A Pending Global Boom?

When asked to define the difference between a fundamental analyst and a technical analyst – I usually say (from personal experience) – the fundamental analyst will think they are right and the technical analyst will think the market is right.

Lately many technical analysts have been watching the U.S. Russell 2000 - small-cap index or the clone ETF the IWM - which is the group of stocks that in early March began to trace out a typical A-B-C type correction which so far has been holding at the important 200 day or 40 week simple moving average - important to technical analysts because the Russell 2000 is bellwether for the U.S. domestic economy. Also important is the Dow Jones Transportation Average which this week closed at a new 52-week high powered by the rails and the airlines. So is the domestic sensitive Russell 2000 over-sold or is the domestic / export sensitive Dow Transportation Average over-bought? The answer may be the quiet new 52-week high of the global trade sensitive Guggenheim Shipping ETF (SEA) which is a clone for the Dow Jones Global Shipping Index which measures the stock performance of high dividend-paying companies in the global shipping industry. The market is predicting a global economic boom 

Watch the Russell 2000

Yesterday I had a conversation with one of my market letter subscribers – who is an investment advisor – and he was worried about that Sell-in-May thing. Of course he knows a prudent investor would never sell out of a good portfolio just because it is May but if one is worried about various fundamental and technical issues – one could reduce and raise a little cash

I told him to watch the Russell 2000 - small-cap index or the clone ETF the IWM - which is the group of stocks that got us into this worried mode. The IWM peaked in early March and has since traced out a typical A-B-C type correction – also in the process slipping below the 200 day (or 40 week) simple moving average. We need to see if the IWM holds at the Feb 5 pivot low of about 107. If we fail here the next support on a P&F is 98 – if we hold and recover we need to get above the 200 day of about 110.50 to put out the fire

Is the Russell 2000 in trouble?

I saw this item on maketwatch.com – banner - ETF Focus Archives | Email alerts - May 9, 2014, 5:01 a.m. EDT - Small-caps’ slide reflects a market in trouble - Opinion: Stock bulls find danger under the Street’s surface.

The author who I assume is a technical analyst is worried about the failing leadership of the smaller US companies. The author states – “But under the surface troubles loom with markets. (See small-cap chart below)” – a weekly IWM etf with a possible head & shoulders top – a very scary technical call The author then goes on to display a number of free charts from stockcharts.com

So here is the problem with the Russell 2000 - “Small-caps’ slide reflects a market in trouble” analysis. First the author overlooked the non-confirmation of the larger cap Russell 1000, the Dow Transports, the Dow Industrials and the SPDR Financial sectors. Second the author overlooked the structure of the Russell 2000 to be a basket of domestic focused business – unlike the global focused business of the larger cap Dow Industrials and the S&P500. Most likely we are just seeing a shift of capital away from domestic focused co’s to global focused co’s Third this head & shoulders pattern is not valid unless the there is a broken neckline – which did not occur – (more like a simple A-B-C correction) and finally the Russell 2000 can flash a false “buy” signal as it did in mid 2008 just before collapsing - and the false “sell” signal as it did in mid 2011. Finally the cumulative NYSE advance decline line (which leads) has not yet broken down

Is there a housing price bubble?

Last week the Toronto Real Estate Board President announced that during April – the first full month of spring – Greater Toronto REALTORS reported a 1.8 per cent year-over-year increase in sales through the TorontoMLS system. Total April 2014 sales amounted to 9,706, compared to 9,535 transactions in April 2013. The average selling price for April 2014 sales was $577,898 – up by 10.1 per cent compared to the April 2013 average of $524,868.

I am not a realty expert but the record average selling price is likely due to a shortage of listings, a seasonal buying binge and cheap money.

So which is the better long term investment; residential property or the broader stock market? Currently over the past 10-years the math favours stocks as measured by the S&P/TSX 60 index or the investable clone the iShares ETF (XIU). The 10-year annualized return on the Toronto MLS average selling price is 6.4 percent and over the same period the XIU returned 6.1 percent – but housing attracts realty tax and repairs and the XIU attracts dividends - but you have to live somewhere and so maybe best to diversify and have exposure to both markets.

Scanning the TSX financial sector:

In the last post I claimed the experienced technical analyst (the older guys) will track the asset managers or financial related issuers because they tend to lead the broader equity markets. Last night I ran a stock scan (or filter) of the TSX listed stocks with the filer argument set at a new 10-week high. I have found through back testing that a new 10-week high usually leads to higher prices over the short term – being about 10-weeks – the reverse applies to a new 10-week low. Stocks under $2 and low volume were rejected.

Thirteen stocks were selected and to my surprise – 3 were banks BNS, CM and TD. Our chart today is that of Canadian Imperial Bank Of Commerce (CM) plotted above Toronto-Dominion Bank (The) (TD) (weekly data) clearly displaying the new 10-week highs, another bullish sign for the broader Canadian equity market