Successful Investing vs. Urban Myths

Market timing is a failed strategy – if you wish to add alpha - seek out the current dominant theme: The dominant theme is a period of rapid expansion of an industry group due to innovation or in reaction to changing economic conditions. Investors and portfolio managers who can correctly identify and ride the dominant theme will likely generate several quarters of above market returns.

The first modern dominant theme was the new economy technology boom of the 1980’s and 1990’s that followed the 1973 Arab Oil Embargo. We had the introduction of the PC and the Internet thanks to the humble beginnings of Cisco Systems Inc., Intel Corporation and Microsoft Corporation. Dumb automobiles became smart thanks to fuel injection and computers.

The second modern dominant theme was new millennium emergence of the global economy and the resulting commodity price boom that ended abruptly with the global financial crisis bust of 2007 – 2008. The subsequent recovery from early 2009 has exposed several new dominant themes.

We have had the U.S. housing recovery and the subsequent rebound of the housing and lumber stocks. We have a boom in the aerospace & transport sector driven by a mix of high energy costs and a travel / consumer boom which has the major airlines up grading their fleets along with municipalities up grading their transit networks.

I will address these issues plus a new theme at the Toronto World Money Show. To register follow this link: http://www.moneyshow.com/tradeshow/toronto/world_moneyshow/?scode=033174

The NYSE A/D Line Refresher:

According to Stockcharts.com – the Advance / Decline Line (AD line) is 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 now breaking up and out of a large ascending triangle to confirm the new highs on the S&P500. Ignore the doom and gloom crowd for now.

Sector Rotation Refresher:

A clip from Getting Technical letter - Interim Update October 7, 2013 GT1413 a refresher on using natural stock sector rotation: The various stock sectors advance and decline in reaction to the expansion and contraction of the business cycle. Typically the “front end” of the market – the Financial, Telecommunications Services and Utilities begin to rise in anticipation of improving business conditions and a low interest rate environment. This stimulates the “middle” of the market and the Technology and Industrial stock sectors begin to rise in anticipation of improved corporate spending. The growing demand for goods stimulates the need for raw materials and the “back end” of the market – Materials, Mining and Energy, begin to advance

As the economy expands, inflation fears trigger higher interest rates and the “front end” of the market peaks in anticipation of a slowdown in consumer spending. As the slowdown becomes evident the “middle” sectors peak as industrial demand slows eventually dragging down the lagging commodity sensitive “back end” stock sectors.

Sector                                     #         

Financials                                Leading - Interest rate sensitive

Telecommunications Service Leading - Economy sensitive

Utilities                                     Leading - Interest rate sensitive

Consumer Discretionary        Coincident - Economy sensitive

Consumer Staples                  Coincident - Defensive

Health Care                             Coincident - Defensive

Information Technology          Coincident - Economy sensitive

Industrials                                Coincident - Economy sensitive

Energy                                     Lagging - Commodity sensitive

Materials                                  Lagging - Commodity sensitive

So here is the problem for the bears – The North American Financials are still leading having posted as a group - new 52 week highs at the close on Friday October 18, 2013. By the way – the last time the SPDR XLF peaked was in May 2007, 5 months ahead of the S&P500 peak of October 2007.

TSX Energy prints a first 52 week high

There are two basic rules for the new 52 week high/low list. The first new 52 week high will not be the last - and the first new 52 week low will not be the last. Today I see both the BMO Junior Oil Index ETF (ZJO) and the iShares S&P/TSX Capped Energy ETF (XEG) posting new 52 week highs

According to BMO, “The BMO Junior Oil Index ETF has been designed to replicate, to the extent possible, the performance of the Dow Jones North America Select Junior Oil Index, net of expenses. The Fund invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index.”

In any event the smaller cap ZJO leads the larger cap XEG so watch for the lagging XEG to play catch up and break up above the old September 2012 high.

Market Timing is for Dummies

Every day I take a peak at the new 52-week high / low list in order to listen to what the market is telling me. At the close of October 15, Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank Of Commerce, National Bank of Canada, Royal Bank of Canada and the iShares CDN S&P/TSX Capped Financials Index Fund were all printing a new (and perhaps an all time high) 52-week high.

I also see some economy sensitive deep cyclical issues like ATS Automation Tooling Systems, GENIVAR Inc and Magna Intl, Inc at new 52-week highs. Clearly the 2009 - 20?? bull remains in place. Timing this market is for dummies and to bail out of good stocks in hope of buying back cheaper is a failed strategy.

The overlooked TSX Industrials:

The problem with some of the TSX sub indices is they have no investable investment product (ETF) replicating the sector. Examples would be TSX Health Care, TSX Consumer Discretionary and the TSX Telecom sector. Of course the problem is the ETF manufactures are reluctant to build an ETF around a thin sector such as the TSX Health Care group.

Here is the problem – I believe the TSX Industrial Index just printed today a new 52-week high and an all-time high – and thanks to the TSX web site there is no data on this. Yahoo Finance has some info but you have to do some work to confirm an event that is basically ignored by the business media AND the TSX web site.

Now there is an obscure investment product that allows investors to participate in the TSX Industrials - which by the way is a deep sector with 23 components. That obscure investment product is the TSX listed BMO S&P/TSX Equal Weight Industrials Index ETF (ZIN) which yesterday traded 240 shares.

Wake up investors – this thing is the only thing out there for getting into the Industrials.

Please – no worries about liquidity – the ZIN is an open ended trust and so the market makers are deep on both sides of the net asset value.

Relative Averages Explained:

Relative Strength (not to be confused with the RSI indicator) is a measure of price trend that indicates how a stock is performing relative to other stocks in its industry.  We can also measure the relative performance of each component of any index. Relative strength is typically a numerical measurement expressed as a percentage. For example, if a stock has a relative strength of 75 it has outperformed 75% of the stocks over a specified period.

Investor’s Business Daily publish their Relative Price Strength Rating that appears for each stock is calculated by comparing its price change over the past 12 months to that of all other stocks in the tables. Results are rated on a scale from 1 to 99, with 99 being best.

At Getting Technical our approach is unique in that we use Relative Analysis (RA) to measure the price performance of a stock vs. the price performance of an appropriate index over several time periods. Note our Air Canada weekly vs. the TSX 60 Index weekly This methodology allows us to scan of filter based of six relative conditions –.

Bottoming:

Early Out-perform:

Established Out-perform:

Topping:

Early Under-perform:

Established Under-perform:

In a filter / scan date Oct 4, 2013 for bottoming TSX listed stocks some symbols selected were ABX, ATH, ATP, EDR, HBM, SLW, T and TGL.