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. 

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

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

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.

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.

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

http://www.theglobeandmail.com/globe-investor/investment-ideas/how-the-big-boys-time-the-market/article4588759/

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....

 

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.