Charting the TSX Materials:

In a Getting Technical market letter - Interim Update January 17, 2014 GT1423 – I looked at the TSX Materials – “A direct beneficiary of a low Canadian dollar.”

The TSX listed clone for the S&P/TSX Capped Materials Index is the iShares S&P/TSX Capped Materials Index Fund (XMA). The iShares S&P/TSX Capped Materials Index Fund (XMA) is a basket of 51 stocks related to commodity sensitive issuers, to include gold and base metal miners, potash and lumber companies. See comments Interim Update January 7, 2014 GT1421. The Materials sector is currently about 11.25% of the TSX Composite by weight – well down from the 19% weight just 12-months ago.

The TSX Materials Sector - Sub Sector Breakdown

Industry                                   % of Sector

Metals & Mining                       68.94%

Chemicals                               26.20%

Paper & Forest Products        3.21%

Containers & Packaging         1.33%

The strategy at work back in early January was for a TSX Materials recovery because the late December tax-loss selling was likely the end of a brutal bear that reduced the TSX Materials to a 11% weight of the TSX Composite – down from almost 20% just a year ago. Add in the mechanical–like quarterly be-balance of many portfolio managers who became over-weight in the financial and consumer sectors and under-weight in the materials sector.

Our chart is a weekly plot of the XMA vs. the TSX large cap XIU along with two simple moving averages, There are four bullish technical signals at (A), (B), (C) and (D) – can you identify them?

A Negative January Barometer:

Just to review – once again, The January Effect is the bullish tendency of the smaller companies (the Russell 2000) to out perform the large companies (the Dow or the S&P500) during the month of January. The “as January goes – so goes the year” thing is actually the January Barometer which relies on the market direction during the first trading week of January – and then the entire month of January.

These are seasonal signals found in the Stock Trader’s Almanac which was first published in 1972 by Yale Hirsch. The Almanac is an annual publication which I acquire once every ten years – because seasonal books tend say the same thing they did the year before. How many ways can you say “sell-in-May and go-away”?

This year we got a negative January Barometer which according to the 2010 Almanac has had “only five significant errors in 59 tears.” Just to review the last few years – the 2008 barometer was negative, the 2009 and 2010 were negative and the 2011-2012-2013 barometers were positive. The 2014 January Effect in the US was flat to weak.

Seasonality aside – I would be more concerned about to-day’s chart which displays the SPDR KBW Regional Banking ETF (KRE). Note the cycle magnitude failure at (A) and the swing failure of the relative perform at (B) – not a good omen. The KBW leads as it did back in early 2007 when it broke down below the 200 day moving average.

Bullion – still in an up-trend:

On a past post on Monday, November 25, 2013, “Gold and the A-B-C Correction” I displayed a 15-year gold chart and wrote, “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).”

Ok - so now let us revisit the same chart - now updated to January 29, 2014. I am using the same trend lines with a semi-log scale. Don’t forget – you can’t place trend lines on a linear scale if the price doubles. Observation; bullion seems to have completed the long bear phase as displayed in the A-B-C corrective period. All we need now is for the gold complex is to confirm the new bull and begin to operate inversely to falling stock markets.