TSX TrendWatch Weekly

2009 has turned out to be one of the most outstanding opportunities for equities investors that I’ve experienced in my entire investing lifetime (and that goes back further than I’d care to admit)! Meanwhile, there are “gurus” being interviewed in the business press that are still calling this a bear market rally!!! That’s like stepping out in front of a high-speed train and saying “that thing will stop and back up any minute now, so I’ll just stand here”.

More on that below, but first let’s look at our pre-Xmas rally.

WEEKLY REVIEW… The S&P/TSX Composite Index gained an impressive +2.5% over an extremely shortened week. All ten sectors have positive trend values, with INFORMATION TECHNOLOGY, UTILITIES, and INDUSTRIALS leading. The ENERGY index jumped 3.9% over the week, but that only coaxed it up to fourth place in the sector trend competition. MATERIALS also did nicely with a 3.6% gain last week, but remains in second last position above FINANCIAL SERVICES. How things have changed from the beginning of the year.

The S&P/TSX Venture Index rose +2.8% and the major US indexes also had 2%+ gains.

We’ve adjusted the date scale on our chart above, but the general message is still the same.  We have just a year’s worth of data now, whereas we were cramming in nearly two years worth before.

Bottom line right now… 89% of all stocks in the S&P/TSX Composite Index have positive trend values, with the 10-week average trend value being +1.1% per week.

GREATEST BULL MARKET IN HISTORY?  OK, so I haven’t gone back and done an analysis of the entire history of equities trading to make the claim I’ve made in the title. That’ll come later in another edition of the newsletter. What I really want to emphasize is the velocity of the take-off from the early March bottom, and the fact that there was pretty much no looking back from there.  They said “V” bottoms were impossible, and I tended to believe that too… until this year.

When analysts size up bull or bear markets, they either look at how long they last, or they look at the change from trough to peak (ideally, in percentage terms) for bull markets. Obviously, it’s the opposite for bear markets. These may have some historic interest, but they are of little value to equity traders with shorter term horizons.

What’s more, you don’t often see anyone putting those two perspectives together… which is such an obvious thing to do.  Why don’t the analysts say “that was a +X%/month bull market”?

Suppose you were driving from Toronto to Ottawa.  You could say the the driving distance is 450km, or you could say that it took 3 hours for you to drive there. Both are useful bits of information, but the most interesting fact is that you got there at an average speed of 150kph (apparently without being stopped by the police).

The analogy breaks down a bit when applying it to investing in the context of a bull market, but it’s still useful.  We don’t know how far away our final destination will be, and so we can’t even estimate how long it will take to get there. But we do know how fast we’re going, and our goal is to stay in the fast lane. With our relative trend analysis™ (RTA) methodology, our speedometer reads in %-price gains per week, which can easily be translated into dollars per week.  Everything else is just a matter of avoiding speed traps, pot holes, mechanical problems, and slow moving drivers that might get in our way.

We also need to pull over and take a break now and then, and we can arbitrarily decide our final destination whenever we want. We don’t have to have a specific place in mind.

OK… before I beat this analogy to death, let me say that sometimes it’s interesting to look in the rear-view mirror too. That’s one thing that investors and the business press like to do near the end of the year. We ask ourselves “how far have we gone?” The choice of January 1 as the starting point is arbitrary and a little misleading, as we’ll explain below. For most of us, though, the tax year corresponds to the calendar year, so we need to consider taking capital gains or losses to optimize our post-tax profits. From that perspective, January 1 as a benchmark makes sense.

So, let’s look at a few of these year-to-date numbers…

• S&P/TSX Composite Index +27%
• S&P/TSX Venture Index  +74%
• Nasdaq Canada Index +63%
• Dow Industrials +16%
• S&P 500 +21%
• Nasdaq Composite +40%

Some of the international equity markets had even more dazzling year-to-date results…

• Russia RTS +130%
• Sao Paulo BOVESPA +80%
• Shanghai Composite +75%
• Seoul Kospi +50%
• Hong Kong Hang Seng +49%
• Mexico IPC +46%

As I already mentioned, I still need to run the historical analysis, but this feels like one of the best years ever, and there’s no sign that the momentum won’t continue into 2010.

But it gets even better!  If you’ve followed this newsletter throughout the year, you’d know that our RTA strategy still had us 100% in cash in January. We had no idea when the markets would bottom, but by late March/early April our chart above was telling us to dive back in. So, our starting point was late March/early April… not January. Some of you may have been fortunate enough to start buying earlier, others later… so let’s use the March lows as the benchmark instead. Here are the 9 month counterparts to the year-to-date gains above…

• S&P/TSX Composite Index +56%
• S&P/TSX Venture Index  +77%
• Nasdaq Canada Index +102%
• Dow Industrials +64%
• S&P 500 +69%
• Nasdaq Composite +81%

Naturally, you’d have to scale those up to get your annualized return, since you were only invest for about 9 months of the year instead of 12.

And, finally, keep in mind that these indexes are simply weighted averages of their components. Our methodology is intended to get you better than average performance.

So, it has been an outstanding year!

I may return to the rear-view mirror again next week, but our fundamental belief is that it’s far more important to be looking forward and profiting from this bull market for as long as it lasts, instead of looking back at what might have been.

Just keep an eye on the “speedometer” (trend value) that comes with each stock and index we provide. The consistency value is your indicator of how bumpy the road is. The higher the value, the smoother the ride!

All the best for 2010!