Early Cycle Interest Rate Hikes:

The recent sell off in the global stock bourses in response to a sudden bounce in the US 10-yr T-note yields was a little overdone. The equity market does not always torpedo during a period of rising bond yields (or falling bond prices).

Bond yields will typically decline during periods following asset bubbles, recessions and bear equity markets. The subsequent doom and gloom period will then be followed by a recovery and during the early to mid point of an economic recovery the equity market needs the confirmation of modest rate increases. Early cycle interest rate hikes are a positive because they reflect an improving economy and the banking and insurance companies thrive in these early cycle rate hike periods and what is good for the banks is good for the stock market. There are many periods where bond yields rise at the same time as rising stock prices – the two periods displayed are just an example – so enjoy!

Chart one is the 2005 – 2006 period of rising rates and rising stock prices

Chart two is the 2009 – 2010 period of rising rates and rising stock prices

The Interest Rate Shock:

The “negative key reversal” such as occurred last May 22 has got a lot of play in the financial media. A negative key reversal day is a down day on a stock or an index that has two conditions. The price rises inter-day to trade above the pervious day’s high and then reverses downward to trade lower than the previous day’s low. A negative key reversal day is touted to be rare and very deadly. Some technical analysts claim this to be a rare event – it is actually occurs with great frequency with little consequence. For example the S&P500 stock index over the last six months had negative key reversal days on Feb 7, 2013. Feb 25, 2013, May 1, 2013 and May 22, 2013. We all managed to live through these nasty signals.

More notable is the recent bounce in interest rates. Last Friday June 21, 2013 a number of interest sensitive ETFs sold down to new 52-week lows. The list below is rather overwhelming. Perhaps the bond market is now “the sell of a generation.”

Name                                                  Security           Symbol

BMO Aggregate Bond Index               CAD unit          ZAG

BMO Emerging Markets Bond            CAD unit          ZEF

BMO Long Corporate Bond                CAD unit          ZLC

BMO Long Fed Bd Index ETF             CAD unit          ZFL

BMO Mid Corporate Bond                   CAD unit          ZCM

BMO Mid Fed Bd Index ETF               CAD unit          ZFM

BMO M-T US IG Corp Bd Hdg            CAD unit          ZMU

BMO M-T US IG Corp Bond                USD unit          ZIC.U

BMO Real Return Bd Index                CAD unit          ZRR

BMO S&P/TSX Laddered Pfd             CAD unit          ZPR

BMO Short Corporate Bond               CAD unit          ZCS

BMO Short Provincial Bond                CAD unit          ZPS

BMO SP/TSX E W Glb Bs Met           CAD unit          ZMT

BMO US Dividend ETF                       USD unit          ZDY.U

iShares 1-10 Yr Ld Cp Bd                   com unit          CBH

iShares 1-5 Year Ld Cp Bd                 com unit          CBO

iShares 1-5 Year Ld Gv Bd                 com unit          CLF

iShares Advantaged Cdn Bd             com unit          CAB

iShares Alter Comp                            Prtfl unit           XAL

iShares BRIC Index Fund                   com unit          CBQ

iShares DEX All Corp Bond                index unit         XCB

iShares DEX Govt Bd                         index unit         XGB

iShares DEX HYBrid Bond                 index unit         XHB

iShares DEX Long Term Bd               index unit         XLB

iShares DEX Real Ret Bd                  index unit         XRB

iShares DEX Short Term Bd             index unit         XSB

iShares DEX Universe Bond             index unit         XBB

iShares Dvrsfd Mnthly                         index unit         XTR

iShares S&P Latin Amer 40                unit                  XLA

iShares S&P/TSX Cap Mat                 index unit         XMA

iShares S&P/TSX Cap REIT             index unit         XRE

iShares S&P/TSX CDN Pfd                com unit          CPD

iShares S&P/TSX Glbl Gld                 index unit         XGD

iShares US IG Corp Bond                   unit                  XIG

iShrs Adv US High Yld Bd                   com unit          CHB

iShrs DEX ST Cp +                            Mpl Bd t           XSH

iShrs JPM USD Emrg Mrk Bd             unit                  XEB

iShrs S&P/TSX N A Pfd Stk    I           ndex unit          XPF

The Gold Bear downside target:

The current bear in the precious metal complex has served up many conflicting opinions from the analysts to include the gold bugs, mining analysts, fund managers and mining operators. If we look at a long term chart – semi-log scale (of course) we can tune out all of the noise of FED tapering, inflation, China, India, physical demand and the liquidation of the gold ETFs.

I am displaying a 15-year chart of the continual gold contract which includes the tail end of the 1980 – 1998 secular bear and the cycle count of the current secular bull.

First – note the current cycle count – now forming a trough at cycle # 5. A secular bull will normally contain at least 7 cycles so we can look forward to at least 2 more cycles before the current advance is over. Note the two Elliott Wave corrections reactive wave 2 and 4 followed by a final advance to the August 2001 peak and then introducing a classic A-B-C type correction

Second – note that very long term primary trend line (black) and the shorter secondary trend line (red). The secondary trend line was broken when gold broke $1400 and now the ultimate target is the primary trend line currently at $1150 and rising. In summary at the current $1284 there could be another $150 left on the downside, so we are almost there. We went through this peak and crash down to trend line stuff with the Apple - $700 to $400 correction on a post Wednesday, January 9, 2013 Apple Charting.

Keep in mid if we bounce from here that red secondary trend line (extended) will become overhead resistance.

A stock pickers market:

I see the shares of Sears Canada Inc. (SCC) popped 14% last Friday on the news of some big store closings. The market seems to value the company more if dead than alive. Another great shrinking Canadian retail legend is Hudson's Bay Company (HBC) the folks responsible for the decay and closings of Zellers. If you’re a stock picker you would avoid these turkeys  

If you’re a stock picker you would also avoid “timing the market” and also avoid the broader ETFs like the TSX listed XIU or the NYSE listed SPY because just owning the market is a no-brainer strategy.

At the close Friday I ran a stock filter on the TSX to scan for a weekly key reversal to the upside. I got about 70 names which included several oilfield service stocks and some base metals stocks. According to Stockcharts.com – A key reversal is 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

Now I don’t place too much importance to a one-day reversal so I only rely on weekly reversals. One example is Lundin Mining Corporation (LUN) $4.35 displayed in a chart along with money flow and the Coppock Curve setting out three low risk cyclic lows (A,B and C) that line up with a key reversal.

Two Surprise New 52-Week Highs

Every day I scan the new 52-week high and 52-week low list mostly because I have learned that when a stock makes the list following a quiet period – the first 52-week high or low won’t be the last.

My 52-week low rule is to never own a stock that makes a new 52-week low period. My 52-week high rule is to consider a stock for purchase if it makes the 52-week high list following a quiet or congestive period.

I see that at the close to-day Cascades Inc. (CAS) $5.38 (volume 335,372) and Precision Drilling Corporation (PD) $9.62 (volume 1,405,000) both posted new 52-week highs following a long congestive period. Most interesting is these stocks are cyclical names and quite a departure from all of those consumer and income related names. Disclosure – I own CAS and wished I owned PD

The NYSE Advance / Decline Line

I just returned from the Caribbean and after spending 7 days and nights on a sailboat – I am over the land sick period but I am still in the lay-back island mode.

According to Stockcharts.com – the Advance / Decline Line (AD line) One of the most widely used indicators to measure the breadth of a stock market advance or decline. The AD line tracks the net difference between advancing and declining issues. It is usually compared to a market average where divergence from that average would be an early indication of a possible trend reversal

They say a picture is worth a thousand words so I will let my chart do the taking  The upper plot is the S&P500 and the lower plot is the NYSE A/D line which is just moving below the 20 period simple moving average. So look for some selling in the leading sectors such as those “safe” consumer discretionary and consumer staples sectors in the US and Canada.

By the way – I apologize for those ridiculous Harry Dent Dow 3300 pop-up adds - more on that later.