GT- BLOG JULY 29/09

Technical Analysis – myths and urban legends continued…

Sometimes when we all know something to be true - the opportunity for profit is lost in the crowd - In other words if we all know - who is left as a bag holder?

To-day many intelligent and experienced money managers believe the U.S. dollar is in a long term decline vs. all the major currencies. They protect their portfolios with bullion ETFs and precious metal stocks such as Barrick, Goldcorp, Kinross and whatever.

The attraction for the gold stocks is the leverage because if bullion were to ever break firmly above $1000 - the gold stocks will fly

Then again - maybe not.

Our long term chart of gold stocks vs. bullion illustrates the three stages of the stock/bullion relationship. The first stage is the gold stock out-perform stage at (A) 2001-2003 when the gold stocks out performed bullion - this was the "recognition of survival" stage. The second stage at (B) 2004-2007 is the earnings stage when earnings kept pace with the rising bullion prices.

The third and final stage is at (C) 2008 to date when the gold stocks under- perform the price of bullion because of rising costs, political and environmental issues. Best just to own the bullion - by the way - the energy stocks have the same problem

GT Blog July 21, 2009

Technical Analysis – myths and urban legends continued…

Today we look at the dreaded Key Reversal – yes the inexperienced analyst will often recommend a sale based on this over-used reversal pattern

According to stockcharts.com “Key Reversal Day: A one day chart pattern where prices sharply reverse during a trend. In an uptrend, prices open in new highs and then close below the previous day's closing price. In a downtrend, prices open lower and then close higher. The wider the price range on the key reversal day and the heavier the volume, the greater the odds that a reversal is taking place.

I have found that on daily charts – the key reversal is just noise and in most cases the trend is not interrupted – take a look at the daily chart of SNC – Lavalin Group Inc the 10 key reversals are marked with a red dot

The experienced technician will use other trend following tools such as trend lines and simple moving averages – more complex studies such as relative performance and money flow will also confirm the advance or decline

GT Blog July 17, 2009

Technical Analysis – myths and urban legends continued…

A few days ago I looked at one of the most over-used and misinterpreted patterns - the scary Head & Shoulders Reversal pattern

Another over-used technical tool is the 50 day and 200 day crossover – the idea here is to buy if the 50 crosses above the 200 (the golden cross) and to sell if the 50 crosses below the 200 (the death cross) – Well I did a scan of 100 of the top TSX big caps and then did a scan of all of the major stock indices to see if the buy & sell signals worked

The scan covered long and short trades – and found the batting average overall was less than 50 % meaning that profitable trades will on average occur four times out of ten trades – but in a trending markets the profitable longs or shorts more than covered the losses on the whipsaw losing trades.

As you can see the 10-year batting average for the TSX Composite was 40% which means an investor cannot “blow out” an entire portfolio on a sell signal and then re-acquire on a buy signal – a more practical approach would be to use one trade per signal and put on or take off an insurance product such as and inverse ETF such as the TSX listed HIX or the HXD – for more info visit http://www.hbpetfs.com/index2.asp

GT Blog July 14, 2009

I was channel flipping and caught business TV call-in question on the Head & Shoulders top on the S&P500 and I wondered what in the hell was the caller talking about. To my great surprise the host technical analyst admitted to be concerned about the bearish implications – the chart below displays the pattern in question

The Scary Head & Shoulders Reversal pattern in the S&P500

My concern here is the improper use of technical analysis which often results in the profession being referred to as “Voodoo Science”

First of all the pattern above is too small at 8 weeks to be important – if you look closely the up trend was violated in early June just to the right of the head and so we have completed a small A-B-C correction – that means the small H&S pattern is late and too small to even act. Are you really going to blow out a portfolio because of a series of small little bumps?

To be meaningful the H&S pattern has to be big - at least 8-months – sometimes 8-years because a true H&S top can only be seen in weekly or monthly charts which most investors and technicians seldom use. The large H&S reversal will usually signal an end to a business enterprise – or signal an important change in the related industry which in the case of the FNM chart below an early signal of trouble ahead for the US housing industry How many investors and professionals saw this deadly pattern? Very few – and you know why?

Why because no one gives a crap about the long term forces at work – we only care about last week and the outlook for next week – we all want to make a fast buck just like those US financial engineers who got us into this mess


Fanny Mae – a real top

GT_ JULY 11/2009

This was an entertaining item in the Globe Report on Business last week – readers were invited to direct questions on the capital markets to an “expert” - I believe header was “Ask Dennis Gartman “ or ask an expert who lives in a foreign country

Here is a clip (with the typos)

Vaidyisa Bala writes: What are some of the best dividend growth stocks in Canda for long term (5 to 10 years ) investment you recommend? This could be in any stable sector.

Dennis Gartman: Dividend stocks for 5-10 years? I’d say probably the same dividend stocks that were good for the past 5-10 years, which is none. I’ve no ability to look out 5-10 years, and anyone who tells you they can is a charlatan and/or foolish. Perhaps a year or so is reasonable, and to that end I’d buy raw materials manufacturers and miners: steel; copper; zinc; grain growers; water… these are where I’d put my money… with stops on everything.

WOW – this guy really ignores the question – the answer is flippant and furthermore Gartman knows little of Canadian equity history – but we need to check out his story
Below is a long term chart of the TSX Financial (dividend paying) Index – note the relatively smooth returns from 1990 to 2007 – the 2008 collapse and subsequent recovery was a global event – in answer to the question a stable group

Below a long term chart of Canada’s Metal Mines – not a stable group and clearly not relative to the question because of the volatility and unpredictable returns

From 1991 to 2003 basically dead money – no income just nothing but lost opportunity to be in places like financials, technology consumer – now look at the big gains from 2004 to 2007 and then once again dead and volatile money from the 2007 peak to date

So Gartman would buy raw materials manufacturers and miners: steel; copper; zinc; grain growers; water OK great what are these names? Aside from the miners what are the great names in grain growers and water?

The only asset left is a hole in Saskatchewan - Potash Corporation of Saskatchewan which at its manic peak was worth more than Canada largest bank and RIM – can we now even think of Potash as a reasonable investment for our investor who seeks the safety of “stable dividend growth”?

GT Blog July 05, 2009

A few comments on the dreaded torpedo stock

Last week I was a guest on BNN’s Market Call and I believe I gave a hurried and insensitive answer to a question regarding the collapse of OPTI Canada Inc. (TSX-OPC)

There are a lot of callers and so there is pressure to hurry but that is no excuse and I regret glossing over a significant event that inflicted harm on many investors - OPTI is a torpedo stock and so here is how I learned who to deal with a torpedo

There is no protection from the torpedo – it ambushes the fundamental and technical guys – to include the pros and the private investors. That means that stops do not work and there are no warnings in the balance sheet.

I get stuck with a torpedo in August 2004 when CP Ships released its second quarter 2004 financial results restating previously reported financial results – apparently a new SAP financial accounting system in January when implemented revealed some deficiencies in former systems - CP tanked – so - first of all do nothing – no buying or selling because the sudden drop or torpedo is usually the only drop BUT - the stock needs time to “heal” so just wait it out for at least 26 weeks – in the case of CP Ships a year later the stock was taken out by German conglomerate TUI AG at $27

For GT Blog July 02, 2009

I hope many of you enjoyed the great March – June advance in the world equity markets. OK so now we go through a period of confusion as the market has to answer some legitimate questions

Is this a bear market rally? Will we have a re-test of the October-March lows? Then again perhaps this a bull market and we should hang in there for more highs, Perhaps you sold in May and went away with a view to buy back in the fall – well I think we have a new bull but I also think reducing here is a good idea – but – reduce what?

I would reduce a group of stocks that ALL of the experts love to own. This group gets more business press than all other stock groups combined – this stock group is a Canadian champion – this is a must-own group

Well the group is energy – yes I would bail out of these oil stocks now – especially the tar sands participants – look at the chart – clearly the stocks are not responding to any rise in crude prices – a bad omen – what happens if crude falls?

Crude vs the SPDR Energy ETF – (XLE) – US dollars