Back at the Bottom End of the Range

General Comments

Last week was another downside probe with a lot of contradictions. While Friday’s rally cut the losses on the week, they were still significant on both sides of the border. The financial media has virtually thrown in the towel on the market, and this isn’t to say they are alone. Wall Street brokerages don’t really know what is going on either, and the hedge fund crowd is similarly baffled. They continue to lose more money than the base line indexes they disdain, even though they must be making a few dollars on their bank short sales—another reflex from 2008, even though it makes little sense these days.

I mention the US banks as they were down even more than the market again last week, and the hapless media were saying that was due to ‘growth concerns’ in the overall economy. Last week, commodity shares were solidly to the upside. How does that square with ‘growth concerns’? The most economically sensitive stocks surge and that is a growth issue? I understand it’s a difficult environment, but talking out of both sides of your mouth must be uncomfortable.

The other thought on banks is that they are stuffed with so many underwater loans to energy companies that they will suffer huge write-offs, similar to the housing bubble of 2008. Here’s the difference: Energy companies aren’t people. They don’t just borrow at the bank. They issue stock, and bonds, in the tens of billions over the past 8 years. And none of it was subject to derivative bets that were also sold as toxic ‘assets’ to gullible pension funds, as CDO’s were in 2005-2008 on mortgages. Banks undoubtedly have energy loans that are nonperforming. But plain vanilla loans do not sink financial systems. It takes something like 2008 for that.

Gold has been on a rocket ride this year, up another 7% just last week. Gold shares are up over 60%, which is helping the TSX pretend to outperform the NYSE at this point. The gold bugs are delirious with joy, but from a technical standpoint, the shares are vastly extended and very vulnerable. The action is mainly due to a typical trading pullback in the US dollar, which has been so strong for two years. This move is likely over.

Markets are now back to their 2015 lows. They have retested those lows and a few more days to the upside will give a strong follow-through signal to the upside. Bearishness is at multiyear highs, our long term indicators are deeply oversold, and oil rallied hard on Friday after a late day turn on Thursday.

To me, we lined up for a very tradable bottom. While the first bounce was not as impressive as expected, it is encouraging that the retest has both held and almost destroyed the willingness of market participants to care. That is how bigger moves occur.   We should see a follow-through to the upside this coming week.

Source: Dorsey Wright and Associates

Source: Dorsey Wright and Associates

Source: Thomson Reuters

Source: Thomson Reuters


Our longer term indicators are negative for all Toronto and the NASDAQ, but positive for the NYSE. All are well below 30%, however, making reversals up historically relevant.

Short term signals are negative in the US and positive in Canada, mainly due to metals issues in the past few weeks. All remain at low levels and reflect the oversold nature of the markets.


TSX Chart Feb. 12, 2016

Chart courtesy of

Interest Rates 

Bonds were up on the week, despite some selling on Friday, with the TLT’s finishing at 131.50, with the ten year yield at 1.60%. Bonds are extremely overbought at this stage due to the softness in equity markets.

Utility stocks outperformed early in the week again, but sold off with bonds late in the week. We have sold some and will finish this week. This has been a great counter cyclical trade that offset some of the general equity weakness. A good bounce in the broad market will cause people to run from utilities in the short term. When that happens, we will re-establish our position for both safety and yield.

There is no change to my expectation that more will come around to our long standing view that it is a lot better to get a 5% dividend than a 2% interest payment, though these shares are much more volatile than I expected to see.


Our dollar continued rising this week, despite crude being lower most of the week. This is mainly due to a general bias drawn from US dollar weakness overall, and the fact that our dollar was oversold. It is still only back to roughly where it started the year at 72.23. In a perfect scenario, it would continue to rally to the 75 area where we could convert even more funds to the US dollar. Even though we expect crude to recover over the course of the year, the underlying fundamentals for the Canadian economy remain weak.

The Euro was higher at 112.64, as the US dollar has had a technical correction and apparently everyone has forgotten that Mr. Draghi promised to do ‘whatever it takes’ to help out the European economy. Janet Yellen was in the news this week backing away from guaranteed rate rises in the US this year, but Mr. Draghi will be back in the news soon.


Gold finished up strongly at $1,239. Gold shares blasted through initial resistance that had held for some time but at this point they are ridiculously overbought, and it is mainly on the back of the US dollar technical correction. While they may have turned a corner from years of big declines every year, they need some time and pullback to consolidate these gains.

Base metals shares also bounced, though to a much lesser degree than gold. Copper rose to $2.03, nickel at $6.4, and zinc at $0.79. We still have no interest in the metals shares.

S&P 500

S-P 500 Chart Feb 12, 2016

Chart courtesy of


Crude finished at $31.30 which was down over 4% on the week, but up big from Thursday at lunch. Apparently a mid-east source tweeted a comment that OPEC was ready to consider production cuts. As this news was picked up by other sources and not refuted, crude surged $3 during Friday’s session.   Natural gas finished at $1.97. Energy shares substantially outperformed crude all week on the downside, which is a positive divergence. They were weaker, but nothing like the drop in crude for the first four days of the week.

As I’ve said a few times, it is much more relevant to remember that at $30 crude, the oil production business in the United States—and much of Canada—cannot exist. Those who myopically point at a few tankers filled with crude have confused the trees for the forest. Real supply will collapse at these prices—not the occasional bankruptcy of high cost producers, but virtually all of it. Throwing energy shares away at multiyear lows makes as much sense as buying them with the herd in June of 2008.

Canadian Stock Focus

Stocks in buy range are: Liquor Stores, Martinrea, Keyera, Shaw Communications, Exchange Income Fund, Pembina, Stella Jones, Ritchie Brothers, and now most bank shares.

US Stock Focus

US Shares in buy range are: Amgen, Wells Fargo, Bristol Myers, Nike, Home Depot, Starbucks, Amazon, Disney, Vantiv, CBOE, Munro, Cantel Medical, and Visa.


Overall, this remains a miserable start to the year. Although we are expecting better market behavior for the rest of the first quarter, there will be few times this year where I expect things will be ‘easy cruising’ and low risk. We will continue to follow our strategy of owning stocks with better attributes than the index—faster growth, lower valuation, higher ROE, higher yield— but will likewise be aggressive in taking unsustainable gains, and offsetting growth positions with utility names as did at several junctures last year.

In addition, we will be looking at outright hedging strategies at opportune times when indices are short term overbought. Clearly, we do not believe that this is a time to be hedged. But with the current volatility, a rally could ensure we get to that point sooner rather than later.

We fully expect to be adding some positions in the following week. There are many listed to the left that have fallen a long way to our preferred buy ranges, and we have the cash to take advantage of this weakness.


This newsletter is solely the work of Greg Radovich for the private information of his clients. Although the author is a registered Portfolio Manager with Dundee Goodman Private Wealth, a division of Dundee Securities Ltd. (“Dundee”), this is not an official publication of Dundee, and the author is not a Dundee research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Dundee. Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by the author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.
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