TSX TrendWatch Weekly

Just to be different, I’m going to provide you with not a quarterly, but a thirdly report on our progress this year in the Canadian equity markets. It’s the end of August and we’re 2/3rds of the way through the year. But first, last week’s action.

WEEKLY REVIEW…  After a painfully boring week, week before last,  last week wasn’t much better, although the S&P/TSX Composite Index managed to tack on a +1.4% gain.  That’s better than the 0.5% or less gains in the major American indexes.  The S&P/TSX Venture Index  took a small loss over the week of -0.3%

We’re certainly not going to complain about the fact that 82% of the stocks in the S&P/TSX Composite Index have positive trend values, nor that the average trend value is +1% per week! But you don’t have to go with average performance when our DATA & CHARTS workbook lets you find all those that are performing much better than average.

SECOND THIRD REVIEW… It still surprises me that there is lingering pessimism about the equity markets, when there have been such amazing gains year-to-date.  The S&P/TSX Composite Index is up +19% so far and the S&P/TSX Venture Index is up an amazing +40%. The Nasdaq Canada Index (mostly Canadian tech stocks listed on the Nasdaq) is up an incredible +65%.  And, again, these are averages… many component stocks in those indexes did much better.

What is perhaps even more amazing is that the equity markets were still dropping through January and February.  The gains would be even more impressive if you simply looked at March through the present… but that’s not our timeframe here and we couldn’t have predicted that bottom anyway.

So which market sectors have performed best?  All of the stocks in the S&P/TSX Composite Index are slotted into one of ten categories. MATERIALS and ENERGY carried us upward through the last bull market and many have said that they constituted the bubble that burst and drove us into the subsequent bear market. Maybe so, but those sectors have bounced back quite nicely since the bottom in early March.

The chart above tells the sector story year-to-date.

The sectors tagged with a ticker symbol prefix are those which have a dedicated ETF, so you can “buy the sector” without being a stock picker. ETFs are an option if you are super-conservative or just want instant diversification.  We warn you though that three of these indexes - HEALTH CARE, INFORMATION TECHNOLOGY and TELECOMMUNICATION SERVICES - have only 4-5 constituent companies. That doesn’t offer much diversity and the index may be showing a distorted view of what’s really happening in that sector. CONSUMER STAPLES and UTILITIES have just 9-10 companies… better, but not great. So we’re left with five sectors that have 20 or more constituents and would be good ETF candidates, if you want diversity through one investment and don’t want to play the stock picking game… FINANCIAL SERVICES, INDUSTRIALS, MATERIALS, ENERGY and CONSUMER DISCRETIONARY look like the best bets. Unfortunately, ETFs are available for just FINANCIAL SERVICES, MATERIALS and ENERGY so far.

I would definitely not consider the groups with the smallest number of constituents representative of their respective markets. For example, Research in Motion (RIM) is up about 62% year-to-date and has single-handedly carried the INFORMATION TECHNOLOGY index to current levels. Similar examples could be given for HEALTH CARE and TELECOMMUNICATION SERVICES (both positive and negative).

So, my take on the chart above is that FINANCIAL SERVICES rule, followed by ENERGY, MATERIALS, and INDUSTRIALS.  The improvement in INDUSTRIALS is relatively recent, but promising in terms of a revival of interest in some of the companies hardest hit by the recession. The current outlook for MATERIALS and ENERGY seems a little soft right now, but that could change once demand returns.  FINANCIAL SERVICES and INDUSTRIALS may be the best place to focus one’s attention for the time being.

Averages aside, our typical top-down strategy is to identify the best performing sectors, then look into the constituents of the best sectors and buy the best performing stocks there.  The net result could be at least a few returns like those you see below in our Top 20 year-to-date.

We’ve appended a sector abbreviation after each company name. Also, the two stocks that continue to rise at least 1% per week with 70% consistency or more are tagged with a “*“. You can check on the trend and consistency values of the others in our DATA & CHARTS workbook.

You’ll see that while stocks like RIM get a lot of media attention, its year-to-date return of 62% is still substantially lower than those you see above. Our Top 20 is almost all MATERIALS and ENERGY stocks. These shouldn’t be ignored going forward into our “final third”, but as mentioned earlier FINANCIAL SERVICES and INDUSTRIALS are also looking interesting.

Finally, although I’ve dismissed the S&P/TSX INFORMATION TECHNOLOGY and HEALTH CARE indexes as being inadequate measures of what’s happening in those sectors in Canada, some US counterparts suggest that these areas are thriving too.  The CBOE Technology index is rising +1.3% per week with 72% consistency and the AMEX BioTech Index is actually climbing +3.1% per week with 74% consistency.  That on top of the fact that both are already up about 40% this year so far. To properly determine whether we have something similar happening in Canada, you’d need to dig into the larger Canadian database available through our Premium Services.