TSX TrendWatch Weekly

History may be fine as a form of entertainment, but from my perspective it has minimal value when it comes to investing. Treat it as fiction… no problem! Treat it as a guide to the future… big problem!  More on that after our weekly summary.

WEEKLY REVIEW…  It was a down week for the S&P/TSX Composite Index… down -1.1% to be specific. The S&P/TSX Venture Index stayed on the plus side with a modest 0.2% gain, and the SmallCap index fared better than the LargeCap  index… +0.6% vs -1.2%.

The S&P/TSX Smallcap Index is now up 40% year-to-date and continues to climb at 1.5% per week on average with 77% consistency. Investors clearly aren’t as risk averse as they used to be. By contrast the S&P/TSX Largecap Index is up 22% year-to-date and is essentially flat in terms of outlook moving forward. The trend value is +0.3%/week with 16% consistency.

South of the border, the major US indexes experienced modest declines of less than 1% over the week.

ENERGY  and MATERIALS declined last week, but still top the sector chart with trend values around +1% per week. CONSUMER STAPLES and TELECOMMUNICATION SERVICES continue to be the laggards.

We still have 78% of the S&P/TSX Composite Index with positive trend values, averaging +0.8% per week.

As usual, you’ll find all the details on which sectors and which specific stocks are performing best in the DATA & CHARTS workbook.

THE DOWNSIDE OF HISTORY… One of the most often quoted remarks about history is the following…

George Santayana… Those who cannot learn from history are doomed to repeat it.

I would say that there is nothing further from the truth, when it comes to investing (or anything else for that matter)!

Here are a few other famous quotes from people who got it right…

Adrienne Rich… False history gets made all day, any day, the truth of the new is never on the news.

E. L. Doctorow…  History is the present. That’s why every generation writes it anew. But what most people think of as history is its end product, myth.

George Bernard Shaw… We are made wise not by the recollection of our past, but by the responsibility for our future.

Henry Ford… History is more or less bunk. It’s tradition. We don’t want tradition. We want to live in the present and the only history that is worth a tinker’s damn is the history we make today.

Paul Valery… History is the science of what never happens twice.

Winston Churchill… History will be kind to me for I intend to write it.

Patti Smith… I don’t fuck much with the past, but I fuck plenty with the future!

The common theme here is that history is little more than fiction or myth, and people rewrite the history books with each new generation.

So, why then do so many stock market pundits rant about why today’s investment climate is a repetition of some mostly fictional account of the past? Why were the papers filled with articles last year about how our rather sharp bear market was exactly like the 20’s leading up to the Great Depression? Why are the interviewers even asking the gurus whether this phase in our current market cycle is just like some other one in the past… or totally different from it?  Isn’t it all irrelevant? I certainly think so!

My biggest concern (well, second biggest anyway) is that there’s a false belief that the history of the financial markets is somehow more real than other histories, because numbers are involved and numbers can be compared. Or can they?

Consider a very simple example… the current price of gold is at a little over $1000.  The highest price in history, you say?  No, not really, if you factor in inflation. In the early 80’s gold hit $850 an ounce; but to break that record today, adjusting for inflation, the price of gold would have to be $2300 in 2009 dollars.

My point isn’t that gold might now move on to $2300 or higher, but that today’s numbers can’t be compared with ancient numbers unless you factor in all of the variables then and now that could influence the price of gold.  Historical comparisons (even with numbers involved) are really like comparing apples and oranges, and you’ll never be able to turn one into the other to carry out a fair assessment. So, why bother?

My VERY biggest concern is that all of this total nonsense is harmful to investors. All financial information that distracts us from the true purpose of investing is harmful information. I look forward to the day when the media are held accountable for that.

Anyway, I’m guessing that your core reason for investing is exactly the same as mine… to increase our net worth as rapidly as possible within the constraints of our respective levels of risk tolerance, our respective perspectives of where the opportunities lie, and our respective views on how those opportunities should be evaluated.

I say the best way to do that is to understand the present and forget about the past.  Of course, some of you will jump all over me for saying that, since I do use historical charts and do occasionally comment on today’s numbers relative to some over the past few years. In that respect I have a two things to say in my defense…

1. We can’t ignore history entirely, but we can weight more recent events more highly than more distant events in the past.  That’s why we use exponential moving averages here in any of our calculations based in a time series. Last week’s price change will be weighted higher than the price change the previous week, and that in turn weighted more than the week before that, etc. In short more recent events are far more important than those in the distant past.
2. We do our best to provide metrics that can be compared fairly over time. Consider our “%-Up” chart above, which we use regularly. The range can only go between 0% and 100%, no matter what the inflation rate is, the differential between the Canadian and US dollar, whether we’re in recession or not, etc. We simply invest when the odds are in our favour (i.e., over 50%), and we pick stocks that are outperforming within that environment.

In short, it’s the future that is most likely fixed and inevitable, and the past that is totally changeable; because there are no absolute ways of recording history and lots of ways to change it (e.g., via new history books).

So, where does that leave us?  All we need to do is use the best tools we have available to weight the recent past in such a way as to find trends that might persist at least a little way into the future. Some trends will be bigger than others; and like a speeding locomotive, you won’t stop it by stepping in front of it. You want to be on that train instead, until it runs out of fuel. The historian on the other hand will say, “A train came by here 20 years ago and I think it might come by again, so let’s just wait for it.”

Let me leave you with one last example of the useless historical perspectives that do us more harm than good as investors.

Stephen Foerster, a finance professor at the University of Western Ontario, recently published an article in the Globe & Mail with the headline, “How to cope in a sideways stock market”. According to the professor, there have only been two “dramatic” bull markets since 1896… April 1942 to January 1966, and December 1982 to January 2000.  Meanwhile, since 2000 to the present, we’ve been in a sideways market where the best strategy is to buy stocks that pay dividends. His cheerful conclusion, “eventually there will be another bull market”.

Who pays these so-called experts and what are they smoking???

With this kind of historical analysis, we all need at least 100 years between now and retirement.  Does that seem practical to you? Is that how you invest? Let’s talk “bull” here, not “bull markets”!

Both of the “bull markets” that the good professor described in the article lasted, respectively, 24 and 18 years and each returned about 1000% over that span.  That actually works out to 10.4% per year in the first case and “a whopping 15.4% a year” in the second one.  How many of us today are going to say, “Hey, I think I’ll make 1000% on my investments if I hold them for the next 20 years”?  Why are our business papers filled with this sort of crap?

Here’s a reality check, professor.  Most people (who didn’t have the investment tools of the sort we provide here) lost 50% of their investment capital during the 2008 bear market. Many more are now also being further punished by evaporating pension plans.  Try telling them that they’re in a sideways market.

And, on the other hand, try telling the people that found the March 2009 bottom, and have made on average 50% in six months, that this is a sideways market. That’s 100% annualized, professor!

ARCHIVES… Our hosting service has still not restored the 6 weeks worth of updates that recently disappeared mysteriously. The missing entries begin with the second week of September. Last week’s entry is (so far) still there. We apologize to those who like to review past updates for the more research-oriented items that we include.

PREMIUM SERVICES…  Watch for some changes in pricing for our premium subscriber services over the next few weeks. We’ll be launching a US stock subscription database, increasing our fees for the ETF database because it has grown do fast, and offering a couple pre-Xmas deals for first-time subscribers.

As you may already know, these services are not for casual investors.  They’re primarily for those who actively manage their own portfolios and already make use of spreadsheets or technical analysis software to make their investment decisions.

TWITTER… Finally, another reminder that we use Twitter for bulletins between our weekly updates. Usually, each entry is a headline, plus a link to more detailed material. If there’s room, maybe a terse opinion on the piece. If you’re already a Twitter addict, you know how the “follow” routine works.  If you want to learn how to use Twitter, start at the Twitter.com web site.  If you want our “tweets” without wanting to get involved in Twitter at all, we have something called a “badge” at each of our web sites, where our Twitter entries scroll by. We don’t have weekly newsletters for Income Trust Trader or ETF TrendTracker, so our badges are larger there and serve as micro-blogs. More detailed reports are added on an occasional basis.

Full Twitter addresses for those who want them…

• TSX TrendWatch… http://Twitter.com/TSXtrendwatch
• ETF TrendTracker… http://Twitter.com/ETFtrendtracker
• Income Trust Trader… http://Twitter.com/IncTrustTrader
• ProfiTrend Enterprises… http://Twitter.com/ProfiTrend

The last one is dedicated to updates of more general interest to investors… not specific to any one area. It also includes our corporate updates, including commentary of our financial consulting and market research activities.