A Toppy Canadian Financial Sector

Natural stock sector rotation is due to the forces of the normal business cycle, which is led by the financial and consumer sectors followed by manufacturing and then the cyclical industries. Examples of the current leadership are financial and consumer names such as, Bank Of America Corp., Wells Fargo & Co., J.P. Morgan Chase & Co., Citigroup, Inc., Home Depot Inc. and Walt Disney Co. all recent 52-week highs.

Investors (and their advisors) should know the 10 unique and distinct stock sectors (or asset classes) as set out by Standard & Poor's – energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, telecommunications services and utilities.

The best way to understand the rotation order is to picture a roller coaster with the financial, utility and consumer sectors riding in the front two or three cars. The next three or four cars will be occupied by the telecom, technology and industrial sectors. And finally, riding in the last few cars would be the energy and materials group.

Picture now the current condition with the leading financial and consumer sectors riding in the front cars slowly climbing to the crest of the ride and eventually slipping over the crest and falling. We would now have a condition with occupants in the front end screaming in fear while the middle and back end cars still are enjoying the climb. Eventually the middle cars crest and you know the rest. The distance in time from the front end to back end is anywhere from 18 to 24 months or about one half or a complete bull market cycle.

Our weekly chart of three banks CM, NA and TD are displaying a potential double top on CIBC – a double top and a recent swing failure on the National and triple top on the TD.

It appears the front end of the market is peaking which is the first phase of an aging bull market. This now opens the door for a strategy that would cause us to reduce the front end sectors (financial & consumer) and to direct the proceeds into the back end sectors such as energy and materials

S&P500 Cyclic Commonality:

Just to review on the five cycle principles – Summation – Commonality – Variation – Nominality and Proportionality. Commonality is a condition when the cyclic peaks and troughs of the major stock sectors bunch together following periods of congestion or Variation. In other words when the peaks and troughs of cyclic rhythms and the relative magnitudes are similar when over-laid in graphic form – we have a significant buy or sell opportunity. The innovators of this graphic placement of the intermediate cycles were the great Ian Notley and Don Stark back in the early (1982) Dominion Securities Trend & Cycle days.

Our weekly chart is now displaying a cyclic commonality peak in three important S&P500 sectors - financial, industrial and technology which in total weight represent about 44% of the S&P500 index. Historically a summation of these troughs and peaks precedes a turning point or juncture. The lower high of the S&P Tech sector is also a setup for a pending cycle magnitude failure and that rarely has a good ending.  

Moving Average Crossover Studies

On February 13, 2013 I was a guest on BNN’s Market Call and the host Michael Hainsworth observed that a stock under discussion had just posted a Golden Cross “buy” signal. According the stockcharts.com the golden cross is a signal where the shorter moving average moves above the longer moving average. Usually, this term is associated with the 50-day moving average crossing above the 200-day moving average. Conversely a Death Cross is a signal where the shorter moving average moves below the longer moving average. Usually, this term is associated with the 50-day moving average crossing below the 200-day moving average.

I surprised Hainsworth when I brushed off the signal to be useless with a batting average of about 50/50.

Today I am posting two unrelated charts with the two moving averages and the buy and sell cross over signals. The first one is a daily of MCD which illustrates the potential of selling low and buying high on the crossover signals. A SuperCharts back test from Nov 2010 to date displays no winning trades during the recent congestive period.

The second one is a daily of the GLD gold ETF which also illustrates the potential of selling low and buying high on the crossover signals. A SuperCharts back test from Nov 2010 to date displays no winning trades during the recent congestive period.

These moving average crossover studies (we old timers call the work departure analysis) will work on a trending stock or index – but so will almost any study. My experience is to monitor the maximum spread or departure of the two averages for better signals on over-bought and over-sold conditions.

Natural Gas – Inverse H &S

A lot of North American natural gas producers had a pop last week and we wondered if the advance just a sucker rally or, are we into the early stages of a new bull market in the natural gas complex?

Our weekly plot of a continual the natural gas (NYMEX) futures contract displays an inverse Head & Shoulders (H&S) pattern along with a relative perform spread vs. the price of crude. It is important to see there are two unrelated studies displaying bullish signals for natural gas  

Just to review some inverse H&S rules

1) The left shoulder (LS) is usually larger in time than the right shoulder (RS)

2) The LS usually is accompanied by higher volume (not shown) than the RS

3) When drawing the neckline always extend it to (2)

4) The initial neckline breakout is measured from the lower RS to the peak at (1)

5) The price will usually decline from (1) back to (2) or support at the neck line.

6) The major move is measured below and above the neckline from the low of the head (H) to the peak at (3)

7) Finally – the bigger the pattern in time the better – this one spans over 6-months.

Next post we look at the ways to enjoy the new natural gas bull and perhaps we can repeat the success we had with the lumber space several months ago    

Natural Gas: A Bull or Bear?

A lot of North American natural gas producers had a pop last week.

The big question here is, was the advance just a sucker rally or, are we into the early stages of a new bull market in the natural gas complex?

Our weekly plot of a continual the natural gas (NYMEX) futures is clean with no technical studies except a relative spread vs. a crude futures contract. Now aside from the current improving relative perform vs. crude, there is a very important reversal pattern which I have not identified.

Two questions: – Can you spot the pattern and what investment decision would best take advantage of this chart? I will refresh in two days.

 PS: Take a look at a Jr. gold miner vs. GLD chart

Basic technical analysis:

Our weekly plot of the NASDAQ Composite is accompanied by two studies, a weekly MACD and a spread vs. the S&P500 smoothed by a 20 period simple moving average.

There are four distinct patterns here

(A) Note the series of lower highs of the MACD as set out in the upper plot.

(B) Note the series of higher highs of the NASDAQ Composite center plot

(C) Note the rising wedge as contained between the two rising and pinching trend lines

(D) Note the declining spread slipping under the 20 period smoothing illustrating poor performance relative to the S&P500.

In summary we have negative divergence between (A) and (B) in other words a series of higher highs on the index and a series of lower highs on the MACD. Also the rising wedge at (C) is bearish and finally the declining performance relative to the S&P500 is a negative for this important index. Don’t shoot the messenger.