Welcome once again to the Smart Money Dumb Money Show – Ask Us Anything Episode.
I am your host as usual Keith Richards, I’m president and chief portfolio manager at Value Trend Wealth Management. And with me today is Craig Aucoin. Craig is my co-portfolio manager and he’s a vice president with ValueTrend. As you probably already know, I’m a technical guy and Craig is all into fundamental analysis. So we’re covering things from two sides today. And this is the Ask Us Anything Episode. So it’s a big episode because we’ve got literally 24 questions and Craig and I agreed that we would try to get through them in a timely fashion. So we’re going to try to allot just a couple of minutes per question, or so, depending on how complex the question is.
So forgive us for being a little bit to the point, but we think that’s necessary in order to cover all of your questions. And yes, we did manage to level off exactly all of the questions that you guys have given us. A couple of them, we have combined. So you may hear two questions in one answer, and we’ll address that as we hit it. So as we talk, each of us will go back and forth and I’ll just start with number one and work our way down. So I will start with the first one and I’m, it is a double one. You’ll see me look down once in a while. That’s because I’m looking at my sheet of questions, but I’m going to start with William and Sam. And both of them asked more or less the same question, which was what is my outlook technically for the S&P 500.
I think it was William that asked for the longer-term view and Sam asked for a more near-term potential for the downside. I’m going to bring up a little bit of a PowerPoint that I put together, and I put a few charts on that PowerPoint. This is a chart that will help address the question, and I’m looking at a fairly long period of time here. So we’re going way back to 1990 and a couple of things I wanted to point out. And that is that at the bottom here is a rate of change. It’s a very simple oscillator, but because this is a monthly chart, I’m using a 10-month rate of change. So what it does is it measures 10 months back and the percentage gain over every 10 month period on a forward going basis. When the rate of change spikes and it’s too much above the 200 day moving average, and you know because you follow my blog and you read my material, that when the market’s too much over a moving average, and in this case, I’m using a 50 month.
So it’s a, it’s a biggie. So that’s, that’s quite a long period of time, but it really gives us an idea that the market becomes overbought at that point. I’ve noted that here and you can see it was, it’s been pretty predictive. You get these spikes in conjunction with the market being too much above the moving average. Well, that’s what we had. And, and typically these spikes occur after a parabolic move. So this is the green line is the trend line back in the nineties. You can see the jump up over the tech bubble, and you can see the green trend line that occurred since 2009, which was the bottom of the last market crash. And you can see a parabolic move there and a parabolic move there. So we had all kinds of evidence that this was going to happen.
So to answer, I think it was Sam’s question, how low can the market go? Well, you know, it’s anyone’s guess. In fact, I just wrote a blog the other day, as far as my thoughts of it moving into possibly a sideways period where we don’t go any lower than the recent lows. My thoughts right now, though, is that the worst-case scenario is it’ll probably move into where the trend line touches. And you’ll notice this 50-month moving average, it’s a big moving average, has been pretty darn good support over most bull markets. So you follow the red line and you’ll find that the markets don’t generally move below unless it’s a major crash. So projecting it all, I’m going to suggest that your maximum downside is probably somewhere around that 3,500 level, but I’m not predicting that because it could just end up going sideways for a while, which read my blog as of yesterday.
And you’ll see that thought that we may be moving into a sideway period. As far as where we will be at the year-end. Honestly, that was, I think William’s question. William, I don’t operate like making projections for X months from now or one year from now, the market will be here. I don’t do that because as a technical person, we have to be asking what is it doing? What it may do is immaterial. We have to trade in the moment and not form a bias or a theme as to what will happen. What I can tell you is that it looks like it’ll set up for some sort of a, a bottom pretty soon, actually in the next month or so. So that could move into a sideways period. It could move into a new bull market. I don’t know, but I do think that the signs are there that we’re setting up for some sort of a bottom to be put in in the next month or so. All right. So the next question is for Craig and Richard asked should stock investors still go into cash like the equity managers have done? So I’m gonna, I’m gonna bring Craig on for that.
Hi there. Well, Richard, the short answer is yes. You know, according to our way of thinking, you should still raise cash even when you’re invested in dividend stocks that have a stable dividend. The theory or our thesis is that if you’re gonna be collecting 5% annual on a dividend stock and you expect the stock to fall 10% in the next six months, well, why wouldn’t you sell the stock in an expectation of that, and then buy the stock back when it’s 10% lower. Yes, you might not have collected your two-and-a-half percent dividend in this time period, but yyou would’ve saved yourself 10% loss of capital. And if you can buy it closer to the bottom there you’re gonna gain both the dividend going forward and the capital appreciation. So yes, there’s a timing element to it, but at the same time, that’s how we expect to operate in a risk-mitigating fashion.
Okay. Next, next question.
The next question is also for Craig. There were two people that asked more or less, again, a similar question, and that was regarding credit investing alternatives to income investing beyond bonds. So we’ve talked about dividend stocks as one alternative, but Craig, what other ideas do you have for Jack and John who asked these questions?
So Jack specifically, Jack had a distaste for fixed income as a part of his allocation, which you can, in the recent environment, you can understand why bonds have not been a good place to be. The alternative then suggests savings vehicles. See that savings vehicles seem to indicate that you’re gonna get a guarantee on your return, which has been, been appropriate recently because you’re getting that. And those rates that you’re getting on guaranteed investments are a lot more. They’ve tripled, they’ve gone from 1%, one and a half percent, eight months ago to now you’re getting 4% for a guaranteed GIC. That’s with no risk and no credit risk.
The other part of his question here is he’s asking about credit investing and, you that’s where your credit risk comes from a corporate or an entity that is issuing bonds with risk to them, and that risk as defined by a rating agency. So a rating agency would, and we’re gonna talk more about this a little bit later, but the rating agency gives it a rating below in this case, below government security. Government securities are considered no risk and then the risk above that is the credit risk. A credit risk that a corporation would have that perhaps a municipality would have. and so then if that, there that risk is, are they going to make due on the payments that the bond investors are expecting and the riskier they are, as far as the question of their ability to pay, that determines and gives them a lower credit rating would be riskier. Lower credit rating, more risky entity. So that, is what is credit investing.
We’ve got another interesting question here. We were just speaking with a client who came into our office and they just sold some real estate. So this was a question regarding real estate. Now I must point out that we’re stock and bond people here. We do stocks, bonds, and commodities. We don’t trade real estate. We don’t spend a lot of time analyzing real estate, but there are a couple of comments that I’ll say on my, in some ways my opinion, but also I’m going to bring in some thoughts from another expert on the direction of real estate. It was a person named New York Jets. And you think Craig, that that was his real name, or is that just a handle? Cause imagine if you named your child New York Jets and then that child maybe meets his wife at a Super Bowl and he makes a pass at her. That’s how they got married. They met each other anyways, I digress. So New York Jets asked, will real estate crash?
I will go back to my screen share. This is real estate home prices versus disposable income. And this comes from a corporation called Coplay and this data is right up until about the spring or so of this year. So it’s pretty timely. And you can really see the difference between American patterns. The gray line is incomes, the American income levels in all of USA. So this is across USA, average income, and this is across USA and that’s, it’s a big place, the United States, but these are the prices and you can see the ’08 bubble and the crash and you can see where incomes were in relationship to that. So what you’ll see is they, more or less are, especially right now in the states, real estate is pretty much in line. It’s a little ahead of the incomes.
Incomes are coming down a bit, but it’s not parabolically, from a price perspective or from a relationship to the income perspective, not so bad. Canada, a totally different story. Literally in the past, more than a decade, the markets move so far over the average Canadian income. Again, it’s a cross-country, wide income average that, you know, we have literally become, and this is something you can look up for yourself. We are the highest in debt on a per capita basis, consumer of all the G7 nations. So we’re very, very leveraged and real estate, the red line here, has just gone absolutely parabolic. So the issue, you know, when you compare the two, yeah sure, prices are coming down in the states and prices are coming down in Canada, but you know, this is my personal opinion, just based on what I’m looking at here.
And again, I’m not a real estate expert, but I think there’s a lot of room to go down and I’ll, I’ll carry that forward because Brooke Thackery wrote a research report. And if you look, the report was written on March 28th and, and he projected, he gave a lot of statistics. He didn’t just offer an opinion, it’s called ‘Letter to my Children’, but he gave a lot of statistics showing why he was projecting at the time, something like a 30% drop. And this was going back, which his timing was perfect because literally, the peak was about a month later in Canadian real estate. And he confidentially told me that 30% was kind of a minimum projection based on his work. So, you know, now, again, he’s not a real estate expert either, but his data put more than just one simple chart like I just looked at.
And I think that’s worth considering that the Canadian situation versus other places in the world is a little bit more aggressively priced. So, you know, we have to take that into account when we look at real estate.
In the next question, Hank asks if healthcare stocks, which are primarily normally a low beta place to be, are still a good place to be given the weakness of the group? This is the healthcare index in the US. Now you find a very similar look if you bought iShares, the one that’s listed in Toronto. But when Hank talks about it being weak well, true enough, you know, from its peak it’s down, but everybody that follows my work or follows technical analysis, in general, knows that this is a consolidation pattern.
I mean, you could pretty much draw a horizontal line here and, you know, healthcare actually it’s down, but it doesn’t look like the S&P 500 or the TSX 300. It’s held out quite well. So, you know, to me, it looks like a trading range. So was that a better place to be than the TSX and the S&P 500? Absolutely. It’s still been a low beta play. Low beta doesn’t mean no risk. It just means it moves less than the market and that’s up or down. So it’s definitely moved less than the stock market to the downside. So I still think that healthcare is a decent place to be if you want low beta stocks. So we also have another quick question that I can answer in 10 seconds, and that is Bob asked, why am I not on BNN anymore?
And the answer is I’m a technical analyst. And 100% of my work has to be illustrated by looking at charts. So if you watch BNN you’ll notice it’s all the fundamental people and Brooks still is on the program, but he does seasonality so he can describe that verbally. But for me and every technical analyst out there, you’ll, you’ll notice that none of us, you know, Don Vialoux and, and all of us are no longer on the show because we need charts. That’s the reason. I was in contact with the producers back in early 2020. My last show was I think, February of 2020 or something like that. And I haven’t been on since, and it’s because of the fact that they are not yet letting people back into the studio and they don’t have the technology set up to allow me to share screen, like with Zoom, at least, I guess, with some controls that I probably, you know, censorship and stuff, would they always have to take that into account? So they don’t have the technology to allow technical people to show their charts and therefore no technical analyst is on the show. All right.
We’re going to get to Marlena’s question and that is for Craig. So Craig take it away and I think we have a slide for you, so I will bring up the slide.
So it is another credit question and its on investment credit. Investment grade credit is the question. So investment grade credit is quite simply back to the rating agency rates credit and an AAA-rated credit is, is very, very strong. And so investment grade is anything that is included in investment grade, but in investment grade includes anything down to a BBB-. That’s by Standard and Poor’s and by Finch, by Fitch. And Moody’s, however, has a different rating for investment grade. Anything above B , AA is investment grade. So anything below that is considered junk or high, high yield, therefore we go back. There’s a lot more risk and that risk is in, in that the counterparty, the issuer, is going to be able to make good on the payments and paying back the principle on those bonds.
Okay. So if you know, an investment grade credit, you consider that quite stable and that you’re going to get your coupons. You’re gonna get your payment as well as your principle with a high degree of certainty. Then now the lower you go on the scale and when you drop into high yield and junk, you’re really taking a considerable risk on whether that entity is going to still be able to pay at the end of, when payments do as well as when the principal is required to be returned. Okay. So that’s the essence of the credit rating system.
All right. Well, thanks, Craig. And by the way, you’ll notice that I’m paraphrasing. Like if you see us answer one of your questions, you go, well, actually I expanded on that, but we have to paraphrase it a little bit because for us to read an entire paragraph it gets complicated. So I’m trying to get it down to the nuts and bolts of someone’s questions.
So Alvin asked, what sectors do we like coming out of the bear whenever the bear market ends? And that’s the issue, isn’t it? So these are some of the sectors that we like. Now, of course, we do like the, right now we do like the Staples and you know, those, those lower beta stocks, but there are some, there is some argument for the value sector as well.
Whether it’s now, which you can see does not look like the S&P 500. It’s been okay, it fell, but then it’s been kind of basing. So this is the Vanguard Value ETF. So we, we like value stocks going forward, not just during the bear phase of the market because they’ve been relative outperformers and we think they’ve got a lot of catch-up to do so because they were so overlooked when it was all about tech stocks and the FAANG’s and all that sort of thing, Tesla, whatever. Now we think that there’s some catch up to do on the value stocks. So both now and going forward, I think we’ve made it pretty clear through our, if you subscribe to our newsletter and read my blogs, that we like commodities. Now, commodities have come down in the past year. They were outperforming in 2021.
But now they’ve come down a bit in general, but they still look pretty good and it’s a longer-term trend that goes back to 2020 began, you know, a couple of years ago that suggests that commodities are still okay. I can’t say that the same long-term trend since 2020 on the S&P 500 looks like this at all. It’s definitely broken down. Not to mention there’s, if you read our most recent research report, so if your newsletter subscriber, you will have received our report arguing for the potential of a sideways market. And if you do read that report, you’ll notice I put in a long term chart, like I’m talking a hundred year chart of the CRB index, and you’ll see that there’s a real argument for longer term performance on commodities. So we definitely like commodities.
I’ll disclose we own this particular, this is an ETF. This is the Brazil ETF. So we are, we are holders of this both personally and professionally. But we like this as a tradeable. I mean it really, you know, the S&P 500 fell and never hasn’t really rebounded. Whereas this, this is very most definitely a trading situation, but we like Brazil because it does have commodity exposure through Petrobras. It’s one of their biggest holdings. As well as there’s some possibility that if the US dollar starts to weaken the emerging markets will start to still look a little bit better. So that’s, that’s one thought we like as well. And then one to watch, we are not in, so this is more a question of what are you looking at going forward, is China.
Now we don’t own any China right now, but if you look at the blue line, and how far China has come down. And anybody that studies my work knows that I believe in phases of the market. So there’s, you know, up trend, you know, topping, down trend and then basis before you get breakouts to new bull markets. So it’s my opinion that China is in a perfect basing situation. This is the BMO ETF, which again, we don’t own but I’m using this because it’s the A shares, it’s the better quality shares like Alibaba and whatnot. And when this chart breaks out, it’s still basing. We don’t own it. We are not planning on buying it anytime soon, but this is one that we definitely have our eyes on because we love basing stocks when they break out, they’re powerful.
So that’s one to watch. So there’s a few stock ideas for you as far as what we are thinking, what might happen in the next number of months, you know, or, or years.
So the next question is also for me and it kind of ties in. So what are our views on the mining sector? And this is from Lee on copper, uranium, and mining and Harm also asked about uranium. So we own a uranium stock and we’ve owned it for some time. Now I gotta tell you that uranium is not the lowest volatility sector you can buy. It’s up and down like crazy, but uranium definitely, from a fundamental perspective, we feel that there’s upside because of the development of clean energy. And you guys know all about that. But also the trading pattern is good.
Now we, again, we own a stock. We own, we don’t own the uranium itself, but we like the look of the equities and the commodity itself is, is trading sideways, which is, again, is right now, outperforming the S&P 500. So we, we do like the sector a lot, and we think there’s, there’s some, both fundamental and technical reasons that if this, this little thing breaks, then the producers will follow. And they’ve actually already been moving ahead of this. Now, as far as the outlook on mining, so this, this red line is the mining ETF, and XME on the US, and you can see that it was in an up trend, and then it looks like it’s starting to break down. So, we did own a fair amount of mining.
We owned a mining ETF, base metals ETF, and we also owned Teck Resources a while ago and we sold them. And the reason we sold is because of, of this look, and if we go down to copper, which was part of Lee’s question, you can see why the metals have broken dow and that’s largely because of copper. So not to say that we wouldn’t go back in, but again, we’re technical people first and there may be fundamental reasons to own it, but we need the charts to cooperate. So right now we like uranium. We don’t like the mining sector for now, but remember, you’re allowed to change your mind. And that’s what the beauty of charting is. It’s that the chart changes you get to change. So the next question is for Craig and it’s a question from Vonda, so I will, I’m gonna stop sharing because I don’t think we have a chart for this one. No. Take it away, Craig.
Okay. Vonda is asking about the, our ability to, to predict the Bank of Canada rate going forward and you know, it’s, we can’t use technical analysis to predict what the Bank of Canada is going to do based on what they’ve done before. It’s just, it’s not, it’s not a liquid market. It’s not, you know, it’s not set up to with, there’s no emotion in it. It’s based on the decisions of the central banker. Yes, the in the past there is some, you know maybe speak Keith can, can speak about the, you know, the relation, just setting rates to the bond market, to the charts of bonds, but specifically about the decisions of the bank, the central banker, it’s not, it’s not a chartable exercise. Keith, did you wanna add to that?
Yeah. The only thing I’ll add Craig is that the, the problem with, so Craig mentioned there’s no emotion and, and so technical analysis relies on crowd behavior. Read my book, Smart Money, Dumb Money. It’s, it’s very, very explanatory about this phenomena. If you don’t have a crowd, and you have say a stock, even that’s traded too thinly, you don’t have the ability to be as accurate with your technical analysis because we need mass crowd behavior. And when it comes to Bank of Canada or the fed decisions, that’s not a crowd. The Fed is, what is it Craig, like 10 people or something, 12, 12 people – a group of people, but it’s not, it’s not the entire market. It’s not a massive, you know, millions of traders across the world. It’s, it’s a group basing their decisions on economic details and that kind of thing, whether they’re right or wrong. The Fed was and the Bank of Canada was dead wrong about transitory inflation, but that that’s beside the point, you couldn’t have charted that. They made their decision based on correct or incorrect analysis and charts won’t tell you a thing. Okay. So no, it doesn’t enter into our equation Vonda. Craig, you’re also up next because and this one has a chart it’s Al asks about the DXY index.
Right? Thanks for your question. Al specifically is asking about the DXY and how does it relate to the US dollar? Well, the relationship is the DXY is a basket of currencies that is traded against the US dollar. So, and that’s, that’s the risk. So instead of being, you know, the US dollar against the Canadian dollar, it’s not. We look at how the US dollar trades against that basket of currencies and that basket of currencies is the DXY. And this chart illustrates what that basket is made up of. Okay. So it’s, it’s not one currency, the DXY. It’s a basket of currencies and it’s traded against the US dollar. Okay. All right. So yeah, that’s the DXY in a nutshell.
Okay. Now Craig, I’ve just stopped sharing here and this next question is for you. It’s from Bill and he asked how Canadian stocks listed on US exchanges that do pay dividends, how’s that from a tax treaty point of view?
Right? So for, because it’s a Canadian stock you’re gonna be, as far as the tax is concerned, it’s Canadian income. Whether you’re getting in US dollars or anything else, it’s a Canadian corporate corporation. It’s corporate, it’s a Canadian security. You’re getting paid a Canadian income. And the answer is Canadian income, regardless of the currency it’s in.
You still get the dividend tax credit. Right. Okay. I’m going to bring up a chart again. So this was from A. Wilson and this person asked for my Canadian dollar outlook. Well, right now so this is, this is very interesting because there are a couple of things that work here is that the Canadian dollar by itself against the US dollar is declining, but so is every other currency right now declining against the US dollar. The US dollar has been stronger because they’re raising rates and during a bear market of any type money tends to flight to safety and the US dollar is always considered the safest place to be.
So there are many, many reasons why the US dollar is doing very well. And it’s not so much that the Canadian dollar deserves to be sold off so much because we do have resources and they’ve done okay, relatively speaking. But the big problem is, is that the US dollar’s doing so well. So it’s in a down trend. So you can’t argue with the down trend. However, I covered this in a video recently. So I want you to go back to my videos and where I, address the Canadian dollar and the US dollar. And one of the issues is I’m not showing this on the chart, but the US dollar is at a, at a very major high point that has been only tested about a decade or so ago and there’s no question about it, when you look at the US dollar on its own merit.
In other words, not comparing it. Just how’s the US dollar done compared to that basket that Craig was just talking about, the DXY basket. It’s at all-time highs and it’s over bought by every momentum parameter you could look at. So it is very, very ripe for some sort of a correction. When that occurs, I don’t know. I would suspect when the Fed starts to slow down, ease back on its monetary policy. Who’s to say, although I have some opinions on that, but you know, really those opinions are, are meaningless. Like Craig was saying, you can’t start projecting bank rates because you don’t know what they’re going to do, but whatever the case, the US dollar is over bought. So I believe that this down trend, you must follow the trend while it’s in place. So the down trend on the Canadian dollar still in place, you, you can’t be bullish on the Canadian dollar on a relative basis, but probably sooner, rather than later, you’re going to see the US dollar stepped back.
And that will probably help the Canadian dollar. Now, this is a support resistance point that I’ve noted in the past. You can see it has tested in this area a few times there. So it tested there multiple times. Looks like it’s breaking down, so it could have lower possibly as low as 73 or so, which is where this green line is. But that’s that’s to be seen because the other component is what’s the US dollar moving at. And if that finds a reason to fall, as I said, then you’re going to see this down trend reverse, but for now, it’s going down. And that’s the only thing I can tell you, you is you stay with the trend until it ends. So that’s, I hope, I hope that helps somewhat. All right. This is also the next question for me is for me, and it’s, it’s from Ron and he asked what sectors we should focus on during this bear market.
Now we looked at healthcare a while ago and healthcare has been trading sideways, but I want to just point out two other, other sectors that we are in. For example, we own this ETF, so we should disclose we own it personally and professionally, cuz we do eat our own cooking you know. We own our models personally, as well as for our clients. And so this is the XLP Consumer Staples. And as a group, you, you know, we own lots of individual Staples as well and as well as Canadian Staples and they’ve been moving sideways. They’ve actually been doing great. Again, look at the S&P 500 and it’s kind of down here. Staples have been sideways. No, you haven’t made much money in the past year, but you’ve not lost anything either. It’s been a relatively great place to be, which by the way, is one of the reasons beyond our 40% cash in our trading for the fact that we are up quite a bit over the past year and the market’s down quite a bit. Like we’ve literally got a, a 100% differential in performance between the US and Canadian markets versus our portfolio.
And it’s because we moved out of the commodities and stuff that were moving very well. We still own a little bit. We own some nat gas producers. We own the fertilizer company and we own the uranium company I just mentioned, but we’ve been heavily invested in sectors like this in individual staples. So you win by not losing and staples definitely are the place to be during this bear market and most bear markets. Now another area, as I said, I already mentioned healthcare. The other area is value. And we like value for both the short term and the long term, because if you look like this is going through the good years, 2018, 19 into 20. Yeah, they were moving up but if you look at the parabolic moves on the tech sector, like the NASDAQ there, you know, they really underperform.
And we think that there’s a big differential, there’s a gap to be made up on value stocks. So there’s no wonder why they’re moving sideways when the rest of the market’s going down. But the other thing is what will they do when they break out because the market will break out. And I think these guys are gonna be leaders because the, no matter what, I mean, we don’t mind the tech stocks when they break out, we will be in them. But we still think there’s a real argument for having value stocks in your portfolio. So the next question is for Craig and Paul asks about where we put our cash.
Hi, Paul. Thanks. Thanks again for the question, Paul. We’ve touched on this before earlier, but in an environment where bonds are not giving you a reliable return, we’re putting our cash into high interest savings vehicles. These are guaranteed vehicles that are now paying north of 2%. That’s double what they were paying less than double and sometimes triple what they were paying just six to eight months ago. So and this that’s really, there was no other alternative. Anywhere where you’re not getting a guarantee on your cash is you you’re, you’re taking risk and risk, while it may give a potential for higher return, there’s a potential for loss in that, and we, we don’t think cash is ever something that truly, if it’s gonna be cash, it needs to be guaranteed and it needs to be completely safe. So, yeah, it’s high interest savings or GICs if we wanna extend it a little longer. Okay, next question.
I’ll just add Craig that you’re right. Like rates have not been that high. So we personally, in our equity platforms, didn’t like in past years when rates were higher, we were buying high interest savings accounts and whatnot for their cash holdings. But this year we didn’t, because two reasons we, we wanna be flexible. And when you’re only gonna make like a half of a percent and you, you still have to even a high interest savings account, you have a one day settlement. So you, you know, you don’t wanna have to mess around with, with settlement periods, if you think you might have to move quickly. So it’s not often, to us, worth the trade off to try to make, you know, over a five month period or four month period, you know, half of half of 1% or whatever it is, you know, that we might make on investing in a higher savings account, especially when rates were that low. They’ve come up but for Craig’s point, they were pretty low and so it really wasn’t worth it this year to be bothered and give up on that extra little bit of liquidity. Now the next question is also for Craig and it’s it’s from David and I, I won’t even try to summarize what David asked Craig. He asked some fundamental questions and that’s all I’m gonna say. So all I’ll hand it over to you,
David. I have broken David’s question into 2 parts. The first part he asks about earnings per share and whether we’re, you know, whether an analysis where we focus on a basic earnings per share, or diluted or adjusted or gap. Well, these are all different variations of, of the similar, you know, of how much you, you wanna break down a per share the earnings on a per share basis. You know, basic is, you know, it’s as the name suggests, the kind of the higher level. And then as you go lower, it diluted would take advantage of any look at any options or shares vested, and then adjusted, meaning you’re, you’re breaking it down to take it, you know, to look at what may be the company suggests is not, you know, likely to happen again, or is, you know you know, they don’t wanna put that in their normal earnings.
It’s extraordinary or something that, you know, breaks it down again. And then you’d have gap where it’s specifically, it’s the tax man. This is what the earnings are like accepted across generally accepted accounting principles. So the difference it’s, you know, for us, it really, we wanna, we wanna look at. It that makes a little bit of difference, which kind of company it is, cuz you know, a, a higher growth company is likely going to have more options for management so that they’re more vested in it to perform it to grow. So yes, you wanna take and really look at that, but for a, you know, for a more stable company, it’s not so important to, you know, to break those down. So we specifically, we’re gonna look at the company and a lot of our analysis, it really depends on the type of company, the sector that they’re in of where we’re gonna, we’re gonna look at and what we’re gonna focus on.
You know, an energy company, for instance, is the same. They’re gonna have, you know, options so that when times are good, that they, you know, management gets paid, but when times are, you know, a little tighter, they give the options, but the employees are motivated to know to expect better times, but very cyclical. You, you wanna look at it, but take a, take a look at what part of the cycle you’re in as well. Now to the other part of the question was an earnings multiple and what kind of multiple you would put on a company. Well, and that, it’s a very loaded question because again, it, it depends on what type of sector you’re looking at. You want to, you wanna generally take a historical perspective on the multiple. So you’re looking at, you know, for instance, a staple. You’re looking at a grocery store. It’s gonna have a higher multiple, you know, cuz it has more of a, it has a stable, more stable business that is, you know, it has the fluctuations, but they’re understandable.
They’re cyclical. They go through the period and the historical multiple is, is a good way to look at it. You know, that history will repeat itself in for a, for a, for a staple company. But for a, you know, for a technology company, the multiple, it, it, you know, you have to gauge what type of multiple you’re gonna put on it when the growth you’re gonna experience and the earnings you’re gonna see, it’s, it’s, it’s different. You know, you’ll project it for five years. Well, that five years turns out to be quite different. So you have to adjust that a lot more and looking at a historical multiple on it is, is a lot more difficult. So, you know, to say there’s one way or there’s one multiple to look at it’s it’s, it’s it’s you can’t and when you put a multiple, it’s like when you put the multiple on the S&P 500. One point in time, you can put a multiple on it. Yes, you put historical, but that makeup again, and we spoke about this a little bit in the report we put out a month or so ago, the makeup of the S&P 500 is changes. So is the multiple, should it be the same on a 10 year historical when the 10 year makeup of the S&P 500 is different 10 years from now, or 10 years before? You just have to be conscious of that and, and make the adjustment.
Can I ask you a question, Craig? Yes. So on this subject, PEG ratio used to be something that, you know, I’m not a fundamental guy, so I know that was bantered around earlier in my career. That was a way that, well, if you got that, you got the growth and you know, the PE could be, you know, if it’s one-to-one PE versus growth, that’s a good deal. And if it’s not, you know, what do you think of that? And where, where do you stand on that?
Well, I, think that was more used in, in the technology element to, to justify some of the multiples that we’re putting on things and, and think it changes. And I don’t use that as much now. I find the multiple that people have gravitated to use more of a more cons, a multiple that’s, maybe EBIDA. EBIDA is a multiple that’s used more now in certain circumstances than a PE multiple. It just depends on the industry. So yes, the PEG is it’s still, it’s still relevant. You can still gauge a company, but at the same time, it’s not, it’s not necessarily what drives putting a price target on a stock. And I think, just a little bit of an aside, that I think there’s something to be said that those, those multiples are gonna be adjusted again.
We’ve come through an environment where the Fed has always been there to support, you know, a stock, and multiples and valuations were not so important in the last, you know, 10, 15 years cuz the Fed’s been there to support the market when it falls. And you could just, the valuation of putting a real, you know, emphasis on a multiple and what it means to value of a company, I think is gonna become more important when the Fed isn’t, you know, they can’t be so accommodative or they seemingly are not gonna be so accommodative going forward.
Good. Okay. Well, thanks. There you go. So we have a couple of questions that’ll be for me. And the first one is from Diane and I appreciate Diane’s first comment. She says she loves the online technical analysis course. And for viewers of this video, if you have not taken the course, then I encourage you to do so. You know, you can lose thousands of dollars on a trade, and the small amount of money that this course costs, it literally outlines an entire trading system and I’m not, I don’t make my money selling courses, you know, but so I make very little on these things, but I think it’s very important for, if you are a do it yourself investor, to understand that you need a process. And the process I outline is very much driven by what we do as professional money managers.
So you’ll, you’ll get a lot out of it. Anyways, so Diane asked how to play the volatility in the market. So I’m gonna back to screen share, and there we go. So actually Diane, when you took the course, we talked a lot about trading consolidation ranges. Now this is a biggie. So we’re, we’re, we could look at a consolidation range that might occur over one year, or this is as outlined in the report that Craig and I just put out, the markets go sideways for 10, 15, 17 years at a time. And this happened to be a 17 year sideways period. This is the Dow Jones industrial average from 1965 to 1982. As you can see the Dow really didn’t crack 1000. There’s 1000 and you know, a little bit over that, 1,050, but basically, you know, even there was a spike back in 72 and it fell hard after that during the Nixon era when he was impeached and number of other factors as well, there was the oil embargo.
So whatever the case this was a long term period. Now you could look at a shorter term chart and you could see a trading consolidation period on an individual stock or the S&P 500. And you know, there’s a potential for the market doing maybe not as, as big and as long as this period was during the sixties and, and right up until the early eighties, but there’s a potential for the market to consolidate. I mean, we were just looking at China a few questions ago and I said, look, it’s basing. Well, we looked at Brazil and I said, look, it’s in a swing trading pattern. So these are patterns that you can trade. Now in the course and just in, in a simple way, looking at it, it’s pretty obvious you sell in this. If you, this way you were created this big humongous macro cycle, you sell somewhere near 1000.
If it breaks out, then you have to have some sort of a rule that keeps you, keeps you in to see if it’s a head fake. And in fact, that was a head fake and you can see it broke down. So, you know, I describe my rules for this in the course, but you would have some sort of a base level. So these are spikes to the downside, but on the Dow Jones, you know, it’s clear that somewhere around 750 with support. You can see that there, there, there, you know. It did spike there, but generally speaking, there was more touches around 750 than there was below that or above that. And there’s more selloff points around 1000 than there were below or above that. So, you know, you now have a range, call it 750 to a thousand and you trade it. And you use if it’s a shorter term period, which is probably what Diane is asking me about is the volatility in the near term, then you use momentum oscillators.
You’re not gonna use it with a big pattern like this, but you’re gonna use momentum oscillators to confirm that the market is reached a high cuz typically momentum oscillators will get into their over buy at the top of a trading range and we’ll get into their oversold zones or really very close to them at the bottom of a trading zone. So you can confirm your observations with momentum indicators and even sentiment indicators on a big thing like this. Most definitely this is where, and I describe all this in the course, but this is where you can use big macro sentiment indicators, because I can tell you when the market’s up here or here, say on this big swinging pattern over the 17 year period, well, the bulls erode. That’s the whole reason why the market was up is cuz everybody was bullish.
And so you’ll see if you look at, you know, put to call ratio and, and all this kind of thing, the smart money, dumb money, and, and even the CNBC investor fear index, it’ll be very, very bullish. You know, markets participants can be very, very bullish. The AAII study will show very, very big pile of bolts. When it’s down here, you’re gonna see the sentiment depressed. The put to call ratio and all that are gonna be low. So that’s better for macro signals than, than so much for short term signals, but you could use maybe one sentiment indicator like the VIX which is a shorter term mover as well as some momentum indicators. But the main thing is, is to pay attention, to support resistance and have your rules in place again, as I describe on the course. And so Diane, thanks for saying you like it, but you know, go back to that section of the course and it should help you because I did cover trading consolidations you know, quite, quite intensely in that course.
So I’m, I don’t have a slide for this next one but I’m, I’m not going to take it off a screen share because the following question is also for me. So Larry and Harry both asked for my gold outlook and rather than covering it again on this video, I just did a video last week on gold and I strongly encourage you to visit it because it’s pretty comprehensive look at gold. Okay. So you can, you guys can do that and get my, my far more in depth than what we’ve been covering in most of these questions on gold. Second, last question is Martin and he asked me, this ties into some of the work Craig was doing earlier with talking about interest rates. Well as we said, we don’t predict interest rates, but we can certainly look at trends for bonds because this is crowd behavior.
Remember we don’t know what the Fed’s going to do, cuz that’s just, you know, a group of whatever, 10, 10, 15 people or whatever in a room. But we do know what the market is thinking about the securities that trade off of, in this case, long term interest rates. This is the TLT, it’s the US20 year bond. And you could see it was in a monster size up trend since the early two thousands, right after the ’01 crash like the tech crash and it’s been in that, you know, with plenty of tests, you know, along the way. This is a really long chart, it’s a monthly chart, but you can see that humongous, long term bull market for the, for the bond market that began in the early two thousands is basically over. And this, this chart is right up to a couple of days ago.
So the bull market’s over for, for, for bonds. It doesn’t mean it can’t consolidate or have, you know, rallies back up, but the big picture bull market’s over. So my long term outlook on the TLT, I, I may, I, I’m not bullish. At best I could be neutral cause it might consolidate at some point, but this point I can’t be bullish and I can change my mind if something changes. but at this point it hasn’t. So I’m going to take it off of the slide presentation. And this is a question that Craig and I both enjoyed getting. So it’s from a really long term reader. We actually know his real name. He calls himself Daddio, but we we’ve met him. But he’s, he’s a really like probably been following the blog for, I don’t know how long, 15 years. And he is always posted great questions. It’s daddio. You’ll see his questions on the blog and great guy, by the way, we’ve met him. And daddio asks if we’re bearish right now, which we have been for the entire summer, why hold 40% cash? I mean, why not go a hundred percent? So Craig, why don’t you start with this one.
As, as wonderful as we think we are, we’re not magicians. We can’t predict the future. You know, if we could predict the future, we would, and with a hundred percent accuracy, we would go a hundred percent. We’re not, we can’t predict. We can only prepare and try and, you know, utilize the tools that we have to assess the risk in the market. And with that, that’s what we, you know, that’s why we gauge and why we go to different levels of cash based on the risk that we determine is there. Are we, you know, we’re not, we’re not a hundred percent correct all the time. In hindsight, yes, we’re correct more than we’re wrong, but we still are humble enough to recognize that we’re not gonna be right a hundred percent of the time. So we’re not gonna operate with a hundred percent conviction to go a hundred percent cash when we think there is bearish. Cause we know we’re gonna be right and we’re gonna be wrong sometimes.
Good. So that’s yeah, that’s it in a nutshell. So the best way to put it is we’re probability analysts. So, you know, I follow crowd behavior, Craig follows fundamentals, we put it all together. We make decisions. We use my barometer, which follows a lot of sentiment and, and breadth factors, stuff like that. But at the end of the day, they’re, they’re mostly right. These factors that we look at. They are. They’re really, really accurate, but just wrote a blog the other day, I talked about it, how my barometer was completely wrong during the summer of 2017. It was, it was signaling bearish and market just kept going up and up and up. So if we had, now, we didn’t see a break in trend. So we, we didn’t go aggressively into cash, but we still held some cash because the barometer was saying it’s risky.
We, you know, not as much cash as we have right now might, but you know, it, it caused us to underperform that summer. So thankfully we didn’t go a hundred percent cash because we always know that first trend comes first. So we did stay much more invested then we are now. But the second thing we do is we say we could be wrong. The barometer could be wrong. And it was that year and it, and the trend even could reverse. If even if you see a breakdown, it’s a probability that that breakdown will follow forward with, with worse conditions as it did this year. When the market broke down, it was like, well, okay, we gotta get out. And that 200 day moving average was cracked, we got out. I could show you tons of incidents where the 200 day was cracked and we made a note lower low, and then the market went right back up again.
In fact, 2018 December, all those conditions were there. It broke down and then went right back up again. So, you know what I, what, what we’re saying is it’s we follow our system. We move in steps. Take the online technical course because it talks about legging in and legging out, don’t make a hundred percent moves and do it systematically. And I teach you how to do that systematically. So that’s what we do at ValueTrend. We do everything systematically. So when we saw the breakdown of the early part of this year, we took a leg out and we saw some more and we took it more out. Just about a month ago, we moved from like 28 to 38% cash. So we didn’t do that. We didn’t get to 40% in one step because we have to, we, we have to acknowledge that it’s an imperfect system.
It’s the probabilities on our side. We’re more often right than wrong, but we’re, we’re wrong sometimes. And it’s not us. It’s, there’s no such thing as a perfect system. If it was perfect, quite frankly, Craig and I would probably own a continent each. I’d own Hawaii. I don’t know what you own because we’d be so rich that we could predict things with a hundred percent accurate that, you know what I mean? So, you know, I’m talking tongue and cheek here, but you know, the day that we can become that accurate, I’m buying Hawaii. I’m buying it and the whole, all the islands that surround it. I mean, I’ll be that rich. So, sorry, not there yet. You know, live in Barrie. So I hope that that helps that. It’s all about following a system and I hope this video covered the questions the way you wanted. Sorry we couldn’t be too in depth on any of them, but we’ll be back with another one of these in the future. And thank you for watching. Craig, any final words?
No, that’s great. If you have, if you have any questions or you wanna follow up please yeah, reach out, reach out, send us an email.
Great. Thanks for watching folks. See you next week.