Earnings and Central Banks Push Levels Higher

 General Comments 

The turn from three weeks ago has now carried the US market, as measured by the S&P 500, up from 1875 to 2075, or over 10% in just three weeks. Of course, in the two weeks prior to that turn, the same index dropped nearly 10%. At that point, bearishness reigned—at this point, the mood is much more upbeat.

Things were helped in the past week by some big earnings from Microsoft, Amazon and Google. Some takeover activity among others such as Sandisk added to the upside. In addition, the European Central Bank hilariously implied that they are considering expanding their bond buying program, or QE, which of course markets love as the policy has no effect in the real world. If I have some extra time this week, I will try to ballpark how many billions of euros the ECB has incinerated so far this year on this program already, before deciding that it needs to be expanded. Even the Fed has recognized that this was a foolish idea. Yellen deserves some credit for winding down the US QE program in a very slow process of restoring normal interest rates in the US.

On the downside was virtually everything medical. From biotech, to drugs, to hospitals, the formerly top performing health care sector has been bludgeoned by the momentum crew, as they race off to buy the technology shares they had no interest in all summer. The healthcare decline started a few weeks ago with political football and threats to subpoena Valeant and others to explain their pricing of existing drugs. Things got a lot worse for Valeant last week as a short seller (whose motivations are clear) alleged that Valeant was not really making the sales it was claiming, and essentially accusing the firm of a type of fraud. In a market that was already skittish on health stocks this had a huge impact. We owned Valeant last year but haven’t for some time. The huge decline the stock has suffered suggests repurchase, but we would like to see further proof from the company that these allegations are false.

We spoke a week ago that markets were approaching technical resistance after being so oversold at the end of September. With last week’s action we have gone from ‘approaching’ to now at resistance. With about 45% of earnings delivered, and the big positive news out, it would be very easy to see a few weeks of backing and filling and general softness in markets. As mentioned a few weeks ago, we still expect the markets to finish higher for the year, but likely with one more pullback before setting up for a year-end rally. It seems likely that the health care group will avoid further downside and may very well be the engine of growth into the end of the year. 

Source: Dorsey Wright and Associates

Source: Dorsey Wright and Associates


Source: Thomson Reuters

Source: Thomson Reuters



Our longer term indicators are all positive, and the follow through day from three weeks ago was clearly valid.

The shorter term signals are still positive as well, and not that extended.

On the other hand, this October rally is not only historically unusual, it has brought the index right back to longer term resistance that would usually would not succeed on the first try. It is interesting to note that the seasonal pattern was ahead of the curve this year, and we’ve always said it is a useful thing to watch, but it is not inviolate.


TSX Chart Oct. 23, 2015

Chart courtesy of Stockcharts.com

Interest Rates

Bonds were stronger on the week as well as stocks. The TLTs finished at 123.30, with the ten year yield at 2.04%.

Helped by lower yields, utility stocks were stronger, and most are now back to where they were before the surprise gap down with the rest of the stock market in August. We are much less enthusiastic now than we were on the group a month ago. They will likely see some temporary softness from here as well. But 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 2% interest payment.


Our dollar was lower last week after the election, but not as soft as I would have expected. Our view on the dollar has turned much more bearish. Anyone without the benefit of US currency investments at this point is encouraged to change that situation rapidly. The Canadian finished at 75.83, and we are still a long way from our preferred level to convert more funds. Our hope is that an energy rally back to the high 50s might drag our dollar back toward 80c. We would be aggressive sellers there.

The Euro was lower at 110.12, as the market seems to see the losing futility of an expanded QE program much better than the ECB. Still, we continue to be more open to euro share purchases now that one third of the air has been removed from the Euro, but they are not in the ‘must have’ category in my opinion.


Gold finished higher at $1,164, and remains around resistance. The shares were also slightly more positive on the week. They have had a nice bounce from a month ago but I don’t expect further gains in the short term.

Base metals shares also consolidated. Copper was a bit lower at $2.35, nickel at $6.50, and zinc at $0.80. We still have no interest in the metals shares, and do not expect last week’s rally to continue.

S&P 500

S-P 500 Chart Oct. 23, 2015

Chart courtesy of Stockcharts.com


Crude finished the week at $44.65, which was down about 3% on the week. Natural gas was lower at $2.43.

Energy shares were softer, but not as much as expected given the commodity prices and the election result. I expect this will likely change. Behavior such as this shows just how much the short interest must have been in these names.

We are more negative on energy than we were a month ago. First, prices have rallied a lot from those levels. Secondly, our outlook for crude prices is not as bright as expected due to stubborn oversupply from OPEC. Third, the election result in my opinion is substantially bad news for the energy sector in Canada, despite the best efforts of all to pretend this is not the case.

Canadian Stock Focus

Stocks in buy range are: Manulife, Liquor Stores, Medical Facilities, Gildan, Magna, Martinrea, Keyara, Richie Brothers, and Wilan.

US Stock Focus 

US Shares in buy range are: Ciena, Wells Fargo Bristol Myers, Cambrex, Abbott Labs, Korn Ferry, UnderArmor, Lowes, Acadia Health, Panera, Jabil Circuit, and Gilead.


Overall, it was a much better week in the US than in Canada, and I expect that will be the case for the foreseeable future. The election of a Liberal majority intent on confiscatory taxation a deficit spending is the triumph of marketing and income class warfare from the supposed ‘inclusive’ Trudeau. I fail to see how it is anything but divisive to promise 80% of the population more government money per month once the state appropriates it from the top 15%. I suspect that some of this 15% are too dim to realize that they are “rich” in this scenario, but they may soon find out that voting as instructed by the media will not be in their best interests.

Although we didn’t see this outcome, the chances of it were clearly a risk over the past year, and make us glad once again to have positioned ourselves in the US market. We will take any reasonable opportunity to increase that weighting.

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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