Stronger All Around
Markets were expected to open sharply lower on Monday morning after the US payroll report was released on Good Friday in much weaker fashion than expected. The pre-opening futures obliged to the downside, but once the market officially opened, the markets decided that they weren’t so disturbed by the weak numbers after all, and fairly rocketed to the upside. This was unexpected in timing and scope, but overall not that unusual given the sideways action in the US markets since December. At this point, the market is following a fairly well defined uptrend, and helpfully bounces off long term support on pullbacks. With last week’s action, the US is back nearer the upper part of that band. In Canada, we are definitely there. It’s been said that the best way to understand whether you are in a secular bull market is the reaction of markets to what should be bad news. In this case, softer than expected payroll numbers get shrugged off with the explanation that these numbers are far from perfect and are prone to revision. That’s true, but in bear markets, markets find excuses to go down even with good news. With bad news, they just go down faster. The bottom line is something we’ve said for years and continue to advocate: we are in a secular bull market that will often reward patience and short term caution but almost never stubborn negativity. We base this on reasonable valuation of roughly 14x forecasted earnings, rock bottom interest rates, and economic growth that remains expansionary, even though slower than most prior recoveries. While the action was good for growth, it was less positive for income names early in the week, which we were not expecting. But bonds rallied later in the week along with shares, and yields fell and utilities recovered and look poised to continue. Transports did not really bounce early last week, but they did hold their own by week’s end. Any further weakness in this critical group won’t change our general thesis but would definitely imply a rockier interval than we currently expect. The more likely case, in my view, is for the recent selloff in the group of roughly 6% to be shortly deemed by the market to be “enough”. This coming full week of trading will unveil more of this story. One are I have ‘called’ correctly but only made limited gains is the auto sector. I’ve pointed out for years that the average age of cars on the road has risen. Auto company profits are fat as well, yet the shares are below old highs and look unexciting. But monitoring sales—now at a strong 17.15mm unit annual rate—is a useful gauge of economic strength, and supports our bullish outlook.
Our longer term indicators are all positive at this stage. Short term measures are now positive in the US. The Nasdaq had corrected its overbought condition and now seems to be back near the upper end of its range.
Bonds ground a bit higher on the week, with the TLT’s finishing at 133.50, and the ten year yield was at 1.89% with Friday’s action. This gave some support to the income stocks, which had underperformed growth early in the week. I continue to feel the turn is now complete for utilities, and prices should continue to move higher. REITs should have similar performance, and have started recovering as well. We have added some utility exposure and will be adding more US REITs as well, as they are now moving into range as well. Canadian REITs started on the upside last week.
Our dollar took another run at the 80 area before falling back to close at 79.60. It is not a positive for our currency that it cannot rally when crude does so. Our trading range since February is 78-80, which is a tight channel. I still expect a bounce back to 85 sometime in the next several months, but the loonie is in no hurry to begin that process. I repeat that this is not the time for bulk currency conversions to invest in the US market. That said, conversions as needed for individual buys make sense, even if some currency headwind is expected. The Euro was mostly unchanged, finishing at 108.70. The attempted bounce in the euro was also brief in duration. We remain negative on the European economies vs the US, but clearly the amount of the slide in the Euro makes us less negative than we were a year ago, or two years ago. Overall, our strategy of concentrating on North America has been rewarding, and we can leave it at that.
Gold finished up at $1,209. Gold shares were up a only a bit, and the group remains a stock market graveyard. When gold rose, the stocks moved grudgingly. Base metals shares were flat again. Copper was flattish at $2.74, nickel at $7.35, and zinc at $0.80. We still have little interest in the shares of either metals group,
Crude finished the week at $53.45, after two big gains and one big daily loss on the week. Net result was solidly higher but with a lot of volatility. The stocks continue to outperform crude, which is also a bullish sign. Even on the big down day in crude, the shares did not drop much. Natural gas was mostly flat around $2.60 Energy shares remain mixed: some are out of buy range, while some have pulled back nicely and could be bought. We are positioned enough for now, though we have room for further buys if the action merits.
Canadian Stock Focus
Stocks in buy range are: Surge Energy, Russel Metals, CIBC, Cardinal Energy, Rogers, Baytex Energy, Shaw Communications, BCE, Bonterra, Potash, Rocky Mountain, Medical Facilities, Shawcor, and Chemtrade,
US Stock Focus
US Shares in buy range are: US Bancorp, Duke Power, Dominion Resources, Southern Corp, Schwab, Sketchers, CSX, United Healthcare, Omnivision, Restoration Hardware, Pacific Gas and Electric, Cisco, Corning, Comcast, and Pepsi.
Overall, last week was very strong, especially in Canada. We had mentioned that both the banks and energy shares looked poised for gains, and both helped the Canadian market last week. The US market had good breadth on the week. Although utilities and transports trailed industrials, all were positive. As mentioned, the US market continues to work off the overbought condition it had last November in very orderly fashion.I would simply repeat the closing paragraph from last week: Seasonally, the second quarter usually starts weak, as the first three months are typically very strong. With the first quarter very slow in the US and nothing special in Canada, that pattern could well reverse this year. I expect the rally to be led by income names overall and banks and energy here in Canada. This should continue.