Tuesday, August 14, 2012


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Risk On; Risk Off
My desire in writing this blog is to share my years of experience in the stock market in the hope of helping others to be successful.  My approach has evolved over the years, and continues to, as the opportunities arise.  Currently, I am trading Exchange Traded Funds (ETF's), rather than individual stocks.  Lately, the market has all but ceased trading on fundamentals, and is following some irrational "risk on", "risk off" approach.  ETF's add diversification and more predictability during these highly volatile times.

Nothing To Show
Because of the market volatility I am trying to develop more of a trading methodology, with mixed success.  Since I am not at the point where I feel this would be helpful to others, I decided earlier in the year to share my investing club trades in this blog.  The problem is there hasn't been any trades.  Prior to the end of last year we purchased two inverse ETF's.  One makes money as the Nasdaq goes down, and the other as the TSX goes lower.  We are also holding some silver coins.

Moving Averages
None of those positions in our investing club has proven profitable, year-to-date.  With the exception of the Nasdaq, neither has there been any longer term signals which would justify reversing these positions.  You might know from other posts on this blog that I recommend using the 200-day moving average to manage risk.  The TSX has been below its 200-day moving average most of the year except for a brief high it made at the end of February.

Invest Responsibly
I have three reasons for remaining bearish.  In order to take a responsible and more conservative approach, I am not going to recommend bullish trades to my readers or to members of my investing club while the TSX remains below its 200-day moving average.  While I might take a more aggressive approach with my own personal money by making very short-term tactical trades, sharing those would not be helpful to people who aren't sitting in front of their online investment account all day.

Long Term Trends
Secondly, long term trends are negative.  The deleveraging required to restore government budgets and remove most of the unnecessary  risk in financial markets is going to take years to come.  Demographics will not substantially improve before the end of the decade.  If we look at the U.S. markets they have already reached a peak according to the Elliott Wave theory.  Trust in government intervention is almost all that is currently propping the markets up.  Wait until everyone wakes up to the fact it isn't going to make any real difference!

Head & Shoulders
The third reason is the technical pattern called a Head and Shoulders which the TSX is making.  This is a very bearish pattern which, if we break the horizontal neckline just beneath the recent lows, it could mean a possible return to our 2008/2009 lows.

Cash Is King
I know there is a segment of investors who would scoff at my lack of returns this year.  They would say four or five percent dividend returns is good in this environment.  Those are likely the same people who lost half, or more, of their life savings during the last great recession.  Let's see - four percent upside and 30 percent downside, that is not a bet I am willing to make.  As for not knowing when to get back into the market, I know where that point is, and it is NOT here, except for very short-term tactical trades.  In the mean time, my funds are mostly in cash, thank you very much.

That is my outlook.  Does your outlook differ?


  1. I generally eschew technical analysis and pay attention to fundamentals.

    On that point, do you think that the TSX is currently overvalued? I was recently looking for decently priced dividend stocks (for my article on Thursday) and found nothing worthwhile, whereas 6 months ago I could find plenty.

    Re: "cash is king" -- absolutely. I am heavily un-invested. The Canadian housing bubble is unraveling. It's going to lead to de-leveraging, a drop in consumer spending, unemployment spike, etc. I'm keeping cash because, as somebody in my 20s, I suspect there will be some good deals in RE. Not sure if this de-leveraging will hit stocks as hard, but I'm not following Garth Turner's advice by piling up on bank stocks and preferred shares.

    1. Hey Joe.

      Sorry to miss your comment up until now. I guess I have been more involved in home decorating than anything else, lately. On a forward Price Earnings basis I would have to say the market does not seem to be greatly overvalued. I can find larger Energy, Financial, and Materials companies on the TSX which have a reasonable upside to next years consensus earnings estimates. Many, though, have lousy looking charts. Also, the macro economic view is not good, currently, and seasonality would indicate a correction is due in the shorter term. All that taken into consideration, it makes me wonder if next year’s earnings estimates are too high. All together, I believe we will get better buying opportunities for stocks, than right now.

      Thanks for the question.


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