Fairfax Financial is confusing the experts:

Over the past several days I had many questions on the outlook for the price direction of the Canadian bank stocks. So here is the technical opinion based on my work.

First, there is great cyclic commonality among all of the big five banks and so we have a monkey-see, monkey-do situation. Secondly all of the banks are trading too far above their respective 50-day simple moving averages as measured in historical terms. Third all are trading above their respective rising 200-day simple moving average. Fourth is the peaking momentum studies and finally all have posted recent new 52-week highs.

So a reasonable strategy would be for long investors to reduce because the group is likely to correct down to their respective 50-day moving averages BUT retain some exposure as the banks will likely resume the upward trend which remains in place as evidenced by their rising 200-day (or 40-week) moving averages along with the recent string of new 52-week highs. The ultimate top is not yet apparent and so the bull market in most of the financial sector remains in place – except for Fairfax Financial Holdings Limited (FFH) which closed today at $405.00

According to the company Fairfax is a financial services holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and investment management.

The experts are divided on the outlook for FFH as published on the Stockchase.com web site. According to Stockchase.com, “This site is used by investors to track what stock experts say. It is useful as an online investing tool for due diligence, and for getting a feel for how companies are thought of by investment experts. This site should not be your only resource or reference, but it should be one of the investing tools in your arsenal for wise investing in the stock market.”

Some recent opinions:

Hank Cunningham 2013-07-17 DON’T BUY on FFH then $422.00: “How comfortable should a person be in investing in this companies debt, dated 2020 to 2022? He would not be very relaxed as he is not very comfortable with companies that he doesn’t understand. He doesn’t understand their balance sheet or their strategy. It is a fluid situation and this is a long-term corporate bond with a rating of BBB minus, not strong credit.”

Barry Schwartz 2013-10-09 BUY on FFH then $435.50. “He owns a series of rate reset shares.  If they are trading below $25 then the market thinks they won’t be called.  They are fairly illiquid.  They have not recovered since the announcement of tapering and may be a good investment.”

Don Vialoux 2013-10-11 BUY on FFH then $440.60. “One of the more volatile financial services company in Canada. Chart shows a nice breakout over a long period of time, which is very positive. Trading above its 20 day moving average and is outperforming the TSE. This gives it a technical score of 3. Looks very interesting.

Cunningham is a fixed income guy who does not do technicals. Schwartz is a fundamental value guy who hates technicals and Vialoux is clearly voicing a technical opinion.

When I look at chart #1 which is a weekly plot of FFH displaying poor relative strength vs. its peers the TSX Financial index – in this case the clone XFN, Note the 2+ years of relative under perform. Clearly FFH has missed the greatest financial bull since the 1990’s. The recent collapse is very negative – see the money flow on chart #2

When I look at chart #2 which is a monthly plot, I see a string of cycle magnitude failures from 2009 and recent declining money flow numbers. I think Cunningham has made the correct call on this one.

Gold and the A-B-C Correction:

In a Getting Technical Interim Update November 21, 2013 GT1416 on page 4 - I commented on the precious metals complex.

“Watch the large gold miners The larger gold producers dominate the TSX Materials Sector by weight and the performance is displayed on the Weekly MOM Table on page 3. The TSX Materials sector is currently a # 12 rank on the long term monthly rotation MOM Canadian table. Note Barrick Gold (ABX) and Goldcorp (G) are so far - holding at or above their important June and July 2013 lows.

Strategy: hold on to current positions in the gold complex – but do not add-on in here

Bullion – The long term trend in bullion is still up as displayed in the 15 + year plot to the left (insert). Currently the 12-year primary trend line is at the $1200 dollar level. This important level was tested during the (C) corrective wave low of June 2013 when bullion bottomed at $1183.

The current wave of selling should not violate the June 2013 lows – see support from the major producers (above).

Market Breadth & the 52 week high/low line

I have devoted several posts to detail the importance of using the new 52-week high / low list as a strategy to screen stocks for buy or sell candidates. The new 52-week high / low list can also be used to measure the strength of the prevailing trend.

For example in the NYSE at the close Friday November 15 we had 380 new 52-week highs and only 30 new 52-week lows. During a bear trend the new 52-week high / low list would be reversed new 52-week lows outnumbering the new 52-week highs.

When used as a breadth study we need more than one good day but rather a long series of stocks making new highs. The best approach is to study the cumulative total of new highs less the new lows. This is not the same study of the popular AD line that tracks the net difference between the DAILY advancing and declining issues.

The chart is a weekly of the S&P500 plotted above the weekly cumulative 52-week hi/lo line which smoothed by a 20 period simple moving average. I have marked the two sell and two buy signals issued over the past seven years. When I get a sell signal – you will be the first to know.

Buy and Hold in the Real World:

More on why buy & hold depends on what you buy and hold.

On a previous post I reviewed the April 2012 the Getting Technical market letter Canadian Multi-Nationals Buy & Hold portfolio which over the long term was to outperform the broader stock indices. At the close November 8, 2013 the selections returned 62% outpacing the TSX Composite and the S&P500 by a wide margin.

The Canadian Multi-Nationals Buy & Hold portfolio was selected using only technical analysis as a tool for portfolio construction and maintenance. This is the flip side of technical analysis being associated with speculative market timing and day-trading.

Strategic Planner, Jack Di Nardo of Wealthworks Financial sent me his latest Client Bulletin - November 2013 (Investing vs. Trading) and I quote a portion:

“Trading, which most people confuse with investing, includes any methodology that takes its cues from the price action of various markets, such as, technical trading, day-trading, and momentum (earnings, price or volatility amongst others) trading or buying on rumours because your friends insist the price of the stock is going to go up!

There are basically only three broad methodologies used for selecting individual companies with everything else being a variation upon these. They are value-based, growth-based or growth at a reasonable price (GARP) based security selection. But at the end of the day they are all dependent upon expected profit (and economic) growth over time.”

It appears Jack is claiming technical analysis is for speculative trading and not for use in portfolio construction and maintenance.

I am sure many technical analysts would not agree with Jack’s opinion because many of us have and currently use technical analysis for portfolio construction and maintenance.

A good “real money” example was the Union Securities Hybrid Investment Program, managed in a discretionary manner by a registered portfolio manager (PM) using both "fundamental" and "technical" analytical tools to select securities. The PM and Getting Technical Info Services (GT) would split the Hybrid Portfolio with about one half of the portfolio being fundamental (PM) selections and the other half being technical (GT) selections.

The Union Securities Hybrid Investment Program was closed in mid 2012 when in October 2012; all of Union’s client accounts and assets were transferred to another IIROC Dealer Member.

I did however track an original “Mandate #4” Hybrid portfolio beginning with all the equity components at November 9, 2011 and hypothetically held through to November 12, 2013. The Union Hybrid Mandate #4 program was in the aggressive growth category that allowed up to an 80% exposure to equities and 20% to fixed income.

Summary of Returns; November 9, 2011 through to November 12, 2013.

Our benchmark The TSX Composite had a 2 Year capital return of +9% over the study period.

 

There were 12 fundamental selections with a 2 Year capital return of -8 %, see table #1

Table #1

 

Observations:

The fundamental (PM) would have done OK except for two problems that seem to be common in many fundamental methodologies. Our PM was drawn into a value trap (RIM or BlackBerry) and our PM was caught in the need-to-own-gold as a hedge trap.

I can tell you that in the world of money management, when new investors entered into the Hybrid program they were placed into the same fundamental selections as the earlier investors. So late comers paid more for units of the stronger positions and they paid less for units of the weaker positions.

We know through the study period about one third of the selections were declining and so in this situation the newer investors did better (or lost less) than the older investors.

There were 15 technical selections with a 2 Year capital return of + 32% see table #2

Table #2

Observations:

The technical (GT) selections did well by avoiding the compelling stories that can put a positive fundamental spin on the wrong stock at the wrong time.

All of the GT selections were based on technical conditions such as long bases, improving relative performance and rising long term moving averages.

Once again new investors to the Hybrid program were placed into the same technical selections as the earlier investors. So as late comers they paid more for units of the stronger positions and they paid less for units of the weaker positions.

We know through the study period most of the selections were advancing and so in this situation the older investors did better (or lost less) than the newer investors.

A Buy and Hold Strategy:

According to Investopedia Buy & Hold is a passive investment strategy in which an investor buys stocks and holds them for a long period of time, regardless of fluctuations in the market. An investor who employs a buy-and-hold strategy actively selects stocks, but once in a position, is not concerned with short-term price movements and technical indicators.

This is opposed to the market timers who think you can trade in and out of the market when they get signals from various fundamental of technical indicators.

The key to buy & hold is that it depends on what you buy and hold.

Back in April 2012 the Getting Technical market letter set up a Canadian Multi-Nationals Buy & Hold portfolio (GT letter April 27 2012 #GT1374) based on the assumption that most TSX listed multi-nationals would, over the long term outperform the broader stock indices. At the close November 8, 2013 the selections have returned 62% outpacing the TSX Composite and the S&P500 by a wide margin

The Dow Transports at all time highs

Charles Dow. (1851-1902) created both the Dow Jones Industrial Average and the Rail Average (now known as the Dow Transportation Average). It was his work on primary and secondary trends that proved to be the foundation of modern technical analysis.

Dow’s concepts are known to-day as Dow Theory. One concept states that the averages must confirm each other.  Dow argued that no important bull or bear market could occur unless the industrial and the rail (transport) averages gave the same signal or, confirmed the new change in market trend.  In other words both averages had to move above a previous secondary peak to generate a bull market signal. This price “confirmation” by both averages should occur approximately at the same time within a 6 month time window.

On November 4, 2013 the Dow Transports closed at an all-time high above 7100 and well above old resistance at the 6600 & 6700 level. The advance was impressive with 19 of the 20 components up on the day. Conversely the Dow Industrials have spent the last four months trading below resistance at 15700 and have not yet confirmed the “blue sky” position of the Dow Transports.

The bulls will need the Dow Industrials to print new highs over the next several weeks and the bears will need the Dow Industrials to stall here AND have the Transports reverse and drop below the 6600 level. No need to panic because these signals tend to take time to set up

Covered Call Strategies Protect What?

I have always reasoned that a covered call strategy will for a small premium; provide opportunity for an investor to give away a rising stock and to hold a losing stock.

According to Horizons Investment Management Inc. their HXT Horizons S&P/TSX 60 Index ETF seeks to replicate, to the extent possible, the performance of the S&P/TSX 60 Index (Total Return), net of expenses.

And according to Horizons Investment Management Inc. the investment objective of their HEX Horizons Enhanced Income Equity ETF is to provide unitholders with: (a) exposure to the performance of an equal weighted portfolio of large capitalization Canadian companies; (I assume the HXT) and (b) monthly distributions of dividend and call option income.

Horizons go on to state the HEX will mitigate downside risk and generate income. The 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.

In reality when the two ETFs are displayed an investor may not impressed with the capital performance of the HEX in an “up” market. I can just imagine what this turkey will do in a “down” marke