A trading top in the NYSE advance / decline line:

A clip from the Getting Technical market letter - Interim Update December 4, 2013 GT1417 – page 2 – “A Probable Short Trading Correction”

“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 upper plot (see chart) is the S&P500 and the lower plot is the NYSE A/D line. Some worry now as the A/D Line is just now breaking DOWN below the resistance peaks of May, July and Sept.”

Summary: This is a trading call and should be ignored by longer term investors.

Note the S&P500 close of 1795 on the December 3, 2013 chart and at the close today the S&P500 was 1782. If that lower trend line is extended through year-end the downside target is only about 1750. That is not a lot of downside but just enough to scare Santa away this year.

Riding the Natural gas bull:

A clip from the Getting Technical market letter - Interim Update December 6, 2013 on natural gas: “Colder weather helped raise the price of the front-month natural gas futures contract, which has increased on ten consecutive trading days from November 19 to December 4. This has pushed near CME contract above the February through June 2014 contracts suggesting a short term over-bought condition. However, demand for natural gas could become significantly higher in December and January, when natural gas demand for residential and commercial heating increases. In any event – money is flowing into the natural gas producers – we should have some exposure” (see selections)

How not to play the natural gas bull: According the Horizons, “The Investment Objective of The Horizons BetaPro NYMEX Natural Gas Bull+ ETF (HNU) and the Horizons BetaPro NYMEX Natural Gas Bear+ ETF seek daily investment results equal to 200% the daily performance, or inverse daily performance, of the NYMEX Natural Gas futures contract for the next delivery month. The HBP NYMEX Natural Gas Bull+ and Bear+ ETFs are denominated in Canadian dollars, as the US dollar exposure of the underlying index is hedged daily.” (All that work for a management fee of just 1.15%).

Our natural gas vs. HNU chart sets out the returns from the Feb 17, 2012 peak to date with the upper plot up by 44% and the lower plot down by 41%

YTD through October the HNU has returned a negative (20.6%). The continual NYMEX Natural Gas contract has returned a positive 6% and the equity related BMO Junior Gas Index ETF (ZJN) has returned a positive 37%.

How to play the natural gas bull: If you’re bullish on the outlook for natural gas go with the BMO ZJN or do some stock picking among a basket of the gassy producers.

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.