Smart Money – Dumb Money January 22, 2021

January 22, 2021No Comments

We’re going to take a look at things, as we always do, from a technical perspective. I’d like to start off with a couple of thoughts. And one philosophy is that the TSX is looking prime for the potential for being an outperforming market this year. And I’d like to go into the reasons why. I’ll also take a look at the question. Are we in a market bubble and, if so, what can be done? And I’m going to add some colour beyond the blogs and the charts that we cover every week. And I’ll take a look at another chart just to add some extra thought for those who maybe have already read the blogs. Maybe we can give you a little bit more information, so let’s get started. I’m going to share my screen. And we’re going to take a look at…

I’m looking at my first blog of the week, which is the TSX looking bullish in spite of itself. So, the first thing I wanted to point out is that a lot of people are focused on the S and P for good reason. The S and P 500 in the United States has outperformed virtually every market in the world over the past number of years. But the breakdown of the S and P 500 has been in favour of that outperformance.

 

It’s about 20% technology and 15% financials. And it’s got a pretty good chunk of consumer discretionary. This is what, which has also been a leading sector over the past number of years. However, when we look at the percentage of materials and energy in that index, we’re down to about 10% or so, as you can see here on the screen, we’re about 10% between energy and materials in the S and P 500.

If we were to take a look at the TSX breakdown on closer to 25% between materials and energy. So if you believe, as I do that, these sectors are undervalued and possibly going to move, then the TSX has a pretty good chance of outperforming most world markets over the next number of years

Let’s take a look at a correlation study. And what this does is pits the TSX against the energy sector. And it tells us if the two are moving in sync or not, and anything above the zero lines indicates that energy materials and the TSX are moving more or less in sync. So commodities that are moving in sync with the TSX. And you can see that really since 2019, the relationship has always been strong, but look at the relationships since 2019, it’s grown even stronger. And for that reason, I believe that if the sectors move, as I think they will, then we’re going to have an outperforming TSX, and you can see that the TSX is currently challenging its old highs, and it needs to break that level before we really do see a genuine move on the TSX.

And I noted on the blog by the way that the Canadian dollar will likely it’s broken an old resistance level and will likely continue moving up if the energy sector does as I think it will. Now it has its challenges, but overall I am bullish on energy and materials based on the inflation prospects of the market and on their valuations. So that’s the second part of this conversation. Many people are asking about if the market is in a bubble or not. My thought is that the answer is yes and no. So I look at the market is kind of like a barbell. And I mentioned this analogy last week, basically on the yes side. So on the one side of the barbell, there are a lot of stocks that are massively overvalued.

I’ve been harping about the Fang since the summer, and I was correct in that. And we were a bit early back. If you’ve read my blog regularly, you’ll know I was recommended to start getting out of those kinds of names and in June and May. And of course, the market went up until August on these stocks, but perhaps probably the poster boy of the group was, was Amazon. And you can see, this is August right here on this chart. So one of the factors that drove me to be a little bit bearish about the stocks, like the Amazons and whatnot, is that they were moving too far ahead of their 200 days moving average. As you see at this point, Amazon was something like 40% over its 200 days moving average. Okay. It did come now, what is positive about Amazon?

And this goes for Netflix and, and most of these names even Apple, which doesn’t look exactly as flat has been moving sideways without making any new highs and is getting the 200-day moving average has been creeping up closer to the price of the stocks. So that’s a good thing, ’cause it’s a consolidation pattern. Now you can see on Amazon, it has gone in sideways patterns for many years in the past. So this can be an 18-month occurrence. It could be an eight-month occurrence, I don’t know, but the point is it’s in a consolidation. You don’t buy it because it could start moving in and around the moving average as it did between 2019 and 2020. Okay. So not to mention the earnings ratio, which I’m not a fundamental guy, but let’s face it. 80 times earnings are not uncommon on a lot of Fang stocks.

So the other factor I’m looking at is some of this kind of high flying trades, like the solar power industry this is, and the stay inside stocks. So this is Peloton, which was one of those stays inside stocks. And you can see it was trading something like a PE ratio of something like 410, just this week. And it’s about 50% over its 200 days. It’s been like that before, but you can see a similar gap caused a sell-off. So my thoughts are that zoom Peloton that kind of stock, as well as the fangs, the solar stocks, Tesla, which I talked a bit about last week, these are the crazy overbought stocks that are not just overbought technically, but overvalued fundamentally that is the vulnerable side of that barbell that we just looked at.

And when we look at the S and P 500 and its current price to earnings ratio, which is 38, true, it’s the third-highest it’s ever been in history. I mean, this goes right back to 1800 and something. So we’ve got, we’ve got the entire history of the trailing PE ratio here. This is courtesy of multiple.com it’s true, it’s very high, but that’s based on the overvaluation of a lot of heavily weighted stocks in the S and P 500. I mean, look at the weighting of Amazon. I think it’s something like 20% of the index, which is ridiculous. So yeah, they’re, they’re overweight, they’re overbought and they’re subject to change as we like to say in the industry. But on the other side, the market is not overbought and it is not in a bubble. We can look at sectors like BCE. And I mentioned this, this is a stock wheel.

 

So that’s disclosure. I own it personally. And within the portfolio, we bought it around 54, we target around 58 to 60. That’s not a bad trade that’s around 10% at a pace of 6% dividends. So a PE ratio, something like 18 times, so very, very cheap. And this is not the only one. I mentioned a couple of stocks in the block, but there are a ton of stocks like that are kind of under the radar of the general market. So it’s not about the market being overbought. It’s about certain stocks being overbought. This is, I didn’t mention this, but I’ve mentioned this in the past. I mentioned did not mention this in the blog, is the energy sector? So there is the US energy sector producers. And you’ll see the same thing on the Canadian market. If this is a double bottom then this would be the neckline.

And I do think it kind of looks like a double bottom. If this neckline breaks on the XLE NTF, then we’re looking at a minimum target of up around in the low fifties and a possible target of much higher around $60. This is trading in the forties, right? Low forties right now. So there’s tons of upside. And if you look at the PE ratio is because of energy you’ve been so out of favour because of the new green movement and all that. But quite frankly, I mentioned in a recent blog that China and India are doing anything less going down on their consumption of these products. So the demand is there, whether we all drive EV’s and put solar panels on our roofs, which is not going to happen overnight, that almost doesn’t matter because of the demand coming from the other side of the world.

So this is a sector that we feel is another one of these value sectors. So that’s really the end game here is we want to be in the smart money camp and not acting like the dumb money. The dumb money is paying 400 times earnings for stocks like Tesla and are bidding these stocks up to ridiculous prices. Like we’ve not seen since the tech bubble era. And yet on the other side of the equation, we have stocks like the oil sector and utilities, and a lot of consumer staples are like this too. There are many, many opportunities. There’s even some technology trades out there that you can buy on the cheap. And that’s the message of today is don’t get wrapped up in whether this market is in a bubble because the answer is yes and no. And there’s plenty of opportunities right here in Canada, funny enough, and even in the US and in international markets, there’s lots of value out there. So ignore the headlines and do your own thinking and do your own digging. And you will find plenty of opportunities.

Thanks for watching and final thought, by the way, is that if you feel that you’re not capable or willing to do the digging, talk to us at ValueTrend – that’s what we do.

 

 

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