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:
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 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.
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.
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.
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.
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.