Comfortably numb


This blog is a recap of a client update that we are sending out. I thought it would be of use to you for some forward strategy pondering. BTW – if you don’t already subscribe, our newsletter is sent out once or twice a month. It’s a recap of our client update, ex the specific stock trades we are doing within our models. You can subscribe to by clicking the button to the right of this blog.

If you read this blog regularly, you might be aware that my technical outlook for the market is bullish in the coming months. Sure, there will be fluctuations (possibly even a re-test of the Feb. bottom).  But at the end of the day, I think the market will be higher by the summer. However, I’ve also published several opinions that look at longer termed bull/bear market cycles and other metrics. This research has lead me to suggest that a bear market is due sometime in the coming year or so. Just to be clear, a correction is defined as at least 10%, but no more than a 25% pullback from a peak. A bear market is defined as more than 25% pullback from a peak. Here are some blogs on that subject:

How long can this keep going on?
Armchair Elliott Wave: The macro position of the market 

Some people have asked me how far markets might fall in that potential bear market. My view is that February’s 10% correction did give the market a healthy pause that will allow for a few more months of upside. However, after the near termed upside, the potential for a traditional bear market of more than 25% is strong. This is not to suggest that we are in for another 50% + bear market meltdown – such as those seen in 1929, 2001, and 2009. It is likely that the bear market (assuming there is one) will likely be a more traditional 25% pullback – or thereabouts. Here’s why:

The conundrum

The massive amounts of cash generated via fiscal stimulation, leverage and easy money has created a conundrum for central bankers across the world. The consequences of a massive correction would be catastrophic for financial markets globally – not just North America. We do not think the next bear market will be nearly as deep as that of 1929, 2001 or 2009. That’s because central bankers across the globe will be forced to keep their policies accommodative and even-handed. This, even as they unwind the stimulus measures that have guided us through the past 30 years of bull markets. Nevertheless, we will want to play any bear market pullback with an opportunistic point of view.

Comfortably numb

Progressive rock legends Pink Floyd’s most iconic album was “The Wall”. One of the musical segments of this masterpiece is a song called “Comfortably numb” – something that I feel investors have become.


Clients who have been with us long enough know that the very best thing that can happen for a ValueTrend client is the worst thing that can happen to a buy and hold investor. In a nutshell – sometimes the markets reward the buy and hold crowd. In that environment, investors grows comfortably numb. Suddenly, markets get rough, and the buy and hold strategy turns the numb feeling into one that feels more like nausea.

At ValueTrend, we have a history of taking advantage of the bear market cycles, rather than be victimized by them. Ironically, it has been the years of rough markets, not the bull markets, that have helped ValueTrend outperform our North American Index (85% TSX300, 15% S&P500). There’s nothing like a good bear market to ramp our portfolios up!

Below are a few trends that we suspect may influence our decisions in 2018

Taming the bear & riding the bull

Bears are normally dangerous animals, but we are experienced bear trainers! We don’t use whips and chairs to train a bear. We use Technical Analysis tools such as weekly chart formations, moving averages, and my Bear-o-meter (which was recently published in the Canadian Society of Technical Analysts Journal – contact me if you would like a free copy).

Here’s how we tame a bear: We will sell if the S&P 500 beaks a lower low on the weekly chart in concert with a break of the 200 day moving average. We will leg out more aggressively as my Bear-o-meter signals the severity of a correction.

Conversely, once the bear is tamed, we want to ride the bull. We will leg back into the market as the Bear-o-meter signals bullish readings, and the S&P 500 moves back above its 200 day moving average while moving ahead of its previous low.


Rising rates

Incoming Fed Chairman Powell gave his first address on February 27th. He hinted that the Fed may raise rates not 3 times, as expected by the market, but 4 times! Rising rates are generally considered bullish for financials. Our equity platform is fairly heavily influenced by such financial entities as Canadian and US banks, Insurance , brokerage, and credit.

Interestingly, companies that are heavily reliant on credit, such as utilities and telecom, are normally a bad bet in a rising interest rate environment. But at some point, all of the potential bad news will be reflected in utility stocks. At that point, you might expect that I will take an opportunistic approach to these sectors. Yes, I will be blogging on such opportunities as/if/when they appear.

Steady USD

The falling USD affected our equity platform returns last year. A 13% peak to trough loss on the USD vs. CDN $ made our US holdings look worse than they actually performed in 2017, given that we report in CDN$. This year, the opposite is proving to be the case. Rising US rates and a strong economy should strengthen the USD vs our loonie. And that’s good news for our US stocks. What hurt us last year will help us in 2018. We’re buying US stocks without hesitation with this in mind. The recent Canadian budget has added fuel to our strengthening USD scenario. Specifically, the Liberal government’s piling on of more debt (without suggesting when a return to balance can be expected!) is not CDN $ positive. Note the trendline and support line tests on the chart below for the USD vs. the world currency basket.


Resource stocks

The woebegone resource and materials sectors are areas we expect to see some upside from here. That’s good for our oil stocks. And it’s good for the TSX in general. We hold 3 energy stocks and a broad market TSX ETF. All in, we think this is a place to be – at least for the next few months. The chart below shows my potential WTI crude oil targets.


  • Thanks for your insights Keith, except Comfortable Numb is from “The Wall album”.
    Sounds like the non-hedged versions of ETFs, will work better than the hedged versions, if the Cdn dollar will still moving lower in the next 6 months ? Would you use covered call strategies in ETFs at this time ?

    • Bernie–man, you are right about the Wall album–boom! Changed!
      I do see on the CDN$ chart a trading range at this moment–the picture is flat for now (($).78 to 0.82 tight trading block). It is at the bottom of that range ($0.78) as I write. Likely to stay or float up a bit in the nearterm but the forces of a strengthening USD will eventually send it down. So yes, unhedged ETF’s and direct USD stocks should be good if you hold for a year and dont mind the short termed up/down noise

  • I am holding the zbk etf which holds a basket of the u.s. Financials. Do you think the us financials are still good bet fpr the next two months?

  • Hi Keith,
    We have positions in utilities (pipelines) and BCE. Do we take losses now and get in at a more opportune time later? We are down on average about 5% in these stocks. Do you believe the summer will be better or just hold them? What do you think most people should do? I appreciate your opinion.

    • Tough call John
      As noted, the utilities will eventually be a great place to be. Lousy fundamentals (interest rates) are forward looking. This means that the bad news/bad fundamentals will affect the stocks NOW, not later. So at some point (that I think will be in less than a year in the future) – it will be a screaming buy opportunity to jump on utilities. Can you bear through the neartermed downside if you already hold them??
      If you can ignore the noise, you will likely be ok in utilities in a year. Meanwhile you do earn the dividends….

    • On the way out we go 15% cash minimum then leg out from there according the the Bear-o-meter readings/ market meovements
      Truthfully, we are substantially qucker to get back in–in the recent pullback we legged in over about 2 weeks after the low point (S&P 2500)

  • Keith, when looking at a charts and planning your exit, what do you think about dividend adjusted data versus non-dividend adjusted data? Surprisingly, I have never read anything about his important decisions to make. Only recently, on Reddit, but people there are not professionals, so I’d like to know what you think.

    I have a clear example which I do not own: BPF/UN.TO

    Looking at a 2 year time frame, on a dividend-adjusted chart (stock charts) it’s above its 200 week MA. That MA is nicely going up at an angle that isn’t steep.

    On a non-dividend-adjusted chart, the price is BELOW that 200 week MA. Also, that MA is not going up. It’s flat.

    Many stocks loved by yield hungry Canadians are in that situation right now. Could that be an interesting blog entry?

    Otherwise, I’d love to know which you use and why.

    Thank you!

    • Matt–you bring up an excellent point.
      When I look at charts I tend to do the non-dividend adjusted option on stocks that I know are higher yield. Exactly as you note–the dividend distorts the chart. To me, the biggest problem is that the points of support and resistance are incorrect on the div adjusted charts. The dividend adjustment makes those points form at incorrect prices. Eg: BCE (a stock with a a high dividend) shows support in late 2016 to early 2017 at around $54 on the div. adjusted chart. But wait…if you do the NON div. adjusted chart, that support was around $57. The fact that the stock is now trading below $57 suggests support has cracked, which is bearish. But the div. adjusted chart suggests that the stock is still above its old support levels.
      The fact is, BCE had buyers come in at $57 back a year ago. Not at $54 so much.
      For readers using, the way to eliminate the dividend adjustment is to put an underscore line before the ticker.
      Thanks Matt.

      • It may be obvious to other readers, but I am surprised by the fact that _BCE.TO had support at 57 and BCE.TO at 54. I expected the dividend adjustment to push the price higher by the dividend amount, and so, that BCE.TO would be higher than _BCE.TO. In other words, the dividend adjusted chart who always “look better” since instead of disregarding the dividend, it included it (after all, a dividend is actual money).

        Do you understand my confused and can explain a little more?

        Many thanks,

      • The part that may be most important is when you say:

        “The fact is, BCE had buyers come in at $57 back a year ago. Not at $54 so much.”

        Is that the case? Here’s the way I see it. On the ex-dividend day, if I log into Questrade, the price I see removes the dividend, so I assume what I am seeing is BCE.TO rather than _BCE.TO. In that sense, aren’t buyers seeing the dividend adjusted price?

        • Matt–good question–yes, peoploe pay attention to charts. But more people pay attention to what they have paid for a stock in the past OR the opportunity they missed when they either failed to buy or failed to sell at the right time. They regret the missed opportunity, and jump on buying (or selling) if the stock moves to that price again–so their memory shows up on the charts as support and resistance. The more touches of support or resistance zones, the more significant because that area represents more people / institutions who bought (and sold) at those levels. That’s why I don’t bother with div adjusted pricing on a high div. stock–people recall the price they paid, the dont necessarily do the math and calculate the dividend into that price.
          That, I hope, answers your question


          • I do see what you mean: Most people recall the price they saw when they bought it. That does make sense.

            Here is where it’s hard to be completely convinced: short duration bonds.

            I’m comparing _ZCS.TO to ZCS.TO.

            The first looks terrible. The price is steadily falling and all average are pointing down. The second seems to make more sense. Maybe it’s because the dividend is large relative to its price movement. And extreme case.

            What I think I will do is to use whichever has a price that respects the moving averages the most. Much more work though.

    • zbf? don’t know that ETF–couldn’t find it on my Reuters–did you mistype the symbol?

  • Is the ZBK still a buy given its recent run up? When do you know when it is time to take profit?

    • We still hold our US bank ETF (ZUB) which is simply the hedged version of ZBK. They may be a tad overbought from the momentum indicator signals, and it could pull back a bit–but no deterioration in the chart –and seasonals remain good until the spring. So–depends on how or if you want to finesse the trade. My bias is that one way or the other, the sector will be higher in 2-3 months. So you need to decide on whether to finesse the entry point if you decide on the trade.

  • Is the WTIC patter you outlined a inverse head and shoulder pattern. It’s broken out already? Left should not as well defined as right shoulder.

    • Hi Silver
      I don’t spend tons of time worrying about the “name that pattern” game–and no pattern is near enough to the textbook explanation that you cant present arguments against it. I am more concerned about identifying the phase–A phase one bottom is essentially some sort of consolidation with a neckline or point of resistance that has been tested a few times unsuccessfully. When that resistance/neckline is penetrated (upwards in this case), its considered a good potential for a breakout into a new uptrend (phase 2).
      WTIC oil has broken its neckline/resistance that lies somewhere in the $60-62 price range. Whether it is a perfect head and shoulders pattern or not–it looks like a breakout, or at least a potential breakout from a consolidation. BTW–I spent a bit of time in my book Sideways discussing the importance of identifying the phase and how to do it. The naming of the phase is less important–as you note, its hard to find a perfect representation of any consolidation pattern. So instead of head and shoulders (bottom) – lets call this one a purple rubber duck breakout. A rose by any other name is still a rose—


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