Sunday, June 24, 2012

Black Swans Red Kangaroos and Tasmanian Devils

The greatest fear of any equity investor is a sudden unexpected collapse in the stock market, sometimes known as a "Black Swan" event. No need to fear now because a few weeks ago Horizons Exchange Traded Funds launched two Exchange Traded Funds based on Black Swan basics. The basics are found in the Nassim Nicholas Taleb 2007 book entitled, “The Black Swan: the impact of the highly improbable” In his book, Mr. Taleb offers lots of examples that impacted the investment world, including start of the two world wars, the market crash in 1987 and the terrorist attack on Sep. 11, 2001. More recent events include the meltdown of the financial system in late-2008 and the tsunami/earthquake that struck Japan last year.

Lets us see now – last Thursday June 21, 2012 the S&P/TSX Composite Index dropped 351.points or 3 per cent and the Horizons Universa Canadian Black Swan ETF (HUT) closed at $9.950 down 2.45% on a brisk volume of 2500 shares.

It seems the black swan hype began in Europe when people were convinced that all swans were white, a belief that was confirmed by empirical evidence at the time. The sighting of a black swan when Australia was first settled by Europeans was a surprise. It also confirmed that one single observation can invalidate a general belief coming from the sighting of millions of white swans.

The reality is that swans are the largest members of the duck family and the Black Swan is native to Australia just like the Koala, the Tasmanian Devil and the Red Kangaroo. I would think the greatest investor fear would be a Tasmanian Devil event and I am sure the folks at Horizon are all over this. I can see it now the Horizon Devil Event ETF symbol HELL

Sunday, June 17, 2012

Update on NYSE Advance Decline Line

A few posts ago back in May 21, I displayed the daily S&P500 plotted above the NYSE A/D Line where we saw the breakdown of the S&P500 and the NYSE A / D Line which was a significant negative technical event. However equally significant was the major support levels which were just below the prices at Friday May 19, 2012. I concluded it was too late to sell so suggested we change the current mantra from sell-in-May to stay-in-May.

Since then there has been considerable technical improvement in the relationship between the S&P500 and the A/D line. Our chart this week is clearly displaying a juncture or turning point on the S&P500 and the NYSE A / D Line. Note the major support levels which were just at or below the lows of Friday May 19, 2012. Note also the recent A/D line plot – well above the Major Support line. Clearly the A/D line is leading the S&P500 - which for the moment is bullish

Saturday, June 9, 2012

The TSX Relative Weakness

Our chart on the last post was the daily NYSE A/D Line clearly displaying the recent breakdown of the S&P500 and the NYSE A / D Line which is a significant negative technical event. However equally significant is the major support levels which are just below the current prices at Friday May 19, 2012. I concluded was too late to sell so let us change the mantra from sell-in-May to stay-in-May

Over the past year the strongest global markets on a relative basis were in the U.S. large and small cap space. The bad news for Canadian investors is that along with the mature European bourses, Canada was among the weakest markets on a relative basis. The good news is when performance deviation between the various global markets is operating there is also opportunity for investors. For example if we know that U.S. equities have out performed Canadian equities over the past 12 + months then we simply wail for the relationship to change and then react by increasing our Canadian equity exposure.

Our chart this week is that of the weekly closes of the TSX Composite Index plotted above the two squiggly lines representing the TSX performance vs. the S&P500 index.The TSX Composite will generate an out performance signal when the faster black line crosses above the slower blue line, AND when the blue line turns upward.

So far there is no pending improvement in the TSX vs. the S&P500 and so in the interim be patient and enjoy the relative strength of the U.S. markets