that level then the stock market becomes overvalued and then we have to switch our exposure back into bonds.”

CIBC used this analysis to detect and act upon a buy signal for equities in 1998, a sell signal at the beginning of 2000 during “the peak of the tech mania,” a buy signal in October, 2002, and a sell signal again in June, 2007. CIBC also sent out a buy signal in January of 2009, but “we were a little bit early,” he said.

What’s important about the years 2000 and 2007, when the markets crashed, “was that at the same time we were hitting the ceiling for bond yields, suggesting that bond yields are too competitive with stocks. We also have falling profitability because the Fed is tightening, trying to stop the bond yield from rising,” Mr. Gibson explained.

“So the return on investment begins to fall, meaning bond yields are too competitive and corporate profitability is falling,” he said. “You have no business being in the stock market.”

The result was two stock market collapses of roughly 50 per cent. Meanwhile, because bond yields were falling, bond prices rose and bond total returns rose 37 per cent while the market fell 50 per cent. In 2007-2008, the bond total return was up 20 per cent while the stock market was down 57 per cent.

“This is how we time the market,” Mr. Gibson explained.

“By switching just five times, from 1998 to 2009 – stocks, bonds, stocks, bonds, stocks – you are doing almost an 18 per cent per-annum return” in Canada, with a rotating split between 100 per cent stocks and 100 per cent bonds, Mr. Gibson said. “Basically you could play golf the rest of the time. It is because first and foremost you have this positive correlation between bond yields and stock prices.”

Stock picking is less important with this strategy, given that 60 per cent of a total return from individual stocks is a function of the market rising or falling, not a stock`s fundamentals, CIBC states.

Today, CIBC’s data shows “right now the stock market is incredibly cheap, based on the level of interest rates,” he said, and CIBC is recommending that investors should be overweight in stocks.

CIBC had noticed in recent months that corporate profitability was beginning to fall and predicted (rightly) that a co-ordinated program of quantitative easing would occur in the Europe, China and the United States.

“That is what has lifted this market,” Mr. Gibson said. “It is due to a policy shift, though. It is not due to strong and sustainable profit growth. If I had sustainable profit growth with the interest rate picture that I have, I would probably be talking about 1700 on the S&P.”
End Quote:

Now – back to reality. Aside from the arrogant insinuation that the “big boys” are smarter than us “small boys”, market timing implies that investors should dump their investments when they get a “sell” signal from some seasonal or black box strategy and then buy them back when a “buy” signal is generated. In the example of the CIBC model 

Mr. Gibson says “every time bond yields fall, stock prices fall, and every time bond yields rise, in general, stock prices also rise in lockstep”.

There is also one minor problem with the Gibson / CIBC timing model. If Peter Gibson only joined CIBC in 2009 how could he be a component of any CIBC model buy and sell signals from 1998 through 2009?

I display a long term monthly data plot of the 10-year U.S. treasury bonds above the S&P500 and I have marked the CIBC buy & sell signal with up & down arrows. Note the 1992–1998 period where the relationship failed and note the 2010–2012 period where the relationship also failed.

This timing model needs two things to work, firstly the yield vs. S&P500 signals has to be a fact (which is questionable) and secondly you need to get the yield (upper plot) buy & sell calls right as marked by those up & down arrows. Are we to believe the CIBC got all those yield calls right? A posted comment sums it all up: gazous - 1:32 PM on October 4, 2012 - easy enough, after the fact....

Monday, October 1, 2012

Covered call writing is for dummies

According to Horizons Funds the Investment Objective of the Horizons S&P/TSX 60 (HXT) is to seek to replicate, to the extent possible, the performance of the S&P/TSX 60 Index (Total Return), net of expenses.

According to Horizons Funds the investment objective of Horizons Enhanced Income Equity ETF (HEX) is to provide unitholders with: (a) exposure to the performance of an equal weighted portfolio of large capitalization Canadian companies; and (b) monthly distributions of dividend and call option income. (and) To mitigate downside risk and generate income, HEX will generally write covered call options on 100% of its portfolio securities. Covered call options provide a partial hedge against declines in the price of the securities on which they are written to the extent of the premiums received.

The annualized price returns of the HEX, since inception March 18, 2011, to date has been a negative 18.38 %. This does not include the annualized income of about 10%.

The competition – namely the iShares S&P/TSX 60 Index Fund which also seeks to provide long-term capital growth by replicating, to the extent possible, the performance of the S&P/TSX 60 Index has generated a negative price return of 7.92% over the same period. This does not include the annualized income of about 2.5%  

My take on covered call writing is that you are forced to sell winners to the call buyer and you are forced to hold losers in order to keep writing those calls. Those management fees however never go away.

Friday, September 21, 2012

Everyone is now into Dow Theory

One tenant of Dow Theory is that stock market averages must confirm each other and so we need the Dow Transports to confirm a new high or low posted by the Dow Industrials. Keep in mind that Dow did not state a time period for the confirmation to occur. According the Wikipedia, Charles H. Dow stated a bull market in industrials could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers' profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship the output of them to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge it is a warning that change is in the air.

Today most of us know – thanks to the business media that so far this year the Transports have not followed the Industrials on to new 52-week highs. Now back in Dow’s time the Transports did not contain truckers and airline stocks and today it is not unusual to get performance divergence between the rails, the truckers and the airlines. A look at two important railroads make me wonder what all the fuss is about – both are still in linear up trends. Keep an eye on FDX and UPS to see if they can recover back to their 40 week MAs over the next several weeks. If that does not occur then I may have some concern

Friday, September 14, 2012

Francis Horodelski is a bear

One of my favourite BNN personalities is Frances Horodelski who according to BNN has been following markets for over 30 years, including 25 years with two of Canada's largest investment dealers. Her career has spanned research, portfolio advice, investment banking and international strategy. She also holds the designation of Chartered Financial Analyst.

Anyway aside from all that I just like her common sense delivery – but I think the bearish guests have seduced her into the bearish camp. I do know Francis respects technical analysis and so I am posting two important charts that clearly deliver a bullish spin.

The first chart is the weekly iShares TLT which is a measure of fear – the higher the price, the greater the fear and so we need to see the TLT to roll over to confirm a shift to equities. Our chart displays a bearish rising wedge or diagonal triangle. The rising wedge is rare and very deadly – this is the only pattern that when identified I will sell into. 

The second chart needs little explanation – the NYSE advance / decline line which is a measure the breadth of a stock market advance or decline. The AD line tracks the net difference between advancing and declining issues. This study has been around for generations and like point & figure is ignored by the younger technical analysts who prefer the flashy MACD and Stochastic lines. However this little used study usually leads the price and so when the A/D line beaks to all time highs – I get impressed