Sunday, February 1, 2015

Time to sharpen your stop loss triggers

We’re now in the 7th year of the Bull Market if you count from the market bottom of Mar 2009. According to market valuations we’re not super expensive; but coming from the March low of 6000 to today’s 17,000, the Dow has risen nearly 300%.  I remember buying Microsoft for around 18 dollars and recently it traded close to U.S. $50!  This bull market is getting old and don’t forget our adage that the higher a market goes; the higher the risk!

Well, if you read the headlines today, you’d think we’re in a bear market.  Combined with the collapse in most commodity prices, of which oil is the latest one, it is no wonder our own TSX is so wobbly. Worldwide, economic growth is wobbly and unimpressive as well.  There are positive things happening as well: Europe’s latest QE imitations bode well for the EU markets but their economy is far behind the U.S. recovery with the Greek jitters only enforcing overall investor uncertainty.  Now the Canadian banks are in the eyesight of investor temper tantrums.  
Look at the price chart of TD bank shown below for the last 12 months.  It is trading now below its 200-day average and its price trends towards lower lows and lower highs. Technical analysis suggest this is bearish and many fundamental gurus also are less than optimistic about TD’s prospects.  Oh, many forecasters go, that is because of the falling oil prices and its impact on Canada’s economy!  “Oh yeah?” is my response, “Is that why the Dow Jones does exactly the same thing?” (See the other chart below). 

Figure 1 TD 12 year chart shows that it is trading below its 200-day average (yellow line) and the prices go from lower lows to lower highs. Technical analysis suggests this does not bode well.

Oops, the 30 industrials should benefit from low commodity prices!  But many of those industrials are also getting a large portion of their profits from outside the U.S. Those profits are in foreign currencies that have to be converted into a super strong U.S. Dollar when included in the company profits.
The price of oil maybe down due to some oversupply. But all commodities are priced in U.S. dollars and it is that strong dollar that drives these prices down even more, just like it reduces the value of the foreign profits of the Dow Industrials when expressed in U.S. dollars!.  In figure 3 you see the U.S. Dollar plotted against a basket of currencies going back to 2009. You see, the U.S. dollar has gone ballistic.  Recently, only gold has kept up – isn’t that amazing?  So, the U.S. dollar is in bull market territory and nobody sees it coming down. The U.S. dollar market is in a state of euphoria – close to a peak maybe? 

Figure 2 Dow Jones Ondistrials price chart over the last 12 months.

Figure 3. U.S. dollar versus a currency basket (EUR, JPY, GBP, CAD, CHF and SEK) between 2009 and today. Source:
Well maybe! Considering that other countries are cutting their interest rates against a 5% U.S. GDP growth in the 3rd quarter of 2014 and a Central Federal Bank that may raise its short term interest rates later in the year, it is no wonder that the U.S. dollar is in nose-bleed territory! 

So these are indeed uncertain times. Uncertain times are volatile and risky, especially this late in the U.S. stock market bull market.  Here at home things are uncertain as well. This combined with the bearish price trends in Canadian banks AND the Dow makes me very cautious.  I suggest that we all should be cautious and raise our cash position by taking some profits from our biggest winners and offset the gains by selling our biggest and most hopeless losers. This will neutralize our tax burden and fortify our portfolio. I suggest that you raise cash positions in your paper portfolio to between 15 and 30%.  If you own real estate in your overall investment portfolio and this real estate is located in Western Canada, then maybe hold off on buying new properties and make sure that your leverage is not too high! There is a good chance that rental revenue flattens or even falls as a lot of Alberta and Saskatchewan’s economy depends on commodities - in particular on oil and gas.
Finally, rather than using a 25% trailing stop loss, start using a 15% trailing stop loss. This alone may already trigger sales and raise your cash level which, in turn, will fortify you portfolio for rougher times ahead. This is not a time to buy lots of stock; first weather the storm; then when there is light at the end of the dark tunnel start thinking about buying bargains. That time, as said, is not now.

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