No Investment Sheep in Sight

If I had to pick one commodity that is still out of favour with investors it would be natural gas. When I study a long term chart of natural gas (monthly) I see a bear market low in September 2009 followed by a large 20 month symmetrical triangle. This in turn has printed a series of higher lows and is about to generate a positive 10-month ROC number.

We need to get into the natural gas space before the investment sheep arrive. In this case the investment sheep will likely be those trend following portfolio managers who are currently chasing the utilities, consumer staples and telecom stocks. Now when the sheep take note that natural gas prices have stopped declining (three higher lows since last October 2010) they may begin to accumulate the shares of the natural gas producers.

Some smaller names would be Celtic Explorations Ltd., Trilogy Energy Corp, Birchcliff Energy Ltd, Paramount Resources, Fairborne Energy Ltd., Perpetual Energy Inc, Corridor Resources Inc., Tethys Petroleum Ltd., Delphi Energy Corp. and Vero Energy, Inc. The big go to name is EnCana Corporation (ECA). The long term (monthly) chart of ECA displays the monthly cycle troughs of 2003, 2008 and 2009. Note the pending trough of May 2011 that is about to signal the end of the short 10-month ECA bear. This pending cycle trough is supported by an improving relative reform signal. On a P & F chart ECA needs to break above $35 to trigger a bullish stampede into the name.

Where are the Investment Sheep?

Aside from my duties as a top down rotational strategist I also devote time to tracking the movements of the investment sheep. Investment sheep are novice private investors, financial planners and front line bank staff who follow the current investment theme. Investment sheep tend to lack original thought and so they follow the shepherds into places that appear to offer rewards such as capital gains, high yields – all without risk of course. The shepherds are the media talking heads – portfolio managers, economists and financial writers who arrive into a space early and wait for the sheep. The sheep are then fleeced or harvested.

So where are the sheep now? We know they were all in the gold stocks six months ago. One clue is the 52-week high list with names like Canadian Utilities Limited, BCE Inc., Manitoba Telecom Services, Pembina Pipeline Corporation and recently Trans Canada Pipe. Could it be the investment sheep are now chasing yield?

Now if the run up in the utilities, the REITS and the telcos is the result of the investment sheep chasing yield then we know it will eventually end badly. On a technical basis TransCanada is over-bought having reached extreme price deviation from several long term moving averages. Our monthly chart illustrates the over-crowding with the price of TRP almost 30% above the 30-month moving average

A high Canadian Dollar = Cheap U.S. Stocks

When it comes to investing the average Canadian will typically be up to their necks in small-cap resource stocks. A glance at any TSX most-active list tells the story. Day after day, resource stocks dominate the most-actives. Last Tuesday there were only six non-commodities related stocks in the top thirty most-actives list. Contrast that to the new 52-week high list. Out of a population of twenty five new 52-week highs, only two were commodity related.

The reality is while the commodity stocks are actively traded, most have been treading water since early January. This is typical of an over-crowded space where the owners of gold, copper and energy stocks trade among themselves much like sport fans trading baseball cards. The lack of new money entering an over-crowded space will make the group vulnerable to any noise that could trigger panic selling. The “noise” that triggered the bearish stampede out of the commodity space was the CME Group announcing margin requirement increases for gold and silver futures

OK so now we had a correction in the commodity space and I wonder how many Canadian investors will buy more of this stuff and ignore the opportunities in the US markets? Our Dow vs. TSX60 chart displays a surprising reality – the big cap DOW has been out performing our big cap TSX60 for about a year and lately that over perform is accelerating. The NASDAQ Comp is even stronger – wake up and take advantage of our over-priced petro-dollar.

Crisis, What Crisis?

In February 2010 I became a technical sub-advisor to Stonebrooke Asset Management Ltd. who manages the Hybrid Investment Program under the Elite Wealth Strategies program for Union Securities Ltd. In other words Union have a program that uses the joint skills of a fundamental and technical analyst to manage their client portfolios. Our objective for the most part is to enjoy the returns of a bull market and to not enjoy the losses delivered in a bear market.

Of course every asset manager has the same sales pitch, holding themselves out to be different with some in-house “black box” that generates buy and sell signals.  

We simply remain for the most part fully invested with a view to control risk by shifting in and out of asset classes. For example the recent bearish stampede out of the commodity space is typical of too many investment sheep in the same space at the same time. The “noise” that triggered the stampede was the CME Group announcing a series of margin requirement increases for gold and silver futures.

Here are a couple questions I get on a daily basis:

Q) Anyone can generate positive returns is a bull market but what happens when you get a nasty correction triggered by some unforeseen event like the recent collapse in the price of gold, silver, copper and crude?

A) That was a sector crash – in a bull market the money will move from place to place and so the idea is to pick a group of sectors – arrive before the sheep and leave when the space gets over-crowed. The recent “crisis” was centered on the commodity space with the technology and health care sectors unaffected.

Q) What about new money? All well and good to get long in mid 2009 but what about now? Why not wait for the next crash?

A) There is always an excuse not to get invested. Who do you know who got invested in March 2009 when most were engaging in panic selling? If you wait for the next crash you may wait for years, since 1970 there have been only FOUR meaningful or material crashes or granddaddy bears 1973-1974, 1987, 2000-2002 and in 2007-2008.

So I hope that helps. Investing like life is not a spectator sport so get in the game.