Canada’s turn to outperform

January 21, 2022No Comments


Hello, and welcome to the Smart Money, Dumb Money show. And I am your host, as usual, Keith Richards, president, and chief portfolio manager at ValueTrend Wealth Management. And today we’re going to take a look at the US markets and compare them to the TSX. And I’ll start off this video with the conclusion of what I’m going to try to prove to you right off the bat. And that is that I believe that it is Canada’s turn to have a period of outperformance and we’ll look at the charts and we’ll discuss just the basics of why I feel that way. But I do think that the run of outperformance by the S&P 500 and the NASDAQ is quite possibly ending. I am not claiming doom and gloom for those indices. What I am suggesting is probable outperformance by the Canadian market. And that may not last for too long.

It might last a year. It might last a year and a half, two years. And it, that happened in 2015 when markets went up between, I think it was 2014 and 15, and then the party ended for the TSX in and around 2016. And the S&P took off from there and obviously outperformed the TSX for many, many years. So these periods of outperformance happen for the TSX and I think we’re about to enter into one of those periods. So let’s just take a look at the charts to start off because the charts tell us everything we need to know, don’t they? So we’ll go right to the NASDAQ, which is the subject of my video last week. So if you watched the video last week, I was talking about sector rotation. And what I was talking about is the rotation out of the technology and growth type of stocks that make up the NASDAQ.

The NASDAQ is where the action has been. As you can see on this chart, it’s been a very strong rise, really since the 2020 COVID crash. Everybody moved into the stay-at-home technology, that kind of thing. That’s ended. As you can see the basic rules that I follow. When if you take my technical analysis course or read any of my books, you’ll notice that I always talk about an uptrend is identified by a series of higher highs and higher lows. And I prefer looking at the weekly charts to identify that trend because I am a midterm trader. So when we look at this chart, we are looking at a series of higher highs and higher lows, but it appears that it is breaking down. There is the last low, there is the last high, the last high was lower than the previous high.

 

This low is now being taken out. And again, if you take my technical analysis course or read any of my books, you’ll know that when I see a lower high and a lower, low, and a break of the 200 days moving average, I’m gonna call that a bear market. Now, before you jump to the conclusion that I just said the NASDAQ is in a bear market. I want you to refer to another part of my books and the course that I just conducted on technical analysis. And that is the three-bar rule. Now I use a minimum of three days to determine if that break of the lower low and the break of the 200-day moving average is legit. And you can wait up to three weeks if you’re going to make a broad prognosis on the market. So, because this is a big index, I’m going to give it the benefit of the doubt at this point and say, we’re not in a true bear market for the NASDAQ, but there is potential for that happening.

 

If this bar here remains below the 200 days, and of course below those previous low bars, then we are going to be in a bear market for the NASDAQ if it stays down for another couple of weeks, let’s say, all right, so keep that in mind. But at this point, what we can say is we’re seeing definite underperformance. And so when I referred to underperformance, what am I referring to? Well, let’s take a look at some of the indicators, and you’ll notice that you’re seeing, of course, Stochastic and RSI move down, which would happen in any correction, but this line is the comparable performance. So this red line tells you how is the NASDAQ doing versus the S&P 500, which by the way, has about a 30% exposure to some of the big NASDAQ stocks. So it really shouldn’t be outperforming the S&P by too much, but in fact, or underperforming at any period of time.

But right now you can see that really, since the beginning of 2021, it has slightly underperformed the S&P 500, and substantially, since the beginning of this year, you can see this line is dropping substantially. So it’s not just a case of the markets are suffering. It’s the NASDAQ that is specifically suffering. And if you watch my videos or read my blogs, you’ll know that I talked about this little occurrence right here, which is the MACD line divergence. What that means in English is that if you see the MACD which is a big indicator, it is a longer-term trend indicator. If you see the MACD heading down for a prolonged period of time while the market goes up, and that’s exactly what happened, there’s the NASDAQ going up? There’s the MACD going down, you are in for a negative surprise, more than likely.

 

Now divergencies can happen for a while before the proverbial you know, what hits the fan? Well, guess what’s happening. It’s hitting the fan. So we got the heads up. I’ve talked about it before. I’ve really harped on. If you go through any of the history of my blogs or any of the history of these videos, you will see I’ve talked, and talked and talked about the NASDAQ, the technology stocks, the stay inside stocks being way overvalued, way overdone from a technical perspective, it was their time. And now the time has come that this area is going to underperform. So what about the S&P? We saw the NASDAQ is underperforming the S&P, but let’s take a look at the S&P itself because that’s supposedly a broader index. So I am going to click on that and update.

 

And what we see here is yes, it’s pulled back, but it’s still on-trend. And there’s your 200-day moving average, 40 week moving average is the same thing by the way. And it’s well above the 200 days. So the S&P 500 is in nowhere near the rough shape from a technical perspective that the NASDAQ is. So this is a correction on the S&P 500 versus an outright scary situation, or potentially scary situation on the NASDAQ. Of course, this line is that relative performance. And it would be flat because this is comparing the S&P to the S&P. What do you know it’s exactly the same? So we’re not getting any clues here, but we did see that divergence in the MACD same as the NASDAQ, but you’ll notice the divergence really isn’t as steep as it was for the NASDAQ.

Why there was any divergence is because again, 30% of the S&P 500 is stocks that come from the NASDAQ. So you, or at least shared with the NASDAQ, these high growth highfalutin, highly leveraged companies. So there is some danger in the S&P based on this divergence, but it’s not as extreme as we saw in the NASDAQ. But that was a very strong divergence. And you do not have any of the technical signals on the S&P that you’re seeing on the NASDAQ that you should run for the hills just yet. So my view on the S&P is you can cherry-pick good names within the S&P 500, so that’s great. You can still buy good-quality US stocks. Well, let’s take a look at the TSX, and that really is the subject of today’s video. And that is, I believe that the S&P 500 and the NASDAQ will underperform the TSX for some time to come.

And I’m not guessing for the next decade. I’m guessing maybe for the next six months, 12 months, 18 months. It’s hard to say, but we’re definitely seeing a very different looking chart here, aren’t we? We saw a test of the 200 days and then a successful bounce off of that test. And that’s when oil fell a little bit in the last quarter. Now, if you listen to my videos or you watch my, read my blogs, you’ll know that I was pounding the table. And a couple of my blog readers posted comments saying, Hey, do you think the oil boom is over? And I said, absolutely not buy more. And of course, that’s what’s happened is oil’s gone up and that’s helped the TSX because some are very close. I think it’s around 26% of the TSX 300 is weighted in energy names. And that’s important and another big chunk is in the bank names, which by the way, loan a lot of money to the oil companies.

 

So you wanna see oil go up for the TSX to go up, and that seems to be going on right now. And if you read my blog of this week about oil, you will know that I am very bullish on oil for the next year. Sure. It might be over bought a little bit right now, but I think in the next 12 months, you’ll see oil go up. And that will probably help. I’m saying more than probably actually. We will almost definitely help the TSX over the coming year, if I am correct on that prognosis. The chart is telling us that the TSX is in fine shape. It’s above the 200 day, and it’s not even pulling back to the low that you saw on the S&P 500. So if we go down to this line and you say, how’s the TSX doing versus the S&P 500?

 

Well, of course, it underperformed forever, cuz the S&P 500 and the NASDAQ were the bees knees. There were, the TSX was in oil and whatnot, and it really wasn’t going to perform as well as these big tech names. But there is the very, very beginning in the first part of 2021, you’re starting, sorry, 2022, gotta check my years. We’re in 2022. So the first part of 2022, we are seeing this line pick up and break its moving average, which is this blue line here. So it’s a rolling twenty-week moving average that I use to track the relative performance. And you’re seeing it is breaking that and it’s moving up and that’s the bottom line. So you did get that divergence again on the MACD. Most of the North American indexes did diverge on MACD but as I said the extreme divergence was seen on the NASDAQ and not so much on the TSX and the S&P 500.

 

So I’m gonna conclude by saying, and I’m going to take us off of share, and you can get back to seeing my lovely face. And I’m going to conclude that one should start to overweight the TSX in their portfolio for this moment in time, which happens to be near the end of January of 2022, and keep an eye on oil in particular, the Canadian banks, which are breaking out and looking fabulous and keep an eye on the TSX 300 index itself. You wanna see that it’s continuing to outperform the S&P 500. It is my view that it will outperform the S&P 500 and the NASDAQ, for at least a number of months going forward. So this is a place you wanna start overweighting. A lot of investors have overweighted the S&P 500, the US markets in their portfolio. Canadian investors have correctly bought lots of US stocks.

 

We did too, but now is the time to change. Nothing stays the same. I talked about that late that week. Sorry, that fact in my video last week, when I showed you a picture of the Tour de France and how the competitors in the Tour de France in 1930 or so were under the belief that you would smoke cigarettes before you climb the mountains because cigarettes would open up the lungs. Well we know that’s not true. And I think that’s the same mentality with the NASDAQ. The market has been fixated on the fangs as we call them, these high growth names. And they were the only game in town. We even once had a client say to us, how come you’re not outperforming the S&P 500? We said, well, because we’re not a pure US money manager. And thankfully, we’re not because we’re killing the S&P 500 right now, but for a while, we underperformed it.

 

So times have changed just like now we know that smoking doesn’t open up the lungs if you’re an athlete. In fact, it does the precise opposite. And we also know that the NASDAQ does not open up your portfolio right now for the same kind of growth that you’ve seen in the past few years. So I hope that helps. Get on the TSX bandwagon for now. It looks good. Things can change that will change, but I hope that you do take this message seriously because I think there’s a real opportunity in the TSX and all the components such as the commodities, the banks, et cetera. Thanks for watching. Y’all have a good day now.

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