TSX Index January 31, 2008

The S&P/TSX Composite Index is still moving more or less sideways just below the peak of 13, 171 (13,158 error corrected). The Bears and Bulls are evenly matched so far and it still could go either way in the short term. Similar patterns exist for RIM and POT as well as for the US S&P 500 Index.

TSX Going Lower now?

I'm seeing a number of signs that the market rally that started on Tuesday near 12,000 may have run its course. This is a very short-term prediction.

The TSX Comp index hit a high this am of 13,171. Now its always possible that a lot of new money may enter the market and keep this rally going for a while yet. The market always has incredible flexibility.

If this was the complete end of the relatively small bear rally and not just the first leg of a longer term rally...then the market is free to resume its fall below the low of 12,000. So far - this rally has taken on the shape of an upward pointing wedge. This shape is a common pattern that forms during bear markets. This pattern is more pronounced in RIM where the required decreasing volume pattern matches very well.

To put all of this in perspective...I firmly believe that the TSX Index will eventually bottom and then recover all of the lost ground, eventually making new all time highs.

Early Warning Signs

Anyone who follows the stock markets is currently wondering... What will the stock market do over the next few months or years? Fortunately, there is a relatively simple way to get a feel for what is likely to come next. This method does not require one to guess anything about profits, dividends, interest rates, government intervention and so on.

Here's how it works.

Over long periods of time stock markets move in trends. After a number of years the long-term trend changes. A simple way to detect if the trend may be changing is to use a simple trend line. For a Bull Market the trend line moves upward. It is a line connecting all of the major low points. For a Bear Market the trend line moves downward. For the Bear Market it is a line connecting all the highs. The trend line works for market indexes and for many stocks.

We can think of the trend line and the market action relative to the line as a "trip wire" or early warning system. The market cannot change from one long-term trend to the opposite long-term trend without breaking through the trend line that has been "in force" for a number of years. This is a simple undeniable fact. This analysis is scientific because it can be repeated and verified by others. For longer time periods there is always only one long-term trend line. Any market history chart will show this to be true.

At this point in time we wonder.. Are the stock markets just in a relatively short-lived and shallow correction, or have the stock markets begun a much deeper longer-term Bear Market? Before the next large Bear Market can begin, the Bull Market trend must be penetrated on the downside. The long-term trend must start to change.

These two graphs show that the US and Canadian Stock Markets have both broken below the long-term Bull Market trend lines. These trend lines have not been violated for the last 5 years. In general, longer time period trend lines are more important that shorter time period trend lines.

At the very least, the recent breaks through the 5 year Bull Market trend lines should be viewed as an early warning of a larger (deeper) Bear Market starting. If so, it is only in the early stages.

Chasing The Bear

I've decided to put a little more money behind my forecasts for a deeper Bear.

I have sold out the balance of my mutual funds that are stock market based. I'm completely out of the TSX Comp Index Fund and the Royal Bank Dividend Fund. I can't recall for sure why I kept the remaining units of these funds this long. It was probably part oversight and part concern for selling mutual funds within the 3 month minimum holding period. I took a loss of a few thousand but if I'm right I will easily make this back later when I buy back in at significantly lower levels. A good trader has to be cold-blooded about these things.

I am also going one step further. I have also placed an order for some Horizons BetaPro Bear Fund (HXD) that shorts the TSX 60 Index. I'm currently trying to guess the extent of the current short-term bear rally so I can get it at a little better price. Its at $23.50 and I'm offering $22.85. I know I'm unlikely to call the exact bottom but its fun to try. Its a little confusing with the index going up and HXD going down.

HXD trades just like a stock and its great being able to short the TSX market with such convenience. I think the last time I went short was when the airlines were in a nosedive after 9/11 and I made a little money on Air Canada's tailspin.

I can never predict whether the TSX's next move will be due to energy, mining or financials or some other stocks. By focusing on the entire market I don't have to try and guess the details. The truth is I don't care. I view the market as just a possible way of making a profit.

Changing the topic a little...I took this picture of a Buffalo/Bison bull yesterday. It was a nice change of pace. I have to say that I refrained from touching him. He must have weighed 2000 pounds.

Bear Market Protection

I have been searching for a Bear Market Mutual Fund. One of interest is the S&P/TSX 60 market inverse fund sold by Horizons BetaPro Funds. It appears to ba available as a normal mutual fund with a $5,000 minimum purchase and also as an Exchange Traded Fund with no minimum limit. The graph is for the ETF version.

It is a relatively new fund that appears to be equivalent to shorting the entire index. It moves opposite to the index. It is a means of offsetting the Bear Market. It has two times leverage so a little goes a long way. $5,000 in this fund will offset $10,000 of long positions in stocks or mutual funds exposed to a down-trending market.

Caution...the leverage works both ways. Call the direction wrong and you lose twice as much.

Bear Market Fear

The TSX Composite Index broke below the 12, 500 level today to a low near 12,120. I was expecting this break below the 12,500 level. It is just more data to support my forecast. Down about 17 % from the last high near 14,647.

A quote from this am..."Tebbutt said the recent market reaction is composed of "irrational" behaviour motivated by fear and uncertainty."

Is it really irrational to sell at this time? I disagree. Even a person with the foggiest notion of how the markets work will likely realize that many people will rush to the exits under the current conditions. Even the US government is "afraid" and "uncertain".

I sold out in November and I’m perfectly comfortable but I have the advantage of being able to see these things coming. When I sold it was a rational decision. I was not afraid. I plan to buy back in closer to the bottom.

I continue to think this Bear Market has a long way to go before it ends.

I see that TD Bank has broken below the $64 level. That was a significant technical sign of continued weakness.

A couple of other high flyers to watch... RIM and POT These two Canadian stocks look like they have entered a downhill snowboard race event. RIM is leading now but that can change overnight.

US Stock Market Looking Very Weak

If you have been following this blog you are already aware that I follow the market and periodically make forecasts.

Well...the US stock market in general is looking very weak from a technical perspective. I won't bore you with the details but the entire US Stock Market looks like it could drop, at least another 20 % or more. The Dow Jones Transportation Average is leading the pack downward at this time. I expect to see a further decline in the DJIA, DJTA, SP500 and Nasdaq.

I'm not sure how much of the US drop will spill over into Canada but the risk is very high that it could. My best guess is that the TSX Composite will also go significantly lower. After the TSX Composite run up from about 6,000 to 14,000 since 2002, a retracement in the order of 50 %, back to ~10,000 would not be unusual. It would be well within normal market action.

2007 Cash Flow

Well the numbers are in for 2007. We have a lot of sub categories so I will only note the larger ones.

Our total spending for the year was about $31,000. This includes all expenses except those that were scheduled to be paid from earmarked pre-retirement savings. Savings paid about $18,000 for a newer used car and $3,000 on boating.

Income Tax ~$2,600
Municipal Property Tax ~$1,800
Groceries ~$7,000
Restaurants ~ $2,900
Entertainment ~ $2,300 including car trip expenses
Home Maintenance ~$2,000
Auto Gas ~$1,500
BC Medical $1,152
Auto Insurance $1,300
Clothing/Hair $1,200
Savings for our next car replacement $2,000 (pay cash every 5-10 years)
BC Hydro ~$900

We own our home and we don't have a lot of vacation expenses other than boating. The total for the year is well within my pre-retirement estimates.

TD Bank follow-up January 8, 2008

TD bank stock is close to an interesting milestone. If it breaks below the $64 dollar level this makes a much lower price drop more likely (not guaranteed).

I have been following Canadian Banks for some time. Bank of Commerce and Bank of Montreal have both seen a large price drop so far. My best guess is that we will see similar drops in all Canadian Banks. They have all had an excellent Bull Market run for many years and a large price drop (Bear) would still qualify as normal market action.

Today's news includes a "rumour" that TD may be exposed to the US Subprime Real Estate problem. This would not surprise me as TD has been working on getting a foothold in the US Banking industry. This rumour could lead to a break below the $64 level which in turn could lead to much lower prices to come.

Net Worth Debate....include the house?

I noticed some blog posts lately about net worth and retirement. Its also that time of year when we receive our property assessment notices. It can lead to questioning if a home went up $30,000 this year should that increase be included in a net worth statement?

The short answer is yes.

If push comes to shove "you can always eat your house". By that I mean you can always sell your house and rent a place to live. This will provide excess cash to live on if you need it.

On the other hand...if you stay in your house when retired and don't take out a mortgage on it to get access to some cash flow...it won't provide any income. But home ownership means you won't have to pay rent each month and this will reduce the need for retirement income.

I know some people who have sold more expensive homes in Vancouver, bought less expensive newer ones on Vancouber Island. They use the extra cash for other things in retirement like boating.

Owning a home gives one more options when retirement comes around.