Don Vialoux On The TSX

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Don's research identifies the time period of Sept. 16 to Oct. 9 as a period of seasonal weakness.  He believes the technical indicators are now pointing to a correction.  This correction is, on average, 4.0 percent for the TSX index.  He expects markets to go higher after the U.S. election.  With the debate surrounding the fiscal cliff in the U.S., I expect volatility to be higher than usual, especially if trading volumes remain low.  I think they will get the job done to avoid the future tax increases from automatically kicking in, but it will come at a cost, further weakening people's faith in the system, and the markets.

Anyone have an opinion they wish to share?

Bearishness

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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?

The Case For Market Volatility

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Signs of Struggle
With an economy which generates almost 18 trillion (US) dollars of goods and services, the European Union is the largest economy in the world.  In the video, Larry Berman gives the litany of problems facing that economy, and consequently, the world economy, as well.  The level of European debt, demographics, and fiscal austerity all add up to a struggling economy and higher than usual stock market volatility for a very long period of time to come.

Volatility; Not Demand
Sovereign debt levels world wide mean political and economic volatility unlike anything we have seen in generations. All this, just at the time the Baby Boomers are beginning to ease back on their spending as their need for housing, and everything that facilitates going to work every day decreases.

New Paradigm
We have just experienced the peak of a period of economic growth unlike anything the world has ever seen.  The engines are low on fuel.  I hate to be the bearer of bad news, but we are not going to see the markets return to all time highs (at least not new highs after adjusting for inflation).  Still, the financial services industry continues their steadfast and unwavering support for the Buy and Hold approach despite the fact it makes a better marketing strategy than it does an effective portfolio management strategy.  As long as they receive sufficient participation, they aren't going to be the ones to tell us the bad news, let alone admit the hoax they have funded all of these years at their clients' expense.

The alternative to Buy and Hold?  Buy lower, and sell higher.  What a concept!

Have you, or are you making changes to your approach?

Trading vs. Buy and Hold

Same, But Different
Everyone is entitled to their opinion.  I am posting this because I am of an almost entirely different opinion than a blog I recently read.  I agree with many of the assertions made in that post, yet I came to an entirely opposing conclusion.

Volatility
The first assertion is the discount brokerage business has changed the way the investing game is played.  According to the author, the new lower commissions combined with the excessive amount of opinions on TV, leads people to think they could be the next Goldman Sachs hedge fund manager.  Lower fees and more information,  they say, is bad because it causes people to trade too much.  I have heard a lot of theories, but I have yet to see any research that says the present market volatility is caused by lower brokerage fees!  If anything, I would say the volume of trading, on average, has decreased since the Great Recession.

Competition
Next they imply that trading does not add capital to the best companies in the stock market, and that long term holds are good, therefore all short term trading is bad!?!  Further, they assert we shouldn't even try to beat professional investors with their automated systems and state-of-the-art technology.  This suggests we are in competition with the professional money managers, where nothing could be further from the truth. We do not have millions, or billions of dollars to invest. We do not have to be in the market 24/7. We do not even have to be fully invested. We do not need to meet weekly, quarterly, and annual investing targets. We do not need to appease fund holders and shareholders. We do not need to meet any forced redemptions. However, we do want to know what the big guys are doing. Doing so gives us an edge because we can do what they are doing, only faster.

Sources of Income
Also, according to the author, Buy-and-Hold always beats riding the latest trend.  The implication is hedge fund managers make their "outrageous returns" from the "suckers" dumb enough to make trades in the market.  Personally, I don't know who this person is invested with, but in taking a close look, we can see only a very small handful of professionals manage to outperform the index.  These organizations do not make their outrageous returns from their investing ability, they make it from the fees they charge!  Have you ever noticed they collect their fees even if you and I lose money?  If I say, "Bank", what do you think of?  I think of fees and service charges!

Theory
Next they assert the efficient market theory has been disproved.  I agree.  This theory supports the idea that assets cannot be mispriced since enough people always have enough information to accurately determine the correct price.  Three things - nice theory, but it is not about what people think, but what they actually DO.  Have you ever paid too much for something, knowing that is exactly what you were doing?  (Ever just had to buy that present for your child, no matter what the cost?)  Second, are we to believe that prices are never manipulated?  Third, the "efficiency" of information has never been greater, but that applies to misinformation, as well.  If the market is so efficient, then how did so many professionals get taken by Sino Forest?  Largely because of that theory, one of the main arguments against trading has been that assets cannot be mispriced, so the odds of buying low and selling high would be zero.  The fact the theory has been disproved supports the case for trading, rather than refutes it.

For What It Is Worth
If we want to just Buy-and-Hold this market, then I would purchase a couple of index ETF's.  Not I, since I personally, have zero expectation the stock markets will be any higher a decade from now.  Think deleveraging, and demographics.  If we do want some sort of return, then I believe (based on my years of experience) a good trading strategy - one that uses low commission rates - is the only way to go.

As I said at the beginning, everybody is entitled to their opinion.  What's yours?

Jim Cramer On Why Price Matters



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Fact, or Theory?
TV host Jim Cramer calls the notion that investing requires a "hands off" approach, one that ignores short-term volatility,  a myth.  He advocates taking advantage of those short-term fluctuations to buy good companies cheap and sell them when they get expensive.  (Never mind the efficient market hypothesis - see previous post - that says that should be impossible).  He says the risk profile of holding a stock changes as the price changes.  He also says the market correction of 2008 has convinced him, more than ever, that "buy and hold" does not work.

His advice is price matters.  Who should we believe, the academics labouring over elaborate models with which they hope to support their theories of markets they don't totally understand, or the ex-fund manager, who made himself very wealthy by following his own common-sense advice? 

Who do you believe?

Commodities



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Volatility
Unlike investing in the stocks of companies which we can calculate a value for, commodities are purely a technical play.  Still, because it involves the perceptions of many, many market players, trends inevitably show up.  The current volatility creates many opportunities, but ones mostly of a shorter duration. 

Inflation/Deflation
Some advisors see gold as a long term hedge against inflation.  Despite the rise in energy and food prices, I am not worried about the effects of inflation on my portfolio as long as unemployment remains higher than normal.  This combined with the baby-boomers turning into savers from spenders would suggest demand, in general, should be lower than what we have experienced over the last couple of decades.  Until governments world wide have dealt with the massive debt issues, I remain concerned about the prospect of deflation, as we just witnessed in the prices of commodities as a little deleveraging took place. 

Commodity ETF's
Many Exchange Trade Funds (ETF's) based on commodity futures contracts (as opposed to ETF's based on the shares of companies that produce the commodities) have become very popular and seem to be having an effect on commodity prices.  Do you invest in commodity ETF's?

Stock Market Volume

Dropping Stock Market Volumes (Source: Bloomberg)

Dropping Volume
We can see from this chart from Bloomberg.com that stock market trading volumes are almost one half of what they were at the beginning of this rally.  Some would call what we are experiencing a new bull market.  Me, I remain unconvinced.  While the volumes have dropped off, many, if not most, have put much of their cash to work.  Fund managers are at record levels of  participation in the markets.  So, if so much cash is actually in the market, why are volumes so low?  While we can't tell for sure, it would seem people are prepared to stick with what they have, as long as the market continues to climb.

Volatility
The problem with everyone sitting on their hands is it increases volatility.  When there is no shortage of buyers and sellers it is easier to get our price.  Fewer participants translates into greater variation between what sellers want and what buyers are willing to pay.  Think of the real estate market.  In times when there are fewer sellers and we need to buy a house, we can end up paying a lot more than we might otherwise want to.

It also means it is easier for the big guys to defend their gains.  Market index values and portfolios can be maintained by purchasing fewer shares in favourite names than would otherwise be the case.  Still, market breadth as measured by the number of companies reaching new highs continues to be strong.  Weaker volumes do not signal an impeding implosion of the stock markets, but moves not accompanied by strong volumes tend to be shorter in duration.

All In (Or Out)
There is no level of volume at which one could predict a reversal in the stock market.  If that were the case we would likely be able to determine the peak or bottom.  The thing to remember, and what makes a reversal so hard to call, is they come when everyone is in, or out, who wants to be.  Either buying dries up at a top as new buyers refuse to pay higher prices, or sellers are exhausted at a bottom.

As for me, I have already taken my profits.  Are you all in, or all out?