ASK ME ANYTHING ANSWERS: PART 2

Here we go with the second installment of answers to the recent AMA blog. Lets hop to it:

Gold, Bitcoin

Diane asks if we use gold as a market hedge. Bottom line: no, we do not. Gold isn’t negatively correlated to the stock market. At best, it is non-correlated to the stock market. So it might be a diversification of sorts, but there is no evidence that it will offset stock market weakness in your portfolio. Both may rise and fall, or they may move in opposing directions – but there isn’t a reliable relationship between their movements. I have blogged on this subject a few times. I would like to point out that gold can be a good hedge against a declining USD. Here is a blog with a chart that offers some evidence of that tendency.

Right now, we are long gold equities – as pointed out in a few recent blogs & videos like here and here. We view gold as we do other sectors. That is, if we like the chart of gold bullion and like the fundamentals of gold producers, we will enter a trade. Simple as that.

Regarding bitcoin – no, we do not trade bitcoin or any of the alternative currencies at this point. The volatility, and the inability to apply traditional fundamental analysis make these securities something we are not comfortable with trading. That may change in the future.

Choosing sectors to invest in

Gunter asks how we choose sectors to invest in, and/or if we use fundamental scans to choose stocks. Diane, from the gold question, asks what sectors we like right now.

Gunter – I do have a sector rotational strategy. Part of it involves the use of stockcharts.com sector perf-charts. Part of the process also involves seasonal patterns. Because it is fairly involved (there are a series of steps to find the emerging sectors as investment candidates), I would recommend that you enroll in my online Technical Analysis course. It teaches the step-by-step method I utilize to uncover sectors to invest in. It also lists numerous sources of finding individual stock ideas. Below is a sector performance chart from stockcharts.com for 22 days (1 month of trading). Note how I have circled the materials and energy bars. They continue outperforming. Note also, however, that technology, which had been getting its head chopped off since January (pink, circled), is showing relatively flat performance vs. the SPX now. Same with consumer discretionary stocks (left blue bar, not circled). This indicates some change, or rotation. Again, take the course to fully understand this tool. This leads me into Diane’s question…

As far as Diane’s enquiry regarding what sectors we like right now: We continue to be overweight resources.  We also hold a good chunk of financials right now. Note that financials are now underperforming, and we are watching them in case of technical breakdown. Yes, resource stocks are overbought and will pull back a bit. But the longer outlook is that of inflation, and the price charts still show room for growth. We also have some exposure to staples and industrials. While we have been underexposed to technology stocks, we have slowly started adding to the sector. I noted in a recent blog (March 16th) that there is a good case for the sector to see some rotation into it. The pref chart, as discussed above, also points to potential rotation into technology stocks.

Canadian dollar

Paul asks why the Canadian dollar is not at par as it was in 2011/12 when oil was about the same price level as today. Is this because of Trudeau’s fumbling, or is it because of a lack of investment, he asks? Now Paul, you KNEW this was an open door that you provided for me to rant…blame it on Paul, all 10 of you who still remain JT fans.

Well, as I have mentioned many, many times in the past – we surmised some time ago that oil was bound to go up due to supply chain and inflationary issues in the midst of government imposed production and pipeline cuts. Funny that two ordinary guys in Barrie, Ontario (Craig and I) could spot this probability as far back as 2020, but the so-called well informed government “leadership” could not. It seems that our guy – who claims to be an environmentalist – doesn’t understand how to orchestrate environmental policy correctly. That, and the economics surrounding an energy producing nation. Turns out, it would have “taken care of itself”, if he had let it. Clearly, he didn’t care to follow the patient & logical path towards carbon reduction. That fumbling has harmed our energy industry and costed Canadians far more than we, as an energy producing nation, should be paying at the pump.

We all know now that Canada, a net positive producer of energy, has now become 30% reliant on foreign oil! This, driven by a complete lack of understanding by Trudeau & team of supply, demand, storage capacity and supply chain economics. I guess they don’t teach that stuff in liberal arts courses. Mind you, he started studying towards a degree in environmental geography at McGill – but then he withdrew from the program. Too much math and logic, I guess. Perhaps he should consult with CPC MP Leslyn Lewis – who has a Master’s in Environmental Studies from York University, with a Concentration in Business and Environment from the Schulich School of Business. Ok, her environmental expertise is nothing compared to someone armed with a degree in liberal arts, or acting lessons. But sure sounds like she might actually understand how environmentalism and the economy can work together. No sense asking a qualified person, though. Best to appease the teenage voters following Greta Thunberg instead. How dare they? As an aside, I am not endorsing Leslyn at all – lets be clear about that. I merely point out that there are people in government who are actually qualified to talk about incorporating environmental policy and the economy effectively. Some are not. Guess which type we have in power?

Anyhow…

So yes, part of the reason behind the C$ not keeping up is that, although Canada is an energy producing nation, that production was cut off, and now there is investment catchup to do. The fumbling and the lack of investment, per Paul’s question, go hand in hand. Having said that, Canadian energy stocks in my opinion now have strong potential – perhaps more so than many energy producers outside of Canada – as we play catchup.  BTW– BA asked if natural gas rising will help the C$. Yes, BA, its all part of the energy trade, and that is good for Canada as we get back on side – assuming no more fumbling & interference. Mind you, with (yet again) incredibly harmful timing, the next level of carbon tax is to start April 1 for Canadian consumers. Keep up the not-so good work, JT.

The other factor hampering the C$ is the rush to the USD in times of duress as a safe haven. Fears of geopolitical risk are certainly pushing money into the USD. And oil trades in the USD.  But its more so the added safe haven move into the USD that is keeping positive flow there – all things considered. I do feel that, as the idiotic energy policies are reversed out of necessity, we will see the C$ rise. Below is the price chart, illustrating that we have strong support near $0.77 and some so-far hard to break resistance at $0.83. If resistance breaks, we might just see that $0.90- low $1.00’s level.

Weekly vs. Daily charts

Marc asks, given that I use weekly charts, how would I trade a breakout (or breakdown)? Would I wait a week before executing a trade to avoid a head-fake?

Marc, its true that I post weekly charts most of the time on this blog. But, again, you need to take my TA course. In it, I talk about using all time frames. On the blog I cannot dedicate the time to do the full chart-by-chart view of an idea. You guys would fall asleep if I did. So, you need to look at the daily chart too.

Regarding the process of entering the trade, you may be aware of my “rule of 3”. That is, wait a MINIMUM of 3 days after a break to enter (or exit) a trade. But that can be up to 3 weeks (3 bars on a weekly chart). How do you decide? Again, this is covered in my course. But in a nutshell, I tend to be a bit more trigger-happy on a fast moving stock – and will use a daily chart with 3 bars to buy or sell on the break. However, if we are talking about a broad index or even a sector chart, it may be wise to wait until the following week (one full bar on the weekly chart, at a minimum). You want to make sure the break is real. Below is the daily chart of the SPX. Note the break of neartermed resistance around 4400. Count 3 bars, and the trendline was also broken by several days.

Below is the weekly chart. It was too hard to place the same arrows, but you can clearly see that one bar (one week) definitively broke the downtrend, and then we got a second bar over the trendline. So, as my course teaches, you have initial evidence of a break. But you don’t go in whole-hog. You leg in. You had enough daily chart bars and weekly chart bars to suggest a couple of legs (lets say 1/3rd, then another 1/3rd on the second week) of your cash so far. Your weekly chart  shows the break is positive, but reminds you its early. So you hold some back. Just in case. As an aside, I just noted to Craig that the daily chart for the SPX and TSX are neartermed overbought. A small correction is due, which is great, so long as we don’t begin a new breakdown. I, of course, will blog on that if as and when.

More to come

I normally don’t blog over two back to back days. Mostly because I don’t have the time to do so. But, I really wanted to get all of these questions answered, so I “toiled upward in the night” as Longfellow wrote. Not really, but I did answer a couple of them late last night.  There are still many questions left on the roster. Craig is working on a batch of them. Hopefully you will see his answers on the next blog.

The heights by great men reached and kept were not attained by sudden flight, but they, while their companions slept, were toiling upward in the night.

Henry Wadsworth Longfellow