Monthly Archives: May 2015

I’m on Market Call!

On Tuesday, May 19th, 2015, I will be on Market Call on BNN (Canadian Business Show) 1:00 pm – 2:00 pm (eastern standard) with Mark Bunting.

Take this opportunity, open our Model Price Facebook application and follow along while I’m on the show answering viewer’s questions about individual stocks.

Would you say anything different based on your interpretation of Model Price Theory and chart? You can make your comments via Facebook.

Should be fun!

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May 2015, S&P/TSX Composite Market Strategy Update

Waiting.

Yes, I know it isn’t much fun. But waiting is sometimes what the market forces you to do.

And it’s about energy.

As a trader/investor you could expend a massive amounts of energy into a market or a group of stocks without much a reward. Your personal energy is a finite resource, especially the older you get, and I husband it every opportunity I get. So when I see the Canadian market as reflected by the S&P/TSX Composite Index, I sit back and relax and try to do minimal activity. Because I know what is coming….

The Canadian equity market, like all global equity markets, takes its cues from the U.S. equity markets. And as I have written the U.S. equity markets are ‘boxed in’ at the top of the zone bookmarked by EBV+3 and EBV+4, as I have blogged about recently here.

If the S&P 500 were to correct back to EBV+3 or 18% lower, I am sure the Canadian market, as well as other global equity markets, would correct also. Conversely, if the S&P 500 had a positive transit of EBV+4, this would propel the Canadian market higher, EBV+3, would be an important target for the S&P/TSX Composite Index…some 37% higher!

S&P/TSX Composite Index

S&P/TSX Composite Index with weekly price bars and EBV Lines.

S&P/TSX Composite Index with weekly price bars and EBV Lines.

As a reminder we aggregate all companies in the S&P/TSX Composite Index into one chart on a market capitalized basis (like the S&P/TSX Composite Index itself), so we can see where the market – S&P/TSX Composite – is trading relative to its EBV lines.

For people new to Model Price Theory [MPT] the index value or equity price can move within an EBV zone with no real consequence. However when a transit occurs – index value or equity price crosses one of our parallel lines – an EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectively.

So the Canadian markets will rally a little above EBV+2 and then fall back to this same EBV Line for support. Yes, we could have a negative transit as well however if the S&P 500 is still ‘boxed in’ – as it has been for months – we will probably rally back up to the aforementioned and same EBV+2.

So you can expend a prodigious amount of energy trying to trade this ‘ go nowhere’ phase in the market but I’m not sure what kind of profits you will be racking up both on the long and short side of the market. Sure there are exceptions, but the individual stock risk a trader may have to take in a sideways market can be high, and yes, I’m talking from personal trading experience.

Conclusion

The whole world is waiting for a signal from the S&P 500 and Canada is no exception. Do valuations go higher or lower? Global interest rates are now in the process backing up – going higher: What does this mean in terms of equity valuation? (Hint: I wouldn’t necessarily assume lower equity valuations.)

Better still, I believe I have made a strong case for ‘taking the summer off.’ My personal energy is precious and I don’t want to waste it in a sideways, choppy market with little to show for my concentration and thought process. When and if the global equity markets make up their minds, I want buckets of energy to grab my share of trading profits. What about you?

May 2015 – Monthly S&P 500 Market Strategy Update

“To transit, or not to transit.”

Sorry Hamlet, but the S&P 500 makes your dithering look decisive. So let’s have a look at what is going on with this index filtered through our Model Price math.

S&P 500 Index with weekly price bars and EBV Lines (colored lines).

S&P 500 Index with weekly price bars and EBV Lines (colored lines).

As a reminder we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P 500 Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.

As you can observe the US market, as defined by the S&P 500, is now at the top of the zone bookmarked by EBV+3 and EBV+4. If the market rallied to EBV+4 (2169) this would represent a gain of some 3%. If the market corrected back to EBV+3 (1734) investors would be suffering losses of almost 18%.

For people new to Model Price Theory [MPT] the index value or equity price can move within an EBV zone with no real consequence. However when a transit occurs – index value or equity price crosses one of our parallel lines – our EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectively.

Top of Zone EBV+4

As I noted in my March comments on this very subject and should be read in conjunction with my May comments here, we could be here for quite sometime – just under EBV+4.

Why?

The best explanation I can offer is the market is waiting. “Waiting for what?” you ask. Waiting for a clear signal from something, I have no idea what, for this index to have a positive transit of EBV+4. Or conversely, sending the S&P 500 down to EBV+3 or some 18 percent lower.

Viewed simply and as a snap shot of risk/reward market metrics this hardly seems like a favorable environment for much of a reward with the amount of risk being taken. In other words, your upside is capped to EBV+4 or 3% higher (unless there is a positive transit of the same EBV+4) and the market index has to fall 18 percent to either a buy signal at EBV+3 or a sell signal if a negative transit occurs of the same EBV+3.

However, and as I have said before, we could be here – at the top of the zone – for years. So time in the market can be rewarding, in terms of dividends, and individual stock returns. Plus our EBV Lines, representing compounding growth in book value, is growing positively giving managements room for dividend increases and share repurchases while we wait for some market resolution to occur. Annual market returns, as viewed by the S&P 500 Index, can still be positive by high single digits, which maybe quite favorable compared to other risk asset categories.

Conclusion

There you have it. The U.S. equity market, as defined by the S&P 500 Index, is ‘boxed in’. Not enough good economic news to send the markets higher…. and not enough bad news…. I think you know the rest.

So we wait. As I noted above, the good news, if there is a silver lining is the growth in our EBV Lines, looking forward, representing positive growth in corporate America’s balance sheets giving management motivation for further dividend increases and stock repurchases giving investors a positive expectation of low single digit returns until Hamlet (sorry the S&P 500 Index) makes up its mind on where it wants to go.