Right Back to Resistance 

General Comments 

Last week was another decent rebound week after a terrible start to the year. As you will be able to see on the market charts on the next page, the US market has rebounded back to the 2000 level, where major technical resistance is likely to be felt. It finally achieved this rebound after a few false starts—including two invalidated ‘follow through days’ that generally work much better in our analysis. But as we’ve said many times before, the stock market exists not to make us feel smart about our predictive ability, but rather to frustrate as many investors as possible when going its own way. It may be safe to bet on the long term growth of equity markets, but in the shorter term—which can be measured in months and years—the link between the stock market and the real economy is loose at best.

This has been demonstrated emphatically so far this year by the strong rally of the base metal producers. While gold shares have also rallied enormously, at least the price of bullion has risen as well, and those shares were beaten entirely into the dirt. But when looking at the copper market, or nickel, or zinc, there is none of that type of rally that would ignite such a strong move up in base metal shares. Said another way, the ‘explanation’ that overall equity markets were so weak in January was the fear of a recession.   So how is it that the deepest cyclical stocks—those most vulnerable in any economic slowdown—have run 40% since their lows and are now actually positive for 2016? There is no rational explanation for such behavior, and these shares are likewise right back to long term resistance. Any investors who still hold any of these names should sell.

Friday brought the US nonfarm payroll report that showed a slightly higher number of new jobs than forecast, though both numbers were anemic and barely above stall rate. Underlining the lack of real growth was the report that actual wages were down, which shows the quality of the jobs included in the ‘surprise’ jobs numbers. Nevertheless, the financial media will continue to milk the entrails of each report for supposed clues to the next action of the Fed. It seems clear to anyone paying attention that the Fed’s initial forecast of four small rate hikes this year is already in the trash can. There will be no Fed rate rises until after the election at the very least, barring some unexpected surge in GDP over the next few months. While we are not bears, neither are we strongly bullish. While the economy continues in its jerky grind higher as it has done since 2008, the argument remains to avoid emotion at the extremes: Investors need to avoid despair on pullbacks, or euphoria after rallies.

It would be reasonable to see a tradeable pullback after this rally since mid-February, which would give better entry points for the next leg up, over the next week or so.

Source: Thomson Reuters

Source: Thomson Reuters

Source: Thomson Reuters

Source: Thomson Reuters

Indicators

Our longer term indicators are positive for all US and Canadian indexes, and remain at decent levels of 50% or less.

Short term signals are also positive, but are now stretched to some extent on the TSX and NYSE, which also underlines our caution with the indexes near technical resistance.

We are currently unhedged but that will likely change this week.

TSX

TSX Chart March 04, 2016

Chart courtesy of Stockcharts.com

Interest Rates

Bonds were down again on the week, reflecting the strength in the equity markets. The TLT’s finished at 128.50, with the ten year yield at 1.83%. Bonds are now more in balance after being extremely overbought a few weeks ago.

Utility stocks have been underperforming with bonds, which is to be expected. We expected to have a better entry point by now, but will remain patient. The US utilities were great holdings for the first two months of 2016, and we expect to re-buy several of them soon.

There is no change to my expectation that that more will come around to our long standing view that it is a lot better to get a 5% dividend than a sub-2% interest payment.

Currencies

The Canadian dollar continued rising this week, helped along with the continuing bounce in crude.

We are now very near the 75 level mentioned a month ago as the possible level we could see after such a one way oversold condition found some equilibrium. The 75 level is also now strong technical resistance.

For those without US dollar exposure, this is likely as good as it will get for the next several months. Crude is a wild card, and could help our dollar rise further, but the upcoming budget and deficit numbers in the $30bb range, combined with steadily weakening growth are bearish.

The Euro was lower at 110.02, and has diverged versus the US and Canadian over the past few weeks. This has held back the Euro stock markets in relative performance versus North America as well.

Gold/Metals 

Gold finished up again at $1,263. Gold shares had been in the middle of a pullback but recovered their recent highs last week on the bullion surge. We continue to think the move is done and the bounce in gold shares should be realized.

Base metals shares ground higher again as well, and are now against long term technical resistance as mentioned earlier.   Copper rose to $2.25, nickel at $6.65, and zinc at $0.79. We still have no interest in the metals shares, and would recommend selling for anyone who owns them.

S&P 500

S-P 500 Chart March 03, 2016

Chart courtesy of Stockcharts.com

Energy 

Crude finished at $36.20 which was up again on the week, and helped power the overall rally in equities we have seen. Most of the media reports of $20 oil are no longer on the list of featured stories. Natural gas finished at $1.75. Energy shares were stuck most of the week but broke out strongly late in the week to recent highs. The group has been frustrating to say the very least.

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. My expectation is that we may see $30 oil before the next run toward $40, but we will get through $40 and likely stay there. The shares will get ahead of themselves and behind reality, but it always pays to keep common sense at the forefront.

Canadian Stock Focus

Stocks in buy range are: Liquor Stores, Martinrea, Keyera, Shaw Communications, Exchange Income Fund, Stella Jones, Ritchie Brothers, DHX Media, Alimentation Couche Tard, Westjet, and Uniselect.

US Stock Focus

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

Summary

Overall, we expected a decent bounce a few weeks ago and it has actually exceeded expectations, though the first bounce off the bottom rolled over far faster than we expected. This made us less than exuberant in adding names on the next retest. Market irrationality has a way of inhibiting opportunism at times.

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. At this point, we are not willing to re-buy some utility names, but we are much more cautious on the growth part of the market than we were 2-4 weeks ago.

It is much more likely we will be adding some hedging coverage to dampen the impact of an expected bout of profit taking after markets have rallied so strongly off the bottom, and have run right into longer term resistance.

As we’ve seen, moves in the market are quick and decisive. We could conceivably move from partly hedged to unhedged and buying in a short time frame. This is no time to be passive.

 

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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