TSX TrendWatch Weekly

Light at the End of the Tunnel?

admin — Mon, 26 Jul 2010 18:16:52 +0000

This past week was one of those that could be interpreted as either mildly positive or excitingly positive. I’ll take you through the evidence for both sides below, but first the basic stats.

WEEKLY REVIEW… The S&P/TSX Composite Index rose +1.2% last week, which by itself is good but not outstanding. The S&P/TSX Venture Index was up about the same amount (+1.1%).

For a change the US indexes outperformed over the week by quite a wide margin. The Dow Industrials, up +3.2%. S&P500, +3.5%. Nasdaq, +4.1%.

Eight of our ten sector indexes now have positive trend values, with HEALTH CARE, CONSUMER STAPLES, INDUSTRIALS,UTILITIES, CONSUMER DISCRETIONARY, and TELECOMMUNICATION SERVICES all rising from +0.5% to +1.0% per week. The laggards are MATERIALS and FINANCIAL SERVICES.

The percentage of S&P/TSX Composite Index stocks leaped to 69% from 48% the previous week. That is exactly what we were hoping for, and a sustained +60% for a couple more weeks would be a definite flag to start buying stocks as their uptrends get back underway in full force. The only thing holding us back right now is that the size of the trend and consistency values for individual stocks are not high enough yet for there to be a lot of opportunities for better than average profits. The median uptrend values among the S&P/TSX Composite Index stocks is currently +0.5%… respectable, but not great.

MILDLY POSITIVE OR GREAT?… While this is starting to look like a turnaround from our May through July doldrums, a little bit of caution is still indicated.

Caution…

As mentioned, very few individual stocks or indexes have trend and consistency values that are high enough to put on a “potential buy” list. Hopefully, that will change soon.
A +1% move on the S&P/TSX Composite Index isn’t really much to write home about.
The “basic 10” sector index results were mixed for the week in a -2% to +2% range. The only stand-outs were in the S&P/TSX specialty mining-related indexes. There are four of them, and they all rose from +6% to +10%, after a depressed showing over the past few weeks. Perhaps that’s a place to start looking for individual stocks that might outperform.

Optimism…

We do have close to 70% of S&P/TSX Composite Index stocks with positive trend values, if only small ones.
We follow the global equity front through country equity ETFs… 95% are now trending higher. This is a good top-down metric.
78% of all North American ETFs are now trending higher. Since these are diversified investments that carries more weight than looking at individual stocks.

So there you have it folks! Not definitive one way or the other, but something to think about!

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.

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.

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.

Summertime Blues - 2010 Edition

admin — Mon, 19 Jul 2010 14:38:30 +0000

The Canadian equities markets continue to frustrate us by not becoming more definitive in direction. This week I’ll deliver a mixed bag of leading indicators for both the markets and the economy. I can’t say that there is any sort of consensus among them, but they’ll give you something to think about while you’re lazing beside the pool working on your tan.

First, last week’s mundane results.

WEEKLY REVIEW… The S&P/TSX Composite Index essentially didn’t move at all last week (0.0%), while the S&P/TSX Venture Index declined a modest -0.7%.

Once again the major US indexes fared worse. The Dow declined -1.0%. The S&P500 was off -1.2%. Nasdaq -0.8%.

There really isn’t anything significant to say about the 10 major sector indexes, but it may be worth noting the the S&P/TSX specialty indexes focussing on mining were -2% to -4% lower over the week. Both gold and silver bullion declined about -1.5%.

With little price action last week we’re still at a stand-off with the trend values… 48% with positive trends, 52% negative. The median trend value is 0.0%… you can’t get more neutral than that!

The conservative investor should wait for better odds, while the more adventurous might say “hey, I’ll take my chances, and look at the better performers among the positive stocks”. Your choice.

LEADING INDICATORS… Some would argue that it’s impossible to have a leading indicator of either economic or stock price performance, because no one can predict the future with any level of certainty. There are too many unexpected events that can throw off the most thorough analyses.

All the same, some longer term measures have been fairly reliable… by which we mean more often right than wrong when viewed from many years of data.

Unfortunately, those that are right 51% of the time are not clearly differentiated from those that are accurate 60-80% of the time. And, there is always the contentious issue of just what constitutes “being right”.

With those caveats, and the even more significant caveat that “the economy does not predict the stock market, the stock market anticipates the economy”, here’s what I’ve been looking at lately.

Economy

The latest debate seems to revolve around whether the US is going back into recession, and, if so, will it drag down other countries in the process.

One popular economic indicator is the Economic Cycle Research Institute’s Weekly Leading Indicator. The index has been in a downward trend since April and is close to a 49 week low. However, “expert” opinions on this vary widely… from a 65% chance of a “double-dip” recession being imminent, to the observation by another guru that the accuracy of the WLI is in the neighbourhood of just 25%. Keep in mind also that the ECRI data are based on US data and that the methodology (i.e. index components and how they are combined) are impossible to find (in my experience anyway), perhaps because they are proprietary.
The Statistics Canada Composite Leading Index rose by +1.0% in June, after +1.1% gains in April and May. In fact there have been consistent monthly increases all year. There are ten components that make up the index, and just the Housing Index is showing signs of having topped out in April. Since Housing is just one of ten unweighted components, this is not a major cause of concern at this time. In short we have nothing to worry about from this index.
An even better economic predictor by far (in my view) is the yield curve. Normally, short-term interest rates are lower than long term interest rates, because those investing in the longer term are taking on more risk and should be rewarded accordingly with higher yields. It’s quite easy to look up the yield numbers for, say, 13 week T-Bills right out to 2, 5, 10 and 30 year Treasury Bonds and these usually form an upward sloping line when plotted on a chart. When the slope of that line reverses and short term money gets more expensive than long term money, a recession almost always follows within 6-12 months (7 times out of the last 7 recessions). As of last Friday the difference between the 10 year bond and 3 month T-Bills was about 2.75%… well up on the positive side. No sign of another impending recession there.

Stocks

The state of the economy is not something to be ignored, because if you don’t have a job or a home, you probably won’t have a lot of money to invest in stocks. Since stock prices rise when there are more buyers than sellers, the state of the economy will have some influence on the markets. That influence, however, is much smaller than most people realize. While we were in the worst depths of this most recent recession we had the best bull market in history in terms of price appreciation in the shortest amount of time. Whether that bull market is over is what we’re trying to figure out now.

The point is that stock prices are most heavily influenced by future expectations of stock prices… not by what the economy or corporate profits look like today. For that reason I believe that leading indicators for the economy are pretty much irrelevant if you’re trying to anticipate future stock prices. I’m far more inclined to look at what the “smart money” is doing, and to some extent the demand for the goods and services that publicly-traded companies provide.

My rationale is simple… when a few investors with huge amounts of money move into or out of stocks at once, prices rise or fall. Then, huge numbers of investors with smaller amounts of money follow… reinforcing the trend. Similarly, when a few Fortune 500 companies open up the purse strings and buy huge amounts of goods and services, the profit potential of their suppliers will rise and that’s good for the “E” in their P/E ratios… driving up the “P” in turn, as stocks become undervalued (i.e. cheap).

I like to look at the State Street Investor Confidence Index (SSICI) for the “smart money” angle. State Street bases its index on actual money flows from large institutional investors worldwide to and from riskier assets like stocks to safer income assets like bonds. The SSICI has rebounded in June after substantial declines in April and May. We’re hoping to see further appreciation in the next report (July 27). Other confidence indexes are generally based on opinion polls and surveys… hence much less reliable.
Although forward earnings estimates are a widely accepted leading indicator, there is remarkably little evidence that accumulating all those consensus estimates for a broad range of stocks predicts actual forward stock earnings… which in turn are supposed to guide stock prices. The correlation between earnings estimates and actual earnings growth, according to Bill Hester, a fund manager at Hussman Funds, is 0.28… meaning that less that 1% of the variation in actual earnings growth can be accounted for by forward earnings estimates. That’s totally useless!
There are various purchasing managers’ indexes (PMI’s) that tap into demand for goods and services… which in turn should increase profitability for the suppliers (and in turn fuel stock price gains). The Hussman research suggests that such indexes are much more strongly correlated with earnings growth (with about a six month lag). What’s problematic is that forward earnings estimates right now are rising, while PMI figures are falling off. If PMIs are a better predictor, there’s a reason for caution at this point. Those who’d like to follow PMI data more closely should look at the Institute for Supply Management’s Manufacturing Index for the US and the Ivey PMI for Canada.

So, there you have some big picture items to consider while you decide where and when to invest next. We’ll continue to monitor these indexes, but, more importantly, will wait for better odds before investing substantial capital. We’ll want our %-up index (charted above) to get back into 60%+ territory for more than a week or two.

REFERRAL REWARDS… We’ve decided to extend the monthly draw based on your referrals until the end of the year.

Here’s how it works…

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

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.

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.

Advantage Canada!

admin — Sun, 11 Jul 2010 22:00:56 +0000

Last week was refreshingly buoyant in the equities markets, and for a change US stocks fared better than Canadian stocks according to the major indexes. I’ve commented on US/Canada differences in the summary of past-week’s performance before, but this week I thought I’d take a longer term perspective. I’ll get to that shortly, but first let’s look at last week’s good news.

WEEKLY REVIEW… The S&P/TSX Composite Index rose 3.3% last week after a major hit of -4.4% the previous week. That week of across-the-board losses was replaced by a week of across-the-board gains… in spite of the US shortened trading week due to the deferred July 4 holiday to Monday.

The S&P/TSX Venture Index bucked the trend with a -1.1% loss for the week, but the major US indexes did well… Dow Industrials +5.3%, S&P500 +5.4%, Nasdaq +5.0%. Volatility as measured by the VIX fell -17% to about 25 from 30 the previous week. Oil and several other commodities were up, while gold and silver were mainly unchanged. The Canadian dollar rose 3% to 97 cents (US).

HEALTH CARE, UTILITIES and CONSUMER STAPLES lead the sector indexes by trend values, although HEALTH CARE is always somewhat suspect with just four constituent companies. Similarly, INFORMATION TECHNOLOGY is at the bottom of the list due mainly to the fact that there are only five constituent companies and RIM has been on a downward slide lately.

The percentage of S&P/TSX Composite Index stocks with positive trend values rose to 47% from 26% the previous week. The median trend value is now -0.1%/week… very close to neutral.

It’s no doubt too early to assume that this good news for the week will translate into an end to the correction we’ve experience since April/May.

BUY CANADIAN… There was certainly a time when it was in everyone’s best interest to hold some US stocks in their portfolio. There are more choices by far in the first place… hence a better chance of finding some major winners. It was also the case that the major US indexes tended to outperform both the Canadian indexes, plus many other equity indexes worldwide. Not so much anymore.

One could simply look at year-over-year gains for one index versus another to back this up, but we thought we might drive the point home best by plotting the S&P/TSX Composite Index divided by the S&P 500 Index over time. Both indexes are prepared and managed by Standard & Poors and both represent the larger cap stocks in Canada and the US respectively.

One could argue, I suppose, that the US and Canadian markets are different enough that we’re comparing the sales of oranges vs. the sales of apples, but does that really matter? Our objective is profit no matter what we’re buying or selling.

The reality is that we’ve seen this ratio grow steadily over the past 10 years. And, the correlation between the weekly data and the straight line that we’ve fitted to the data is 0.96 (where perfection is 1.0). In other words, there’s no reason to expect that this trend might end anytime soon.

I’m not going to try to tell you that the Canadian and US markets aren’t correlated, because obviously they are… given the state of our interdependent economies. In fact most equities markets worldwide are quite highly correlated due to globalization among the largest corporations. What I am saying though is that Canadian and US markets can be highly correlated, while at the same time diverging as we see above… in this case in favour of Canadian stocks.

The advantage is all that more pronounced when we consider that USDCAD (how many Canadian dollars can be bought with a US dollar) has dropped from 1.4811 to 1.0330 over that same time period. However you look at it, that’s a 40% drop in the USD or a similar gain in the CAD. That’s not relevant if you’re buying and selling stocks exclusively in your own country, but the consequences of buying US stocks in July 2000 and selling them now would be devastating when the odds were already in your favour by investing in Canada in the first place.

None of this really has major bearing on buying individual stocks, but as top-down investors we need to be aware of biases like this that could have an impact over time on those particular investment decisions.

Those with a longer term perspective might also try to capitalize on this situation. As long as the relationship above continues that means buying Canadian if you were to buy only an ETF based on the S&P/TSX Composite Index (e.g. XIC).

Again, assuming that the above relationship continues, one could buy the Canadian ETF and sell-short an equivalent amount in an S&P 500 based ETF (hedged to the exchange rate to avoid currency loss). In principle you should make money that way whether the markets rise or fall.

And, finally, one could play short term divergences from the straight line. When the actual ratio gets well above the line, one could short the S&P/TSX Composite Index based ETF until it come back to where it should be. At the same time one could be buying the S&P 500 based ETF as well for additional profits (again using a currency hedged ETF). The opposite strategy would apply if there’s a major divergence to the downside.

Those with a bit of a stats background will recognize this as “divergence to the mean”… which in this case is a mean that already has a pro-Canadian bias.

REFERRAL REWARDS… We’ve decided to extend the monthly draw based on referrals until the end of the year.

Here’s how it works…

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

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.

If you’d prefer that approach, visit http://TSX.ProfiTrend.com often.

Golden Opportunity?

admin — Tue, 06 Jul 2010 16:19:35 +0000

After a debilitating week like this past one in the equities markets, and a not-so-hot May-present for that matter (in spite of some significant upside bounces), people start to think about safe havens until the storm eases a bit. That often means bonds or other income producing instruments, the $US (in spite of the fact that there is amazingly little fundamental support for that currency), and gold as the hedge against seemingly everything!

I’ll provide an update on the current status of gold as an investment vehicle below, but first let me expose the damage from last week that might drive us in that direction.

WEEKLY REVIEW… The S&P/TSX Composite Index suffered a -4.7% loss last week. Other major indexes had similar losses. Among them… S&P/TSX Venture Index -5.1%, DJIA -4.5%, S&P500 -5.0%, Nasdaq -5.9%. Those are losses bigger than the gains investors might expect in a more bullish market in a month or two.

The only index we could find with a positive gain over the week was volatility! The VIX was up +5.6% to 30.12. But that’s still well below the worst levels in 2008.

All of the sector index trend values have turned negative, except for HEALTH CARE. That quirk is still due to the Biovail merger. There are only 3 other stocks in that index.

Two specialty indexes in the S&P/TSX family that still have modest up-trends are the S&P/TSX Global Gold Index (+0.2%/wk) and S&P/TSX REIT Index (+0.2%/wk), although both of those still declined last week as well.

After a teaser rebound up to 60% two weeks ago, holding above 50% last week (56%), we now see our %-up indicator plummet again to 26%. I’m hoping that most of you have followed my tactic of easing out with profit taking and loss cutting from May onward. I still have a few long positions, but will be keeping a close eye on them to exit on rallies.

The median trend values among S&P/TSX Composite Index stocks is -0.6%/wk. This is not an environment for new purchases unless you have a knack for picking bottoms (we don’t!).

Those willing to play the downside will find 7 stocks in the DATA & CHARTS workbook that are falling by an average of -1% per week with 70% consistency. Just make sure that you are aware of the dangers of selling stocks short. Look for put options instead if they are available… but, again, be sure you know what you’re doing.

THE GOODNESS OF GOLD… Gold is an interesting commodity. Aside from industrial and jewelery functions driving demand, it has always been considered an alternative currency to many investors, and a hedge against inflation and declining paper currencies.

In fact many currency brokerage firms (my own included) will let me trade gold (or silver for that matter) against the USD as easily as I can trade USD/CAD ($US dollar vs $Cdn). With enough leverage and the right insight into direction, that can be quite profitable.

I think we all know something about the attraction of gold in turbulent times, but let’s review the basics…

There is a finite amount of gold in the world, whereas printing presses can produce an unlimited supply of currencies… effectively devaluing those currencies along the way.
There are many sources of demand for gold… industrial uses, jewellery, a hedge against inflation, a hedge against a shrinking euro, and a hedge against a shrinking USD. And, since gold bullion ETFs need to be backed by the raw commodity, they too take gold off the market and into secure vaults… increasing demand for bullion further.
Gold stocks rise faster than gold bullion when it rises, and fall faster when the price of gold drops. For a number of years, whenever gold rose by 10%/ounce, gold mining stocks rose (on average) about 30%/share. That gap has closed somewhat in recent years, but gold stocks still have an advantage in good times… they’ll rise about 15% while gold bullion climbs 10%.
In any sort of financial or political crisis world-wide, gold prices tend to rise. The general idea is that even if the world nearly came to an end via some enormous catastrophe, gold would still be used as money, whereas paper currency would be useless.

There are a number of ways to invest in gold. Here are some of the more popular ones, with pluses and minus for each of them…

Gold bars… [+] You have and hold the raw commodity [-] You’ll probably want to pay for secure storage
Gold coins… [+] They have a premium over the price of the bullion they’re made from, and that premium often increases over time if there’s a limited run on certain coins. [-] Secure storage is also an issue, and expertise in coin collection is also required to estimate the net future value over and above bullion price. For example, the world’s largest gold coin (produced by the Canadian Mint) weighs 100 kilograms and is 21 inches in diameter… not well suited for one’s pocket. It has a face value of $1 million, but recently sold in an auction for over US$4 million.
Gold mining stocks… [+] Typically get a %-gain boost above %-gain in gold, when gold rises [-] Typically get a %-loss more extreme than %-loss in gold, when gold prices fall. Gold stocks are also heavily influenced by the direction of the equities markets in general, independent of gold prices.
Gold ETFs… [+] Available for both gold mining stocks and gold bullion; diversification in the case of an ETF based on an index based on gold stocks, easily traded, no storage requirement [-] Recent rumours that companies issuing gold bullion ETFs aren’t maintaining enough bullion to match the net asset value of the ETF shares issued.

Those looking for leverage can find it in gold futures, and other derivatives based on either gold or gold stocks. Some Forex brokers will also let you trade gold against currencies with as much leverage as you can handle.

With that as a back-drop, some analysts are telling us that the recent peak of US$1260/ounce means that gold is grossly overpriced and that this is yet another “bubble” situation.

That’s probably not true, and I’m relying in part on some stats from RBC precious metals fund manager, Chris Beer, to back this up…

Gold appears to be on a long-term upward trend. It has risen against 10 currencies every year since 2001.
Gold is 0.5% of global financial assets (including stocks, bonds, etc.). In the ’60s that figure has been as high as 5%. That’s a big gap.
The previous peak in gold prices was at $850 back in 1980. Adjusting for inflation that would be the equivalent of $2400 today. We have a long way to go to match that.
While almost all major equities indexes are now negative year-to-date, Gold bullion is still up +10% year-to-date. The S&P/TSX Gold Index is up a similar amount.

In all likelihood, the pull-back from $1260 to $1200 today could well be temporary, as some investors have taken profits after another one of those “too much, too fast” price gains. Price consolidation is always good ahead of the next move up that could eventually take us to $2000.

If you agree, it’s simply a matter of using your risk tolerance to determine which gold vehicle is right for you.

REFERRAL REWARDS… Believe it or not, we didn’t receive a single referral for June, so there were no winners of the June prize. Perhaps people aren’t reading down this far. Whatever the reason, we’ve decided to extend the monthly draw 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 referrals from the previous two months are quite good!

If you’d prefer that approach, visit http://TSX.ProfiTrend.com often.

Summer Doldrums

admin — Mon, 28 Jun 2010 16:56:20 +0000

Although we had further declines this past week, there were no headline events that would suggest that we have more to worry about or, for that matter, a cause to celebrate. It’s just another one of those wishy-washy times that take the fun out of trading. More on these “summer doldrums” below, but first a quick review of the markets last week.

WEEKLY REVIEW… The S&P/TSX Composite Index declined again last week… -1.8%. The S&P/TSX Venture Index was down -2.0%.

The major American indexes took bigger hits… Dow -2.9%, S&P500 -3.6%, Nasdaq -3.7%.

Among the sector indexes HEALTH CARE jumped +13%. This index contains a tiny group of 4 companies and Bovail had some big news to drive up the sector last week.

MATERIALS, TELECOMMUNICATION SERVICES and CONSUMER DISCRETIONARY are also on the upside of zero trendwise. Look to the DATA & CHARTS workbook for more details.

We’re still north of 50% with the proportion of S&P/TSX Composite Index stocks with positive trend values (56%), although that slipped a bit from the previous week. The median trend value is 0.1%.

As far as new purchase go, I will probably wait until I see the %-up figure above 60% for a couple weeks in a row and the median trend value above 0.5%/week (that would be about 25% annualized). Those who like to “bottom feed” might like to move in earlier. Those looking for a bit of extra income may want to sell some covered calls.

DOLDRUMS… Maybe it’s just coincidence, but every summer there seems to be a a period of time where us market observers start talking about summer doldrums. This is an old meteorological term basically stating that not much happening with the weather. Consistent temperatures, no winds. The term seems to apply in the equities markets too.

Generally, there’s a downward drift, which is assumed to be due to people going into cash… so as not to worry while they spend some downtime out at the cottage for a month or two. A little extra selling pressure = a drift lower in prices. The phenomenon can also be associated with the “sell in May and go away” approach to investing.

Regardless, the net result is the same. Aside from those quirky events that will suddenly drive markets up or down, we generally have sideways to slightly lower price movements.

I’m still not ruling out the fact that the incredible one year bull market from Spring 2009 to Spring 2010 could be over, but that’s highly unlikely. It’s more a matter of too much, too fast… now it’s time to catch our breath.

As I’ve indicated over many previous updates, I’ve been selling both winners that have lost their momentum (as measured by trend and consistency) and losers that never quite achieved upward momentum. In other words, I’ll have cash available once I’m convinced that the bull market has resumed.

And, finally, if the pendulum does swing the other way, I’ll be using vehicles to capitalize on the downside this time, instead of the more conservative approach of simply holding cash on the sidelines.

REFERRAL REWARDS… Just to remind you, Bob H. from Oakville, Ontario is the winner of an annual subscription to one of our premium services for May. He chose to receive our Global ETF database updates for the next 52 weeks (a $299 value).

Keep in mind that there are at least two more months to win a subscription like Bob’s. 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 for the next two months (June/July). We ask that you please use your best judgment in selecting your referrals. We aren’t looking for spam lists.

Finally, this is the last week to enter for the June drawing… act now!

Thanks in advance and good luck!

TWITTER… 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 “tweets”. If you’d prefer that approach, visit http://TSX.ProfiTrend.com often.

Intermission Time?

admin — Wed, 23 Jun 2010 02:18:51 +0000

I’m running a little late with this weekly update, so I’ll keep it a bit briefer than usual.

WEEKLY REVIEW… The S&P/TSX Composite Index gained a fairly respectable +2.2% last week, bumping up the %-uptrending stats in the chart below.

S&P/TSX Venture Index fared almost as well with a +1.9% gain.

The biggest one week gainers among the sector indexes were MATERIALS (+3.2%), INDUSTRIALS (+2.9%) and FINANCIAL SERVICES (+2.6%). Mind you the trend values continue to have MATERIALS, ENERGY and CONSUMER DISCRETIONARY sectors at the top of the list in the DATA & CHARTS workbook.

The %-up figure has jumped to 60%… into my favourite range of 60-80%. The median trend value is +0.3%/week… back in positive territory.

I’ll probably wait a week or two to see if this persists before making any new purchases.

INTERMISSION TIME… Every bull market is blessed or cursed with an “intermission” now and then, inside what might otherwise be a great action flick with lots of profits at the end.

I’m basically talking about a pull-back after a nice long run up like the one we’ve experienced since March 2009.

The “cursed” side is that it’s a tough call deciding whether the bull market has ended or that this is a “normal” correction. The “blessed” side is often overlooked.

Because of the uncertainty, we are “blessed” with an opportunity to take profits on our biggest winners and cut our losses on our losers… until such time as we know one way or the other. There’s nothing wrong with going into cash for a while… especially now, when trading costs are low and getting lower.

I know cash is boring, but it’s better than hanging on to equities, while your investments lose value indefinitely. Those who really hate cash still have the alternatives of buying put options, selling covered calls or buying bear ETFs to hedge the downside risk… while continuing to hold their stocks until they start rising again.

The worst case is hanging onto your shares based on nothing more than hope or faith that they’ll turn around soon. That’s a loser’s strategy… almost as bad as the gambler’s fallacy of increasing the bet size the more he loses. It’s the quickest way to lose everything.

Keep in mind that there are at least two more months to win a subscription like Bob’s. 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 for the next two months (June/July). 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!

Top-Down vs Bottom-Up Investing & a Special Tool for Both

admin — Mon, 14 Jun 2010 00:14:56 +0000

I haven’t hidden the fact that I’m pretty much a top-down investor (with rare exceptions due to special events). That bias shows in the way I use relative trend analysis™ (RTA) data, and in how I write my updates here. On the other hand, I’ve never said that bottom-up investing is crazy, and I know a number of successful investors that operate that way. They have no trouble using the same data that I provide and use from the DATA & CHARTS workbook for their own approach.

After giving these two “opposite” approaches some thought over the past week, I’ve tried to reason through their respective merits. I’ll explain below, but first a look at the mediocrity of last week’s markets…

WEEKLY REVIEW… The S&P/TSX Composite Index rose +0.8% last week. The S&P/TSX Venture Index took a minor dip… -0.3%.

In the US the results for the week were a little more positive… the Dow gained +2.8%, the S&P500 rose +2.5%, and the Nasdaq was up +1.1%.

MATERIALS and ENERGY stocks rebounded from losses over the past few weeks and CONSUMER DISCRETIONARY remain strong (trend-wise).

44% of the stocks in the S&P/TSX Composite Index are trending upward, if only by a modest amount. This is a steady gain from the low of 22% as of May 21, the retracement to the 50%+ territory remains slow. The median trend value is -0.1%/wk… very close to totally neutral.

ARE YOU A TOP OR A BOTTOM?… Top-down investing has always seemed more intrinsically attractive to me, although I have yet to see any hard evidence that it is more profitable as a strategy than it’s opposite.

With a top-down approach, you look at equities markets globally and if they’re all trending downward, you keep your money in your mattress. If that top-level glimpse is more mixed or positive, you take a closer look at the best performing countries… gradually drilling down to best performing industry sectors in those countries, and finally to the best performing individual stocks within those sectors.

The logic, which is to some extent justified in academic studies, is that a company’s share price is a reflection of a unique component based on the company’s fundamentals and a shared component or weight associated with how similar companies are performing. That factor is difficult to quantify, but the analogy of all ships rising or falling with the tides is close. The “tides” are the forces that drive a group of stocks… such as all those in the same industry or in one country …to rise and fall.

There are lots of anecdotal examples of this. For example, Intel might report worse than expected profits and it’s share price drops. Now, even though no other semiconductor company reports anything on that day, the price of most stocks in that category will likely drop. In fact there could be a ripple effect out to the computer industry as a whole.

The top-down investor is generally assuming that the macro factors are more powerful than the ones driving a specific stock… hence the approach of dealing with the big picture first.

The bottom-up investor is less convinced that macro influences should have a bigger weight than a company’s fundamentals and other company-specific factors, when it comes to an investment decision. The rationale there can be quite convincing too.

The macro forces after all tend to be measured with indexes, which are almost always just averages of the constituent stocks that make up those indexes. A bottom-up investor will argue that those indexes will never rise until exceptional stocks outperform those averages for some time. As the number of those rises, the indexes lift. The nautical analogy goes out the window… since from this perspective, it’s the boats that are raising the tide.

A better comparison might be to think of the average speed of the horses in a race. That average is pretty much irrelevant. It’s the fastest horses that win, place and show… no matter what the average speed happens to be.

I think there’s some value in keeping one perspective or the other for consistency’s sake, but I can imagine that the end result in terms of profitability could well be very similar.

As it turns out, there’s an under-used tool that investors of either persuasion tend to ignore… a stock’s beta. This is something you’ll probably want to look up somewhere, rather than calculating yourself, because you need to be comfortable with statistical analyses.

The beta (β) of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole (or some definable subset like our industry example). An asset with a beta of 0 means that its price is not at all correlated with the market. A positive beta means that the asset generally follows the market. A negative beta shows that the asset inversely follows the market; the asset generally decreases in value if the market goes up and vice versa.

This is as close as we can come to a tool that will let us know if top-down forces are likely to affect a stock in a major way (positive beta), or whether bottom-up forces might allow a stock to break-through the more macro influences (i.e. a stock with negative beta).

In short checking out a company’s share price beta should make you a better top-down or bottom-up investor. You don’t need to abandon your perspective to use this excellent tool.

GlobeInvestor.com reports the beta values of stocks in the summary page after you enter a stock symbol. Your favourite online data source will likely have it too. If you want to learn more about beta with the goal of doing your own calculations, start with this Wikipedia entry.

REFERRAL REWARDS… Bob H. from Oakville, Ontario is the winner of an annual subscription to one of our premium services for May. He chose to receive our Global ETF database updates for the next 52 weeks (a $299 value).

Keep in mind that there are at least two more months to win a subscription like Bob’s. 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 for the next two months (June/July). 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!

The Diversification Conundrum

admin — Mon, 07 Jun 2010 17:10:08 +0000

If you’re new to investing, the first thing any investment advisor will probably tell you is be sure to put together a diversified portfolio. If you put all your eggs in one basket, you’re screwed!

But is that really true? I’d like to challenge that “conventional wisdom” a bit; but first, let’s have a quick look at last week’s action…

WEEKLY REVIEW… The S&P/TSX Composite Index dipped roughly a percentage point last week (-0.9%), while the S&P/TSX Venture Index took a somewhat bigger hit (-2.6%). Regardless of what you blame it on, both of those indexes now have negative trend values (although there isn’t much consistency on the downside).

The “damage” is similar in the US, although slightly more severe as usual. The Dow Industrials were down -2.0%, S&P500 -2.3%, Nasdaq -1.7%.

Eight of the 10 sector indexes have negative trend values now. Just TELECOMMUNICATION SERVICES and CONSUMER DISCRETIONARY have small positive trends. The various S&P/TSX mining indexes all took hits of -5% to -8% over the week, although the more focused S&P/TSX Gold Index was off just -1.1%.

We’ve been down below 50% too long now for us to shrug this off as just another freak occurrence. If you’ve followed our general guidelines though, you’ve already cashed in on your biggest gainers, dumped your losers, and will find it difficult to find anything worth buying right now (unless you’re a bottom fisher… a practice we don’t recommend).

DIVERSIFICATION: BENEFIT OR CURSE? Here’s the usual pitch… unless you diversify with a cross-section of investments you could be be stuck with one or two losers that’ll wipe out most of your investment capital. Seem reasonable? At face value, absolutely! But is it that simple?

Cross-sectional diversification… I’ll be simplifying a bit here, but at the highest level, your financial advisor (if you have one) will tell you to split your investments into growth and income categories. Some add a cash category as well, but that seems pretty foolish to me. Their general notion is to have some cash available for when a great new investment opportunity comes along or you decide to build that deck in your back yard. As we all know, though, cash does not grow, nor does it earn income, so forget that. Sell something else to take advantage of that new opportunity.

The old rule-of-thumb is to subtract your age from 100. That will give you the percentage you should invest in stocks. The rest goes to income producing securities like bonds. After that you need to diversify within those two categories.

Bond diversification seems like overkill to me, but conventional wisdom says buy a mix of corporate and government bonds, and diversify among maturities. I’m not going to take you any further on this topic, but you can look into that if you wish.

With stocks, the typical advice is to spread your money among stocks in different market sectors. There are ten of them in the Global Industry Classification Standard (GICS) that Standard & Poors Indexing Group uses for Canadian, US and other worldwide markets. We also use it at our web site for the DATA & CHARTS workbook and comments in this newsletter.

So you should diversify by picking stocks across those groups. Nowadays, you are also encouraged to diversify across countries… some US stocks, some European, some Asian. Before long, your money is spread pretty thin, but you’ll know that you should get average world-wide returns on your money over the long-term, once you have your money spread out that far.

Then comes rebalancing. Twice or four times a year, you’re expected to sell your stocks in the best sector(s) that have really done well and buy other stocks in sectors that are really doing poorly. The argument is that those stocks will eventually turn around. (They don’t tell you how long “eventually” is.)

Although there are many variations on this theme, those are the basics. For those who don’t want to do their own stock picking, there are many mutual funds based on these general rules of traditional diversification.

Sequential diversification… So, what’s the opposite of a (cross-sectional) diversified portfolio? Since almost no one considers this a viable alternative, let me be among the first to attempt to make it more specific with an extreme example.

Let’s say that you’re about 20 years old and have somehow scraped together $10,000 to invest in stocks. By the rule-of-thumb 20% of that should go into bonds, but that sounds boring. Instead, you put all $10,000 into a single stock that has had a nice consistent upward trend. You’ve also done your homework and know that this is a company who’s future doesn’t depend on a lucky gold strike or a miracle cure for body odour. You’ve looked into the company’s balance sheet, and you’ve read enough about the management team to know that they appear solid. You sink all the money you have into shares of that company.

Crazy? Maybe, but what are the chances that a totally unforeseen event will happen tomorrow, driving your share value down 20-30%? I would say that the odds are pretty low. So, you hang on and sure enough the trend persists for quite a while… maybe even a few months or more.

When the trend shows signs of tiring (you’ve still got to monitor trend/consistency values continuously), you sell all your shares and take your profits. Then you invest every last penny in another stock… doing the same thorough homework that you did the first time.

Maybe this time it doesn’t work out quite so well. After a week or two an unforeseen event occurs… killing that nice upward trend. You sell at a small loss this time. And so it goes. Just one stock after another… but cutting your losses short and letting your profits run.

If the overall markets turn soft (like right now), you might not be able to find a next stock after the one you just sold. In that case you park your money in cash or maybe income securities as a temporary measure. Or, if you’re adventurous, you’d sell-short the worst performing stock you can find with the worst management team and worst balance sheet.

This probably sounds insane, doesn’t it? You’re picturing a madman at the keyboard in front of his online trading screen!

That may be the case, but I intend to launch a little research project to see if this can be a profitable alternative to cross-sectional diversification. You’d certainly reduce your trading costs by only holding one stock at a time, and you’d never be investing in sectors or countries that you know will cause you losses (short-term anyway) as would be the case with the traditional approach.

And, at the end of your investment career you could probably look back and see that you were just as diversified as someone using the cross-sectional approach. You’d just find that you rotated through the best sectors as they each took their turn at the front of the pack. Your diversification just happened to be sequential.

Compromise… Since I haven’t done the research yet on the profitability of the sequential diversification approach vs the traditional method, I’m left suggesting a compromise for now. As extreme as the sequential diversification scenario may seem, I find it more attractive than the traditional approach. If you’re willing to follow your investments closely, the traditional cross-sectional diversification approach strikes me as counter-productive. Diversification for diversification’s sake may have made sense when trading costs were high and everyone had a buy-and-hold mentality, but it seems so limiting nowadays.

There are a couple ways to head towards a middle-ground. One would be to follow indexes instead of individual stocks. You’ll find one or more ETFs tracking each major index. Since the index represents a cross-section of equities, the ETF does too. So instead of sequentially buying one stock after another, buy one ETF after another. Maybe gold stocks are hot for a while. You buy the XGD ETF and hold it until the trend slows down. Then, maybe a switch to real estate makes sense based on an improving trend. You switch to the XRE ETF. In this fashion, you’re diversifying both ways. You’re still limiting your profits, since each ETF represents an average of a number of stocks, but you’re reducing your risk too.

Another possibility is to simply branch out a bit from the extreme sequential diversity scenario I’ve described above. If you’ve made some profits from the one-stock approach; maybe when you sell, you buy two new stocks that look attractive… one in each of two leading sectors. As profits accumulate, you could extend this idea to spread out into three or four stocks if multiple sectors are on the rise.

In principle at least, you should still be outperforming the traditional diversification approach, because you’re not investing in sectors that are under-performing just to get broad cross-sector coverage.

Diversification is not a trivial issue, and you should think it through carefully… factoring in your own level of risk tolerance. Traditional diversification makes sense for long-term, buy-and-hold investors. If you’re one of those, you’re probably not reading this anyway. For the active do-it-yourself investor, you should seriously consider lightening up on asset classes that depend on some future turnaround from their current declining trends. Why bother, when your investment horizon is months, not quarters, years or decades?

Keep in mind that there are at least two more months to win. 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 for the next two months (June/July). 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!

TWITTER… 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 updates are fed into a “badge” at the web site in the margin. It’s a little info box with the most recent “tweets”. If that’s your preference, visit http://TSX.ProfiTrend.com often.

Dilbert on Diversification (freakonomics.blogs.nytimes.com)

Leading Indicators: Do They Exist?

admin — Mon, 31 May 2010 21:50:59 +0000

While the markets bounced back up a bit last week, after a brutally over-sold week before that, I wouldn’t be out on a buying spry just yet. Instead I’m looking at some possible leading indicators of where we might be going next.

More on that below, but first let’s have a look at what popped up last week…

WEEKLY REVIEW… The S&P/TSX Composite Index rallied back 1.3% last week after the big -4% dip the week before. The S&P/TSX Venture Index did even better with a +3.4% gain.

South of the border, the Nasdaq was able to manage a similar gain to the S&P/TSX Composite Index, but the Dow dropped -0.6% and the S&P500 gained just +0.2%. Volatility (as measured by VIX), dropped back from around 40 to 30… a -20% decline.

Commodities had a robust recovery last week… from gold and silver, to oil and gas, to diversified mining… whether you consider the raw commodities or the companies that produce them. All gains for last week in these areas were +3% to +6%.

Seven of the ten sectors are still on the decline trend-wise, but surprisingly CONSUMER DISCRETIONARY stocks are at the top end of the scale. If that price index represents consumers being ready to buy big-ticket items they don’t need, this could be a sign of improving investor confidence in the market.

The chart above now shows that 36% of S&P/TSX Composite Index stocks have positive trend values… with the median being -0.3%/week. We would definitely like to see an improvement to back above 50% soon (and > 0.0% for the median), or we might be looking at a sustained decline.

The DATA & CHARTS workbook data, that backs up what I discuss here, uses 10 week exponential moving averages to determine trend and consistency. It’s also possible to look at longer-term moving averages and compare them. Our premium service subscribers receive 20 week and 40 week moving averages on trend and consistency as well for whatever database(s) they’re receiving.

In the chart below I’m showing you the multi-timeframe numbers for the S&P/TSX Composite Index constituent companies.

In ideal conditions, where the upward momentum is high, the 10 week trend should be higher than the 20, and the 20 higher than the 40. That should be true whether considering the %-up red bars (right-scale) or the medians (the black diamonds, left scale).

I’d treat this formation as a major negative piece of evidence, if it weren’t for the fact that the TR10 numbers have only been south of zero for the past few weeks and the Tr20 numbers just reached the mid-point. You’ll see that over 70% of S&P/TSX Composite Index companies still have longer-term (40 week) upward trends.

As I’ve been saying for a few weeks now, caution is still indicated and if individual stocks in your portfolio are losing their upward trends, selling is a good idea. Hold off new purchases for the time being.

Charts like the one above showing moving average cross-overs are one sort of indicator; but I’ll be the first to admit that this is not necessarily a good leading indicator, since we’re looking at different perspectives on the past up to the present. Let’s see what else we can find that might work better.

LEADING INDICATORS… Obviously, if there were any rock-solid leading indicators of where stock prices are going next, we’d all be on board and all making more money than we could probably have imagined. Unfortunately, it doesn’t work that way. The best that we can hope for is that the odds are in our favour with any specific leading indicator more than 50% of the time, most of the time. Most long-term successful investors are happy with a 60% success rate. Any leading indicator that might help you along the way to that goal is one to hang onto.

The next question we have to address is… are we talking about economic leading indicators or stock price leading indicators? So many people believe that economic growth and stock market increases go hand in hand, but they’re absolutely wrong! The reason so many believe that is because so many reporters in the business media get it wrong too, and they’re publishing the wrong message to investors.

Yes, there are times when GDP and stock prices rise in tandem and everyone’s happy; but that’s the exception, not the rule. Stock prices are the best leading indicator for the economy… not a coincident indicator, and certainly not a lagging indicator. Stock prices rise substantially in the middle of a recession… signaling that the economy will be improving within a quarter or two. By the time the GDP data confirm that, stock prices may continue to rise for a while, but they’ll turn down again well before we see hard evidence that GDP has peaked out.

In principle then, May’s substantial slump in stock prices could be warning us of a short-lived recovery economically. I personally think that we’d need a little more evidence before jumping to that conclusion, but it’s something to think about.

The flip side of this is that if you’re looking at Canada’s new GDP numbers in the 6%+ range, do not use that as a reason to start investing in stocks now, especially if you’ve been out of the equities markets all of last year. Once again, GDP predicts nothing when it comes to stock market performance. Only the opposite is true (almost all of the time).

So, what should we look at as potential leading indicators of stocks? Certainly, not the economy. After all, the economy may determine whether you have a job or not, but it’s not going to offer you any capital gains.

You’ll get lots of suggestions from technical analysts who study chart patterns, cycles and trends. I have to admit that I’m part of that camp at one level (specifically, I’m a trend follower), but I look at the data quite differently. The stereotypical technical analyst will analyze one or a few charts and indicators to death… whether it be for a single stock or a general index like the S&P/TSX Composite Index or S&P 500.

On the other hand, I’m constantly looking at how stocks and indexes are performing relative to one another. Moreover, you won’t find charts like the first one above that give you the rough odds of whether you might be profitable or not given overall market conditions. Most technical analysts do their best with current and past market numbers. But without relative comparisons, you’re losing a lot of valuable information.

For instance, our chart shows you the proportion of stocks with short-term trend values above zero… a rough measure of whether you’ll find a decent sized pool of stocks worth looking into further. Another more common approach which seems very similar is to compute the percentage of companies in the S&P/TSX Composite Index that are trading above their (often 200 day-) moving average. That too is an indicator of where the future might take us relative to the past, but there is a subtle difference. With the commonplace approach, most stocks could still be trending downward at the same time as many of the latest prices are above their moving average. It’s still a decent sign of a turnaround, but not as convincing as when the moving averages are standardized around zero.

But now, let’s look at some other potential leading indicators of future stock market gains or losses… investor confidence and dividends.

Investor confidence is most often measured by taking polls. Investors are asked whether they intend to buy x, y or z over a certain time-frame, and/or are simply asked if they’re bullish or bearish on stocks at the moment they’re asked the question. I don’t have much faith in these.

Suppose the question was asked at the end of the day on “flash-crash” Thursday, May 6. I’m sure the answers would be far more negative than they would have been a week or two earlier. Secondly, buying intentions don’t necessarily mean that there’s any follow through.

Beyond that, the sampling methods are often very sloppy. An investor confidence survey on positive or negative intentions to buy stocks during a certain time interval will rarely discriminate between a respondent who has never purchased a share of anything in his life, and someone who is a trading veteran of 20-30 years and has a 7-figure portfolio. Which opinion means more?

As I’ve mentioned in other editions of this report, the only investor confidence indexes I’ll pay attention to are those tracking real money and big money at that. I want to see real money flows, not state-of-the-minute opinions. That’s why I like the State Street Investor Confidence Index. It tracks institutional investors moving hundreds of millions of dollars around. If they’re moving money from bonds to stocks, that’s confidence that risk will probably be rewarded. If their money is going the other way, they want less risk and see less near-term potential with equities. For the record the Sate Street index has been declining for the last two months… a warning flag for me.

Dividend increases (or decreases) are also a decent leading indicator from my perspective. In this case we’re talking about corporate, board of director level confidence that their company is going to be performing well enough going forward that they are happy to reward their investors with more of their excess capital than they’ve been doling out before. A single company doing this in isolation means little, but if you aggregate companies increasing their dividends across the country, such an index means something.

I haven’t actually found a standardized index of dividend increases/decreases, but many of the latest reports on dividend issuing companies suggest that we’re currently seeing a lot of good news on that front.

That doesn’t mean that you need to buy conservative companies that pay dividends. You just take it on faith that if those companies see good times ahead, companies not paying dividends will be feeling more confident as well.

So there you have a couple leading indicators of stock price performance that are worth following. Don’t expect them to be foolproof, but there are so few reliable ones out there, that we’ll take what we can get.

PREMIUM SERVICES REFERRAL CONTEST… We’ve already chosen the winner of an annual subscription to one of our premium services for May, but there are at least two more months to win. 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 $300 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 for the next three months (May through July). 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!

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 volumes recently and added some new ones over the past few weeks.

TWITTER… Follow us on Twitter if you’re so-inclined… http://twitter.com/TSXtrendwatch You’ll receive numerous updates between these weekly editions and can comment or forward them to others. If Twitter isn’t your thing, the same day-by-day updates are fed into a “badge” at the web site in the margin. It’s a little info box with the most recent “tweets”. If that’s your preference, visit http://TSX.ProfiTrend.com often.

Confessions of a Keep-It-Simple Investor

admin — Mon, 24 May 2010 16:31:14 +0000

As we wait to see whether this correction turns into a new bear market, I thought that I’d share a bit more of my own investment/trading routine. I’m not encouraging imitation, but I think you’ll find that some aspects of what I have to say will make you think about your own methodology.

I continue to recommend… no, insist… that every you-it-yourself investor build and nurture his or her own strategy… commensurate with risk tolerance, available capital, time horizon and preferences for fundamental vs technical analysis. All that I’m offering through my web sites through the relative trend analysis™ (RTA) methodology is a screening tool that I hope will complement your own approach… not replace it.

But before I elaborate, let’s look at last week’s carnage…

WEEKLY REVIEW… I can’t remember the last time that a single week was so totally, across the board, and around the world… negative! The S&P/TSX Composite Index dropped -4.1% and the S&P/TSX Venture Index twice that… -8.8%. The major US indexes took hits roughly in line with the S&P/TSX Composite Index.

All sectors fell in varying degrees over the week, leaving only CONSUMER DISCRETIONARY and TELECOMMUNICATION SERVICES with small but positive trend values.

And it doesn’t end there. I looked for positive numbers everywhere with precious little success. People supposedly rush into buying gold and precious metals in turbulent times like these. Not last week… gold dropped -4.4%, silver -9.8%. USD? No.. that dropped too. Oil? -7.1%. Natgas? -6.9%. Commodities in general -2.8%. Major equities market indexes worldwide… down -4% to -8%.

Remarkably, and probably what you’d least expect is that the Euro climbed +2.2% against a basket of six other currencies. Bonds also had modest gains across maturities as expectations of interest rate hikes anytime soon flew out the window.

After a satisfying bounce the previous week in our %-up index, the plunge resumed… leaving only 22% of the stocks in the S&P/TSX Composite Index with positive trend values. The median trend value is now -0.8%/week.

Judging by all these numbers, one would normally conclude that no one should be in the equities market right now… or any other market!

We’ll reserve judgment on that until we see whether there’s any follow-through to Friday’s rally. You’ll see from the chart that we’ve had similar short-term down-spikes before… only to see positive conditions return quite quickly. Panic selling is not recommended.

KEEP-IT-SIMPLE INVESTING… You might find that my talking about investment strategies right now seems a little like fiddling while Rome burns; but, hey, I’m still not willing to concede that the party’s over yet… so indulge me.

If you’ve been following these weekly reports for some time now, there must be something that you like about our underlying methodology… relative trend analysis™ (RTA). Forget about the math involved. If you wanted to, you could approximate what we do here if you have some spreadsheet skills. But you don’t have to. For the S&P/TSX Composite Index stocks, the weekly results are all in the DATA & CHARTS workbook. You can copy-and-paste the numbers into your own spreadsheets if you like, or simply look at the numbers to pick out some interesting candidates. Then you should go ahead and apply your other tools to find the best investments.

My main suggestion is to keep it simple. When most people start do-it-yourself investing they want to try everything… so they bury themselves in complexity. I was no exception. As fast as I was learning about technical and fundamental analysis, I was applying each and every measure to my potential investment opportunities. Somehow, because I was using so many techniques, I thought that I was becoming a more sophisticated investor… and would soon reach “pundit” or “guru” status! I deluded myself for a long time with this grandiose perspective, until one day I decided that maybe more isn’t better.

I’ll selfishly admit that I have better than average math skills, having progressed to teaching university statistics courses at both undergraduate and graduate levels at one point. So I had to ask myself why I wasn’t using my stats expertise to find out which tools worked better than others. I had been blinding accepting various technical analytic measures, simply because they’ve been around for years and people seemed happy with them.

I won’t bore you with all the details, but here are some of the basic findings I uncovered…

Statistical testing of technical analysis tools to prove whether they actually work or not is virtually nonexistent. They are accepted on faith. But, since math is being used, it’s assumed that they must be important.
The situation with fundamental analysis measures is better, since most university academics have already dismissed technical analysis as nonsense. Consequently, they have focused on aspects of a business that should predict whether or not investing in it will produce better returns than those of other companies.
Almost all technical analysis measures and many fundamental metrics are highly inter-correlated, which means they’re measuring the same thing… only on a different scale. The message here is… why look at a dozen technical analysis indexes when one will do, since they all measure the same thing. The situation is somewhat different with fundamental analysis; because, for example, revenues per share and earnings per share will be correlated in general, but there are also logical reasons for looking at them independently. Revenues/share are obviously based on sales. Earnings/share could also be based on net sales, but also on cost-cutting. It’s possible to show increased earnings/share without revenues increasing. That could be an important consideration.

So, with those discoveries in mind, I started over from scratch to build a new model.
I decided that even if technical analysis is nonsense, it has pragmatic value… it forces you to be disciplined and systematic in what you do. I was already leaning toward trend analysis, because there really does seem to be something behind “the trend is your friend” and “don’t fight the tape”. For me that ruled out all technical measures that reportedly let you pick tops and bottoms and play cycles. If such information fell out of whatever system I invented, so much the better; but otherwise, I’d go with the trend until it ended.

There were two reasons why I didn’t just adopt an existing moving-average technique to following trends, and decided to build my own instead…

Existing moving averages, as you all know, are based on price, so they’re expressed as price. That’s fine if you’re dealing with one stock, but how do you compare the trend of that stock with another stock, or thousands of other stocks? Each moving average is on a different price scale. I solved that by calculating my moving averages with percentage price moves, not raw price moves. Everything can be compared to everything that way.
While moving averages, as a measure of trend, take the bumps out of a price chart, some price charts are still a lot bumpier than others. If I have an uptrending stock (based on moving averages) that is trading around $10 and has average daily fluctuations of +/- 50 cents, I might be OK with that. If the fluctuations are +/- $2/day or higher, I probably wouldn’t get a lot of sleep or I would end up selling at a loss in spite of the trend. So I created consistency, a measure of how the trend was doing relative to its underlying volatility. Higher consistency = Less volatility on the ride up. I want stocks that move up as smoothly as possible.

If you’ve read our web site Visitors Guide, there is nothing new here. But here comes the part that might surprise you…

While I’ll never stop emphasizing the importance of proper due diligence on each and every investment… looking at fundamentals, recent corporate events including M&A activity, economic considerations, other technical indicators, etc. …I rarely do any of that! Maybe a quick check to see whether a recent price jump is due to a takeover bid or some other event that is a one-off situation, but that’s about it.

If you and I sat down over a coffee or beer somewhere and you asked me “What’s in your portfolio?”, I’d probably say “About 20 stocks” (or whatever number I thought was approximately correct). If you said, “No, I mean which companies?”, I’d probably answer, “I don’t know, but I could look it up if you like.”

In an age where I can now get more information about publicly-traded companies than I could have even imagined 10 years ago, I’m now saying, “No thanks… I don’t need it.”

Would I recommend this to anyone else? No! It really takes a lot of effort to get used to a simple solution, when “the more information, the better” is the mantra of the 21st century. If you can recite 100 facts and statistics about why you should invest in Company X, you are treated as an expert in that company. The fact that 99 of those 100 items might be irrelevant to anything doesn’t matter.

If I told members of the business press that I invest using two numbers, price trend and consistency, they’d ask, “But why would you buy stock in this company?” I would answer, “Price trend and consistency”. They’d ask again, “But why would you buy stock in this company?” At that point I’d probably get frustrated and say, “Because aliens landed in my back yard last night and advised me to buy, and because the CEO and most of the management team of the company are cocaine addicts.” At that point, I’d suddenly become credible… “You’ve heard it here first folks. Charles P. Whaley, investment genius, has unique insights into Company XYZ that will guarantee that it will be the best performing stock of 2010!”

You see, there’s a real risk in adopting a simple solution when investing. You lose credibility, even while you’re outperforming the market averages and sleeping well at night.

So, does the keep-it-simple investor lose out on a week like last week, when he or she decided not to watch BNN or read the papers? Perhaps, but not necessarily. I’m addicted to keeping up with my business news, but my buy/sell decisions are based on the same weekly numbers you see in the DATA & CHARTS workbook at TSX Trendwatch, plus those in my premium subscription databases. I tend to buy when stocks have trend values of 1%/week or greater with 70% or better consistency.

Those are arbitrary thresholds.. not based on any sort of statistical analysis. Then I hold them until there is an unforeseen event that takes prices sharply lower, or more likely until the trend fizzles.

Consistency usually falls first… perhaps even down to 20-30%. By then the trend has likely dropped below the median trend value (shown in the chart above) and closes in on zero. By then it’s really time to sell, no matter how much I’ve gained or lost.

What’s interesting is that there’s a natural roll-over that seems to occur, so that you end up with a lot of selling and less buying before a week like last week. In my case there were less and less stocks meeting my buy threshold for a couple weeks prior to last week, and more and more stocks in my portfolio with declining trend values. Some were relatively long-term holdings with 100-200% gains, others fairly new purchases that abruptly changed trends. Either way, I sold them on an individual basis over the past few weeks as my numbers suggested I should.

So, yes, I’m still holding some beaten up stocks after last week, but I ended up selling at least twice as many stocks as I was buying before last week. And, many of the stocks that I’m still holding continue to have decent trend values. If Friday’s rally continues, some of those paper losses will disappear. Conversely, I’ll be gradually selling on a case by case basis.

There you have it! One lazy guy’s strategy for making better than average returns in the good times, and avoiding or minimizing losses when the tides turn. Could I do better with a closer look at the fundamentals, or at least find out what the company’s business happens to be? Absolutely! But we each have to weigh how much time and effort we’re willing to put into investment decisions. After all, the results of those efforts could easily be washed away by something not in our model… like the economy of an obscure country called Greece.

Is my keep-it-simple solution the best keep-it-simple solution? Of course not (or at least I don’t know)! I’m sure many of you are already doing something similar, but within your own framework. It would be foolish for anyone to think to that there is only one solution to optimizing profits.

But I do have a suggestion for those who are still looking at a dozen or more technical and/or fundamental factors for each investment decision… stop and think about what you’re doing. You’ll enjoy investing/trading a whole lot more if you can weed out redundant metrics and stick with a few guiding principles.

Finally, the “soul” of relative trend analysis™ (RTA) is putting things in perspective. You can analyze a single stock to death with all the indicators you can find, but then you should be asking yourself… How are other stocks in that sector performing on all those indicators? How is that stock doing relative to all other stocks in the country? Etc., etc. Your favourite stock may look great in isolation, but still be sub-average in the grand scheme of things. Conversely, the stocks in your portfolio right now may have taken a hit last week, but did you really suffer any more than average? If not, don’t be pressing that Sell Everything! button just yet.

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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.

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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 volumes recently and added some new ones.

TSX TrendWatch Weekly

Light at the End of the Tunnel?

Summertime Blues - 2010 Edition

Advantage Canada!

Golden Opportunity?

Summer Doldrums

Intermission Time?

Top-Down vs Bottom-Up Investing & a Special Tool for Both

The Diversification Conundrum

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