Ask me Anything: Answers part 1

Last week I posted a blog noting I would answer reader questions assuming they would be of interest to the broad audience. Wow! What a response. I am dividing the questions up over a couple of blogs this week, so bear with me. Your question may appear below, or later in the week. Some of the questions I answered on the comment section. That’s because I felt they were pretty easily answered and I could do it quickly in a direct reply.

Here is the first batch of questions:

 

Canadian banks

Richard asks about Canadian banks. He likes their dividend history and current yields.

Prior to the COVID crash, banks had been stuck in a sideways pattern since 2017. This was around the time when the “risk-on” trade came on full-blast. Why buy a stodgy bank when FANG’s are all the rage? That, along with low interest rates (which don’t help their profitability, despite a hot Canadian real estate market) kept the group subdued. Nonetheless, it was a great sector to trade in and out of – note the BMO ETF chart below and how rhythmic the support/resistance points were. Or, you could sit on them and just collect the dividend, ignoring the noise.

After COVID, the sector has struggled. Reality has hit the banks. You’ve seen my bearish comments on the loonie and Canadian economy in the past- so it wont surprise you that I have avoided the sector for our Equity Platform (we do hold a bit of exposure in our income platform, strictly for dividends).  The worlds highest leveraged consumer, an energy reliance, a spend/tax business-unfriendly government has been signalling trouble for bank profits for years. Recently, the sector came up to old support, which becomes new resistance. I think that’s about as high as prices will go for the stocks. However, we do think the dividends are safe, at least for now. So, we think its best to invest for income, not growth, in this sector.

 

Opinion on Long Term Health Care

Daddyo asked me about the outlook for the LTHC sector given potentail legal issues surrounding COVID deaths, and new regulations facing the industry. This is more of a fundamental question, so I asked ValueTrend’s resident CFA to weigh in on the issue. Here are Craig’s comments:

“Chartwell has less exposure to long term care then some of the other names in the space; Extendicare, Sienna (previously Leisureworld). They have a market capitalization of $2 billion, with a fairly high amount of debt. This is an industry that has been struggling to get better margins, even before the pandemic. The near term road ahead seems full of challenges that will continue to increase the pressure on margins. If you need /want exposure the leader Chartwell does seem the better choice. All names mentioned have exposure to Ontario. Chartwell is the most geographically diversified.”

On Craig’s notations, I’ve posted Chartwell’s chart…note that the stock is basing, but has struggled to break out of that base even in the recent rally. Technically, its a 5/ 10 situation. I’d wait for a breakout through $9.75. And as Craig notes, the sector has its problems, so you may not see such a break for a while.

Averaging back in

John asks how we are stepping back into the market. He read my “Plan” blog which was written on the last day of April. In that blog, I noted:

“If 3000 is taken out to the upside, I expect to add one increment of cash (after 3 days). If it stays above that level for 3 weeks I’ll step in with more cash. As the market moves higher, we commit more cash.  Buying a dip after a higher high is a great opportunity to step in with more of your cash….So long as we keep to the  bull market definition (rising weekly chart peaks/troughs, above the 200 day SMA), we stay net long. Sure, we might adjust cash up or down according to Bear-o-meter readings. Same with beta”. 

So, to answer the question: We began buying about a week after the market broke 3000. At that time, we also did some swaps to remove stocks that appeared to be more vulnerable, should the market turn back down again. In other words, we knew we had to go in with some of our 35% cash, but we didn’t want to end up buying at the end of a clearly over stretched rally. So, we focused on swapping some stocks into better values, and then we focused on adding new positions (spending cash) by adding new positions or buying more of some existing true value stocks. These were / are stocks with clean balance sheets, reasonable valuation (not the crazy-11, as noted here) and nice base formations. We really like stocks that appear to be in the initial stages of breaking out, or are near clear support levels and holding. I talked a little about that stance here and gave a few specific examples here.

We added a bit this week on the selloff. But we have not gone past the 1/3rd cash investment yet. That’s because we are getting very mixed (negative) readings from the Bear-o-meter. Its a conflict–the moving average break is bullish, but the Bear-o-meter reading signals caution. What to do, what to do…

We typically like to hold at least 15% cash (or more!) when we have a high risk Bear-o-meter reading. As such, we reduced cash to 22%  because of the moving average break forcing us to buy. But the Bear-o-meter signal suggests holding off on the next third of our cash – rather than legging in further. That can change at any time. We’ll happily add the next third of our cash if the SPX stays over its 200 day SMA and the Bear-o-meter can get back to at least a “3”. I’d imagine we would be fully invested by the fall in this case. But it struggled late last week. So who knows? I may even be forced to reduce equity soon. I’ll give it a bit to see how it plays out.

 

Preferred shares

Shawn asks about preferred shares. I’ll assume he is interested in Canadian issues. There are a few preferred share ETF’s out there we can look at for “benchmark” charts of that asset class. The iShares (CPD-T) is probably the most widely traded. It used to be called the Claymore Preferred Share ETF until iShares bought them out. The others are Royals RPF and Horizons HLPR. Horizons has an active preferred share ETF (HPR) as well. Its run by Fierra, who are smart guys. But that didn’t help the fund avoid the recent downturn in the sector.

Basically, you can see a crash and burn decline on the sector as illustrated by the CPD chart. Its reversed, but there is a fair chunk of resistance between $11-11.30.

Inflation is coming, but perhaps not for another year or…..(insert your guess here). So if you can grin and bear the intern, you may see rates rise. Note that long termed preferred’s are like long bonds. So you need to really examine the duration, so to speak- or compilation – of the ETF. Or pick short duration or floating preferred shares individually when the time comes (not now) to take advantage of rising rates. I cannot advise you, but you may want to explore the active ETF from Horizons. No insight or attachment here – and I don’t know if they will do any better than the market – but it may be worth a look to see if the manager has any leg up in guessing the direction of rates etc.

Island reversals

Wendy asks about the accuracy of island reversals, and if June 5th to June 11th was the formation of such a bearish signal.

As far as the accuracy of this formation, my own experience suggests that the island reversal is in fact pretty reliable. Backing this, Bulkowski notes in his “Encyclopedia of chart patterns” that it is indeed a predictive pattern, especially for tops. The failure rate he noted in his research was only 13%. The most likely decline he shows in his data (its an old book published in 2000, so the data may be less accurate now) was 10% after such a formation.

The chart below shows us the current island reversal on the daily chart – note the gaps on each side of the bars that formed the recent highs. Islands are characterized by a few bars surrounded by a gap on each side (a gap up, then a gap down). I’d suggest that this formation is accurate at the moment, given the rather parabolic reversal we saw off of the March lows. I’ve noted in the past our own strategy of holding cash, gold, and low beta stocks at this time. Island reversals on the daily chart don’t suggest a major correction, but the current market pattern certainly suggests a very overdue pullback likely–possibly into the 2800-2900 zone.

4 Comments

  • Wow, the Fed jumps in again! Something like $250 billion worth of individual corporate bond buying. I suspect this squashes the bearish signal of the Island Reversal!
    Thank you for your earlier comments about Island Reversals. I found your opinion interesting.

    Reply
    • Read my part-2 Answers blog today Wendy–I quote a pretty smart analyst on his view of this occurance.

      Reply
  • What is the best DOW 30 ETF hedged in Canadian dollar. Thank you

    Reply
    • I don’t know the best one. Probably they are similar, so it would come to the MER–look it up on their websites.

      Reply

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