North American Technology – stealth leadership:

We at Getting Technical use the long term (monthly data) and intermediate term (weekly data) sector momentum tables to track the rotation of various stock sectors. Often a sector will display strength on the monthly tables and conversely display weakness on the weekly tables - a condition that can mute the longer term trend. The ideal condition is for a sector to display strength – or a high rank on both the monthly and weekly tables. Currently the technology sector is printing a high rank in both the weekly and monthly Canadian and U.S. sector momentum tables.

In Canada the go-to proxy for the technology sector is the iShares S&P/TSX Capped Information Technology Index ETF (XIT) which replicates the performance of the S&P/TSX Capped Information Technology Index, net of expenses. The index is comprised of constituents of the S&P/TSX Composite Index in GICS Sector 45 – and the constituents are capped at a 25% weight.    

The top five holdings by weight are: CGI Group Inc (GIB/A) 24.64%, Open Text Corporation (OTC) 19.78%, Blackberry Ltd (BB) 15.04%, Constellation Software Inc (CSU) 15.00% and DH Corp (DH) 7.21% to total almost 82% of the sector by weight. A technical study on one component – Blackberry (TSX-BB) suggests the downside may be limited based on long term monthly data – and the two large triangles – the bearish descending triangle of 2008 – 2011 and the current possible reversal symmetrical triangle. Note the money flow numbers suggest exhaustion on the buy and the sell side.

     

At the Toronto World MoneyShow:

I presented at the Toronto World MoneyShow on October 18, 2014 and explained how I used technical analysis to select at least 5 takeover candidates during my time as a sub-advisor to the Union Securities Hybrid program. For a copy just post a blog comment or contact me at info@gettingtechnical.com

I took questions on the fly and several centered on my views of the recent global sell-off in the equity markets – I was prepared and proceeded to display several crisis-related graphic – front page - headlines displayed by the financial press.

The first was a cartoon of and upside down bull (Barron’ s October 19, 1987. The second was a list of “Canada’s hottest dot-coms” (Globe Report on Business June 22, 2000. The third was a cartoon of several great US financial giants being swallowed by a giant black hole, “A Day Of Reckoning” (Globe Report on Business September 16, 2008). The fourth was a full page one-day dive of the Dow Industrials, “Worst one-day fall etc.” (Globe Report on Business August 5, 2011 and finally a full page graph of the TSX Comp and the TSX Energy sector crashing, “FORTY-DAY FREEFALL”, (Globe Report on Business October 15, 2014). In each example these huge banners were published very near to important troughs or peaks, - a great contrarian indicator.

At least the Globe is creative, a Toronto Star item - Monday, October 20, 2014 just rehashed an old correction classic “Why this market correction is no cause for panic:” The author advises the readers to, “turn off the TV. Ignore the noise” and that “the best companies pay dividends“- advice from an author with no financial accreditation.

Well, some of the “best companies” had big declines from their recent 2014 price peaks, Bank of Nova Scotia -15%, BCE Inc -10%, CDN Natural Resource -29%, CNR -16%, Enbridge -18% and TransCanada – 22% - I could go on. The chart today displays a low yield growth company plotted above a big dividend payer – and how about those dividend paying Dow components - Coca-Cola Co. (KO), McDonald’s Corp (MCD) and the late great IBM – all big dividend payers and share buy-back losers

Some bullish signals from the US financials:

I have learned that (thanks to the great Ian Notley) – no bull market can operate without the leadership – or participation from the financial sector of stocks. This rule would apply to most of the mature global equity markets.

Now according to Sector SPDRs the SPDR Select Sector Financial (XLF) is a wide array of diversified financial service firms are featured in this sector with business lines ranging from investment management to commercial and investment banking. Among the companies included in the Index are JPMorgan Chase, Wells Fargo, and BankAmerica Corp. Currently the top weight is Berkshire Hathaway B (BRK.b) at 9.0% followed by the usual suspect banks and then Goldman Sachs Group Inc, (GS) at 2.6%.

Note the chart displaying Berkshire – weekly above Goldman – weekly plotted with their respective 10  & 40 week simple moving averages – clearly both still trading above a rising 40 week (or 200 day M/A) – so there is no break in these bellwethers. By the way both lead us out of the 2008 financial crisis with the Berkshire bottom in Feb 20, 2009 and the Goldman bottom in November 21, 2008 

Time to watch the Russell 2000:

Just the repeat once again on market breadth “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.  

Our latest NYSE advance / decline line displays a break down below the pivot – the early August lows. The problem now is the S&P500 has just confirmed the A/D line break by also breaking below the early August lows

Now the pain is close to the end as the Russell 2000 (the first the break down) currently at about 1049 - is only 50 points above major support as viewed by a point & figure.

Market breadth – Still No Breakdown:

Just the repeat once again on market breadth “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.”

The last time we looked – the breadth problem was acute as we needed the A/D line to hold at the early August lows to complete a shallow A-B-C type correction. Now as displayed in the latest chart as of the Friday Oct 3, 2014 close, we can see both the S&P500 and the NYSE Advance / Decline line holding just above the respective early August lows. So far we have just a rolling sector rotational correction as the energy & materials trade inversely to the consumer, financial and health care sectors. Most notable is the Dow Transports bouncing back above the short 50 day M/A which is well above the longer 200 day M/A

Canadian Energy stocks and the big myth:

The big Canadian energy names, are they great long term investments? Well the experts seem to love them – go to stockshase.com and you will find the CNQ lovers – and I quote, “His favourite.  Superbly run, Thinks the market is really ignoring that this company gets a lot of their effective pricing from Western Canada Select, This, along with Suncor (SU-T) are probably the 2 premier energy stocks. Has done well this year, Cheap and generates cash flow. Pays a nice dividend. If this is in your TFSA and you are looking out a few years, this is a fine place to be, and - A very dominant producer in the western Canada space. International operations in the North Sea and West Africa. Extremely well managed.”

As for the Suncor lovers, and I quote, “With oil by rail, maybe Keystone does not matter.  They are a refiner with upstream and downstream operations.  This is a very conservative company.  They had very good dividend increases.  Worth buying here, Growth in cash flow over the next number of years is tremendous.  Suncor (SU-T) or Canadian Natural Resources (CNQ-T) for the growth? These are both excellent choices, His model price is $79, an upside of 81%. He is willing to be patient and wait for the value to be created. – and Likes it.  Even though he thinks oil prices are vulnerable, SU looks attractive in the long term.”

The quotes are out of context but the message is clear. The very long term charts display several years of no capital returns – both are components of the S&P/TSX60 index and among the worst performers of the index since their relative 2006 – 2007 price peaks. If you’re looking for growth such as we have in consumer, health care, industrial, financial and the technology sectors don’t look to the big energy names anytime soon – for traders only. Don’t get me started on Crescent Point