TSX TrendWatch Weekly

“ Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” –John Templeton

Many of the world’s most successful investors have espoused something similar to Templeton’s sentiments. In short, those investors who outperform are doing the opposite of the general investing public much of the time. They buy when pessimism is at it’s worst and sell when even cab drivers are offering stock picks to get rich quick.

I’m going to try to figure out where we are in the cycle, but first, last week’s activity.

WEEKLY REVIEW… With a 227 point gain in the S&P/TSX Composite Index on Friday alone, it felt like last week was a great one. The S&P/TSX Composite Index was up for the week, but just +1.3%.

The S&P/TSX Venture Index didn’t fare as well… +0.6%.

All the same, gains are gains. The US major indexes went in the opposite direction… Dow -0.6%, S&P 500 -0.7%, Nasdaq -1.2%.

The MATERIALS Index shows the most promise trend-wise. It’s currently climbing at +2.0%/week with 60% consistency. The HEALTH CARE is performing well too… rising 1.5%/week with 72% consistency; and CONSUMER STAPLES isn’t far behind… +1.1%/week with 72% consistency. FINANCIAL SERVICES, ENERGY, and INFORMATION TECHNOLOGY are the only sectors with negative trend values (albeit small ones).

71% of the constituents of the S&P/TSX Composite Index currently have positive trend values. The average trend is +0.5%/week.

As usual, you’ll find all the details in the DATA & CHARTS workbook.

SENTIMENTS IN THE CYCLE… Let’s have a closer look at the Templeton quote at the top, and see if we can figure out where we are in this stock market cycle.

• Pessimism… Everyone remembers how fast pessimism built through 2008, as stock prices dropped across the board. Between the May 2008 top and March 2009 bottom the S&P/TSX Composite Index lost 50% of it’s value. For many that was half of their retirement money down the drain in less than a year. The “buy and hold” crowd learned the hard way that buy/hold is never an optimal strategy.
• Skepticism… Extreme pessimism continued well after the bottom. Throughout 2009 that pessimism gradually turned to skepticism, but hardly into optimism. Even after the S&P/TSX Composite Index rose over 60% from the March 2009 bottom, there were still dozens of “experts” (i.e. idiots) proclaiming that that 60% gain was just a rally in an ongoing bear market.
• Optimism… As far as I can tell, there is absolutely no sign of optimism even after that phenomenal gain. The S&P/TSX Composite Index is now down about -3% from the April 2010 high, which isn’t a lot. However, the flattening pattern that has persisted throughout this spring and summer has led to renewed skepticism about the remainder of the year and beyond.
• Euphoria… Without optimism we’re hardly going to get to euphoria anytime soon.

In short, if we accept this sentiment model of stock market cycles, there’s no evidence that we’re past skepticism yet from what we see on business television and read in the financial press. That should bode well for a continuation of this bull market for some time to come. What is more difficult to anticipate is when the resumption to the upside will pick up speed. It’s hard for anyone to make money in flat markets, when prices are neither rising nor falling.

Since these emotions are difficult to quantify except through a general perception gained from media coverage, we’ll continue to rely on our relative trend analysis™ (RTA) to guide our decisions in spite of market sentiment. We’ll continue to buy as long as the majority of stocks continue to rise (as per our chart above). The bigger the majority with positive trend values, the more confident we become of the bull market continuing.

That doesn’t mean that we should ignore the moods of investors, as per the sentiment model discussed here. It just means that we should use it as a backdrop when assessing our more quantitative information. That means that if our trend numbers start seeming too good to be true, and the “experts” are getting totally optimistic again, it may be an early warning that we might be due for a reversal. That doesn’t seem even remotely close right now.

MICROBLOGS… Follow us on Twitter if you’re so-inclined… http://twitter.com/TSXtrendwatch  You’ll receive numerous updates between these TSX TrendWatch Weekly editions and can comment on or forward (re-tweet) them to others.  If Twitter isn’t your thing, the same regular intra-week updates are fed into a “badge” at the web site in the margin.  It’s a little info box with the most recent posts, but you can link to the full list from there. If you’d prefer that approach, visit http://TSX.ProfiTrend.com often.

VIDEOS… Whenever we find videos on various investment topics that may be of interest here, we add them to our video jukebox.  Be sure to check that page now and then to take in an interview or commentary from some knowledgeable analysts. Several new entries this week.

BOOK STORE… don’t forget that we have a recommended book section in the form of an Amazon mini-book store.  We’ve pruned out a few out-dated books recently and added some new ones over the past few weeks.

REFERRAL REWARDS… You may already know that we’ve extended the monthly draw based on your referrals until the end of the year.

Here’s how it works…

To encourage you to refer friends and acquaintances to take advantage of this free newsletter, we’re offering you a chance to win a one-year subscription to one of our premium service subscriptions (your choice of which one… but that’s up to a $299 value).

Just send us an email. Include your full name, plus the full names and email addresses of people that you think might benefit from reading TSX TrendWatch Weekly. We’ll then send them an invitation to sign up, if they are so inclined.

For each new person that you’ve recommended who signs up for email delivery of the newsletter, you’ll get one entry in the contest. There will be one winner selected each month through December 2010. We ask that you please use your best judgment in selecting your referrals.  We aren’t looking for spam lists.

Thanks in advance and good luck!  Your odds of winning (given the small number of referrals from the previous two months) are quite good!