“Flat” is the new “up”

“Sometimes the best investments are the ones you don’t make.” – Donald Trump

Stock markets had a pretty rocky year in 2011. Trading patterns on the markets were actually fairly manageable for most of the year, but the latter months of 2011 brought on a level of volatility that most traders found difficult to profit by. Portfolio Managers utilizing technical analysis seemed to have had an advantage over pure fundamental managers in this environment. I think that this phenomenon will continue for a while. I spoke about this phenomenon on BNN’s Market Call program on Tuesday.

A colleague jokingly gave me the title for this week’s blog during a recent discussion. He stated that most investors, advisors and managers lost money last year. Thus “flat has become the new up!” according to my colleague. My own equity portfolio performance, which is posted on my corporate website at www.valuetrend.ca was positive by 1.4% for the 12 months ending December 31, 2011. The TSX 300 index was down 11% and the S&P 500 was flat for the year. I’m never happy with such a modestly positive return on my equity model, but it did offer some proof that technical analysis offers a tool to limit ones risk during negative market conditions.

In volatile markets, it’s just as vital to preserve your wealth by avoiding potential drawdown’s, as it is to pursue returns. Donald Trump is right; sometimes the best investments are those you don’t make! This week lets take a look at a few sectors that look technically bearish. Consider avoiding these sectors until they prove technically more attractive.

Real estate (RWX)

The global real estate charts look ugly. RWX  broke down in September and is consolidating in a symmetrical triangle formation. Unless an upside breakout occurs, consider it a dangerous place to be.  As for making new investments into Canadian physical real estate (residential houses, income properties, etc), recent bearish research commentaries by many analysts sugest that Canadian real estate is overvalued and due to correct.   Merrill Lynch, Capital Research, The Economist and Yale Economics professor Robert Shiller (amongst others) have all commented on the negative outlook for Canadian real estate prices for 2012. The signs are not looking bullish for real global or domestic estate investments at this time.

Gold (Spot price)

Sorry gold bugs. While I certainly think there are going to be ample short termed opportunities to trade gold (and silver) profitably over the coming months, the 3-year uptrend in gold was decidedly broken in December. All investment themes and theories concerning a return to the gold standard or International financial Armageddon must be put aside for time being, as the charts do not lie. Gold has, for the time being, discontinued its bullish bias – and will not be a buy/hold investment unless it enters a new uptrend (defined by 3 higher highs and lows). Look for near termed support at $1550, $1480, $1430 and even as low as $1300 (not shown). As mentioned on my prior postings, waiting for a bounce off of those support levels before buying, and selling on technical chart deterioration is currently the best way to trade gold. I will cover such trading opportunities on this site, so stay tuned.

S&P TSX 300

The TSX remains stubbornly stuck in a downtrend. I have warned investors on this site about avoiding broad TSX index ETF’s. Like gold, you can trade this index for the short term based on oversold/overbought signals. Even so, you are fighting the market currents when trading within a larger downtrend. Unless you have a pretty quick trigger finger, avoid the broader TSX plays right now.

China & Emerging Markets

China, and the emerging markets broke support this year. A triangle is forming on the GXC and GMM , which could result in an upside breakout, but also could end up breaking to the downside signaling more pain to come. Avoid these index plays until the triangles break out to the upside; something I’m not convinced will happen, but you never know. A more likely downside breakout from the triangle could signal an reasonable bet for a hedging or shorting opportunity on these markets.