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

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. 

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.

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.

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,

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

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.

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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.

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.