Archive for June, 2008|Monthly archive page


In Uncategorized on June 17, 2008 at 3:53 pm

THE U.S. STOCK MARKET IS STILL IN A BEAR MARKET… Let’s be really clear: unless the Dow Industrials confirm the new high in the Dow Transports, we do not have a DOW THEORY BUY signal. The prevailing SELL signal given November 21, 2007 is therefore still in tact.

Question: Does that mean we have to wait 2000 Dow points or 16% for a buy signal on the Dow?

Answer: Yes. And yes 2,000 Dow points is a lot. But we are not in the business of picking bottoms. This is a business of controlling market risk. Dow Theory has always been knocked for being “late” — and it is. It is also the longest running “system” that has yet to fail to identify the major turning points or “tides” of the market.

Question: Is there anything we can do to “jump the gun” so to speak?

Answer: Not with respect to the US large cap stocks. There are other markets that we can invest in that are in up-trends (bull markets). Canadian stocks, commodities and inflation-protected bonds are some areas worth consideration. Take a look at the TSX Index (Canadian stocks). It has been a fairly narrow rally to new highs with a few stocks doing most of the heavy lifting. In fact, if you didn’t own Potash, Encana, RIMM, and Agrium, it has been a tough year.

OIL PRICES ARE DUE FOR A PULLBACK… I’ve written about a potential top in Oil prices. The trading action in Oil was terrible yesterday. When prices move to a new high and then close below their previous lows, we call that an “outside reversal”. The daily chart below shows oil rallying to a new record high. But the momentum indicators such as RSI did not confirm. Nor did MACD nor did the full stochastics. This is another clue that oil could have reached a temporary top.

SCG COMMENT: Tighten stop losses in oil stocks or exit weak performers. The odds of a correction remain high.

GOLD IS ENTERING IT’S STRONG PERIOD… Gold traded down to $840 at the beginning of May and then rallied to $920. It then re-tested the lows near $850 and has held. This is a positive step and the seasonal odds now favour a rally. In fact, in the last ten years, Gold has rallied from July to September 8 out of 10 years. The average gain was 11.1%.

SCG COMMENT: As long as the long-term trendline holds at $855, Gold can be bought here. The new Point & Figure target (above) is $970.

CONCLUSION: Continue to hold Canadian stocks, inflation protected bonds and commodity based currencies like the Australian dollar and Swiss Franc. Buy Gold on any weakness with a $855 stop loss. Tighten stops on oil stocks or sell lagging positions.


In black swan, dow theory, transports on June 4, 2008 at 1:34 pm

DOW THEORY GIVES US A WARNING SIGN… This is mostly a reactionary business. I tend to let the markets tell us what to do. After all, it represents the collective wisdom of the thousands of market experts, participants, hedgers, speculators and novices. Everyone’s opinion is distilled into price. For an un-emotional barometer of price activity — I tend to lean on Dow Theory. Over 100 years ago, Charles Dow suggested that the Industrials and Transports must move in unison to give valid signals of the primary trend. If one index makes a new high and the other does not, we have what’s called primary a non-confirmation.

Imagine that you are trying to teach a child how to determine if the tide is coming in or going out. One way to illustrate this would be to put a stick in the sand where the waves currently stop, and then wait for the waves to exceed that stick and move it to the new high point. Dow suggested that in order to be sure that the tide is rising, you would need a friend on the other side of the bay to confirm your observations.

Right now we have the Transports making a new high (see chart 1 below), while the Industrials are a big 1,526 points below their record highs of 14,164.53. Where I live, this is analogous to the waves hitting a new high on Jericho Beach on the West Side of Vancouver, while the waves at Ambleside Beach in West Vancouver are no where near their highest point.

Chart 1
ENERGY STOCKS REACHING THE END OF THEIR SEASONALLY STRONG PERIOD… In each of the last 10 years, had you bought energy stocks at the end of November and held until the end of May, you would have averaged a 19% return. Conversely, the return for the TSX Index from end of April until the end of September over the same period is -0.59%. Given that the majority of the strength in the TSX has come from Energy and Materials the past few months (see red and cyan bars in Chart 2 below), we might be wise to put in some protective stops to protect our profits on Energy stocks.

Chart 2

CONCLUSION: I am cautious in the next three to six weeks. I am modestly bullish of commodities via ETFs like DBC and DBE, and bullish of commodity based currencies like Australian Dollars and Swiss Francs via FXA and FXF. Canadian stocks should benefit from Yen carry trade. Avoid long dated bonds.

THOUGHTS… I just returned from an investment conference in Scottsdale where a parade of analysts took the stage to tell a room full of advisors where to put their clients’ money. A friend of mine nudged me with “ooh, so-and-so is up next – he beat the market last year.” Rather than be impressed I was reminded of Nicholas Taleb’s story in The Black Swan. If 5,000 people flip a coin at the beginning of the year, after 5 years you will have 313 that have flipped 5 heads in a row. If you put these people in suits and call them hedge fund managers, they will each earn seven figures. Of course, their odds of flipping a sixth HEAD is still 50-50.