DJUA and Nasdaq Indexes..."Canaries in the coal mine"?

Sometimes one market index will lead the others in or out of a longer term trend. At this point in time the Dow Jones Utility Average has broken below its lower channel line. The Nasdaq Index has also done the same thing.

The other main US Indexes and the Canadian TSX Composite are close to doing the same. This may or may not turn out to be an important market turn but it is a heads up and the evidence is accumulating to support this conclusion. These two breakouts are consistent with other market price action I am following.

TSX Composite Index, January 21, 2010

The stock markets may be near an important junction. The one year chart for the TSX Composite Index shows the rally since the March 2009 low. An impressive increase over a relatively short period of time. Without getting into a lot of detail....the circled breakout below the trendline has the potential to turn out to be an important market downturn. Other indexes in the US are at a similar juncture. We could see just a large temporary downturn in a continued uptrend or the bear market may continue to some point below the March 2009 low.

Financial Advisors are Learning

I am starting to see signs of the rosy picture painted by those who give financial advice change. A few years ago the typical story was ‘invest money in the stock market if you don’t need it for 5-7 years’. Sound familiar? Now, more and more, I hear them saying things like ‘if you have a time horizon of a few decades’ etc.

The undeniable market history, coupled with the severity of the current bear market, is forcing the financial advisors closer and closer to seeing how the market really works. I expect a lot of them are reviewing and rethinking what they were taught in financial advisor seminars etc. I also expect that the majority of them are also taking a big hit on their personal finances.

It will be interesting to see what their literature says a few years from now.

Welcome Back to 1997

The Juggling Dynamite blog brought this movie clip to my attention. It is interesting to watch at this time now that the stock markets are back to 1997 levels. If we don't learn from history we are...

Berkshire Hathaway is down by 43%

Interesting. On a percentage basis, my portfolio is officially much better off than Warren's. I haven't lost a dime since the crash began. I'm a little ahead.

Berkshire Hathaway is down 43 % since the peak. I guess they subscribe to the buy and hold thesis and the fund tracks the market closely.

Unfortunately there may be more bad news for Warren. The chart suggests that Berkshire Hathaway Inc (NYSE) may just be starting the decline. It has broken below a 9 year trendline on high volume. That is not a good sign.

The real test will be to see how I do compared to Warren after the bear is over and the next bull is well under way.

Buy and Hold Investing

I have been reviewing the credibility of the case for the Buy and Hold for the Long Term approach to investing.

As I understand it, the thesis goes something like this. No one can consistently forecast the stock market so it can only be viewed as a series of random events. The exception is that the market history supports the view that the markets always recover from a bear market. Therefore, if one buys "good stocks" and holds for the long-term, then the investor will eventually receive a good return on the market investments. The trick is to ignore market flucuations no matter how deep or how prolonged they may be.

This investment philosophy can be combined with dollar-cost-averaging, which is also based on the belief that it is impossible to time the market. One buys market equities/funds, say every month with a fixed sum. In that way...as the prices fluctuate one buys more at lower prices and less at higher values.

There is no question, as long the country remains in business the index will come back eventually and surpass the pre-bear high. And, dollar-cost-averaging ensures that for prolonged bear markets one will be buying some shares at lower prices.

The whole think hinges, in part, on not picking stocks that never recover from the bear market and unfortunately that does happen. An index fund will eliminate that risk. But there is another little known risk. Unfortunately, the Buy and Hold approach only looks attractive if one "models it" using carefully selected portions of stock market history. In other words with good "market timing".

There have been periods of time when the market would have tested the patience of anyone subscribing to the buy and hold approach. The periods of market history I refer to are the 1929-1954 and the 1968 to 1982 time periods. The markets, as defined by the DIA Index, took 25 years to recover after the 1929 crash. And, the ~1968 to 1982 time period although a less severe bear in terms of depth (-45 % compared to the -89 % loss of 1929) but it was a time period where the market went sideways for about 15 years.

It is easy to show that for these two time periods, a lump sum, that was invested at the pre-bear peak, would have performed much better had it been in a nominal rate GIC. The green lines on the graph of the DJIA show a few recovery times, including the two mentioned above.

TSX Capped Financials Index...the Canadian Canary in the Coal Mine?

The TSX Capped Financials Index, the one that includes all the Canadian banks like Royal Bank etc. has recently broken below it's November low. It has only done so "by a hair" but that is significant from a technical point of view. It all goes back to Elliott and the limit of the second wave. In addition the wave pattern is consistent with just a pause in a continued downtrend.

I know a lot of people have their hopes up for an end to the bear at the November lows, or at least a large temporary bear rally at this time. However, if anything, I continue to see more and more data predicting a near term collapse of markets to lower levels.

By near term I mean it could happen this week or a few months from now. This sideways pattern could continue to stall out the markets for some time to come. The timing of these things is always the biggest part of the mystery.

Wish I had better news.

DJTA Index...Canary in the Coal Mine?

The DJTA Index...broke below its November low this morning. This may turn out to be a significant early warning sign for the US - and perhaps other world wide stock markets. This event will likely make the daily news soon.

After some of the large cap components like UPS and FDX recently broke new lows, the Dow Transport Index broke below it's November low this morning. This appears to eliminate any possibility of an EWP wave two correction as part of a larger rally that many have hoped would occur at this time.

I also see similar wave and volume patterns in the other US and Canadian Indexes, suggesting that they will "most likely" follow on the heels of the DJTA Index. The volume patterns for the TSX Comp and Nasdaq are not as well defined as the others but it's there as well.

The DJTA Index may turn out to be this months canary in the coal mine. If the DJIA Index also breaks below it's November low then this we create the classic and time proven Dow confirmation of a continuation of the current trend. The current trend is a bear market downward trend. In other words, a technical analysis confirmation that the bear has not ended.

From a practical market monitoring point of view this event also suggests that the trendlines can now be adjusted as shown. I have shown them for UPS and the Dow Transport Index. The most exposed point of the recent sideways move now becomes the last anchor point for the most current trendline shown here. This new boundary becomes our trendline going forward.

US Stock Market...Possible Early Warning, December 22, 2008

All three US Market Indexes are showing the beginning of a possible important downturn. The graph is just starting to break below the trendlines that have been in force for the last month. This is properly viewed...as an early warning. The Canadian Stock Market is not quite there yet but it could easily follow.

My Portfolio..up about 2% from the June 2008 Market Peak

The other day I got into a lively discussion with someone about the stock market. I was unsuccessful in my arguments, however this person challenged me by saying what really counts is your portfolio performance not how you have done on one particular stock.

Since I had not looked at my portfolio as a whole for a few months I updated it to see where I stood.

I used the peak in the Canadian TSX Composite Index in early June 2008 (15,155 points) as a start date for my calculations. Its a date that everyone can relate to. Since that point in time my entire portfolio has increased by 2 percent.

In comparison, the stock market in Canada has dropped by 47 percent over that same time period, falling from 15,000 to 8,000.

Now to be honest, being retired I did not have a huge percentage in the market to begin with so my risk going into the Bear Market was not great compared to someone who was closer to having 100 % investment in the market.

Two percent is not a lot but considering what happened to the market during that time period my guess is that I might place relatively high on a portfolio performance comparison list for any age group.

Time will tell how I make out going forward.

Does anyone else have numbers for comparison?

Canadian Banks Getting Hammered in the Bear, Nov. 21, 2008

The Canadian Financial sector is taking a big hit during this Bear Market and it doesn't look like it is over. So far the TSX Financial Index has corrected back about the last 5 years of increases. A dividend mutual fund, one that includes Canadian Banks has only lost about 4 years of gains. Perhaps the dividends are helping to keep the value higher than the index. Definitely on sale today but my analysis suggests prices will continue lower, at least in the short term. I'm not buying any yet.

Exchange Traded Bear Fund Update November 20, 2008

I continue to hold my shares in the stock market Bear Funds and see a high probability that they could become more profitable with a further market decline. Here are the current charts for the Canadian TSX 60 Index Bear Fund and the US SP500 Index Bear Fund.

These funds are like holding short positions without the risk of losing more than you paid for them. Also, unlike buying "Puts" they have no time limit working against you.

Stock Market Comments for November 15, 2008

Its been two weeks since my last post. The markets have continued to churn more or less sideways for the last two weeks. Corrective waves can take a long time to finish.

SP500 and Nasdaq have made new lows in November but not by a lot. DJIA and DJTA have yet to do this. The Canadian TSX has not made new lows yet but it may be close. RIM, one of the big index influences has already done so.

The index volumes continue to remain relatively low or are still decreasing. Continued evidence that this sideways period is only a pause in a continued decent. The fast paced upward and downward moves is continued evidence of a system that continues to be unstable.

Deep Bear Markets (say negative 40 %? or more) often take in the order of 2 - 3 years to bottom so this is all within normal historical experience.

I continue to see some evidence that this Bear Market actually started in 2000 and this is just a continuation. I have stumbled across a number of stocks have already gone below their 2002 lows and some that are approaching that price level. The 2002 to 2008 Bull may have been just a large upward move within a much longer duration Bear (correction). The mainstream media has yet to see this happening.

An interesting stock is Fedex. It has a well defined almost text book set of 5 waves. It now appears to be correcting the Bull market it experienced over the last 30 years or more. It is now into what Elliott called the next higher cycle, a second wave. And, second waves, in the extreme, have the potential to retrace almost all of the first wave. A third wave, one that will go above the 2008 peak, will only occur if Fedex survives the Bear. Some stocks/companies don't.

Stock Market Comments for October 30, 2008

October has seen higher volumes but index values have trended more or less sideways. This includes the TSX Comp, SP500, DJIA and Nasdaq indexes. The Nasdaq sticks out a little because the volume has an obvious decreasing trend.

There are several possible scenarios for what is going on, but in my experience...all of them forecast lower lows for all indexes. As always, the timing of the lower lows is uncertain and temporary increases can happen before we see the lower lows.

SP500 Index Bear Fund

Here's another Exchange Traded Bear Fund. This one is for the SP500 US Index. It ended today at $39 per share. The large degree of fluctuation is due in part to the times 2 leverage on the fund. If the index drops about 5 % the fund will rise about 10 %. This works both up and down. Its a very convenient way to short the market. It trades just like a stock.

I'm expecting the SP500 index to go lower, perhaps a lot lower, and if true the shares of this fund will rise above the last peak of $45.

Agrium Inc. (TSX): Expected to Go Lower

Once in a while I come across an interesting short term chart pattern that turns out to be a good forecast of things to come. Agrium, a Canadian stock, has been falling in price like most everything else. It now has one of those patterns. Agrium recently hit a low of $36 after peaking near $116 back in June 2008. At $36 it was down $80 from the high for a loss of 67 percent so far.

The chart is now saying to me that there is a very high probability that it will go below $36. The obvious pattern here is the decreasing volume pattern as the price moves more or less sideways near $40. One way to conceptualize what is happening here is that the number of buyers who are willing to pay this price, at this point in time, are running out. Once these "bottom guessing buyers" have their fill the price can easily resume it's downward travel.

If I was really gutsy I would short it now but I'm staying with shorting the TSX 60 Index. Its more of a sure thing.

US and Canadian Stock Market Milestones

Many of us are wondering....How deep will the Bear Market go? How bad might it get?

So far we have only seen about a 40 % loss in the major market indexes. The extreme I have seen so far is the Canadian Venture (penny stocks) Index. It was cut by about 70 percent at the low in October.

My review of a handful of Canadian Mutual Funds, mostly TD funds, indicted that fund values have been reduced by 30 % or greater more depending upon the fund. Dividend stock funds have suffered the least so far. Small Cap Funds and Energy Stock Funds reached lows near a 50 % loss in October. All funds have rebounded a little since the October lows.

I have no way to estimate the ultimate Bear Market low at this time but I can see a few scenarios. As the Bear goes deeper and deeper some of the possible "least severe" scenarios are off the possible list.

The Stock Market is governed by rules, but the rules allow it a great deal of flexibility, and at any point in time it has more than one possible future. This makes perfect sense since the people who will buy or sell next week, next month or next year have not yet made those decisions.

I follow both the US and Canadian Stock Markets. They are quite similar. I have used the Elliott Wave Principle to evaluate the markets for many years. This knowledge allows me to periodically "take the pulse" of the market to determine where it might go in the future. It has allowed me to call many important market turns, frequently on the same day they happened. Most recently, it allowed me to see "the possibility" of a big downturn in the market back in late 2007 and I sold all of my stock market related long positions well before the recent large drop in the markets.

So now, like everyone else, I look for signs of a bottom. The best I can offer at this time is a few milestone market levels. From a technical standpoint, the US Markets are ahead of Canada in their decent. They have already passed one important milestone and are approaching the next. If the DJIA breaks below the late 2002 low near 7,100 then a much deeper Bear could occur. In one scenario, it may then be in the process of correcting the entire history of that Index, back down to much lower levels.

The Canadian TSX (Toronto Stock Exchange) still has one more "less severe" option. Here, there are two milestones close to 6,000. If the TSX Comp breaks below 5,700 then it could be a much deeper Bear Market.

We can look for "bottoms" occurring above these milestones, and on occassion, just above them. Its limited information but its better than just guessing, or listening to the news media pundents who attempt to relate current events as the only factor in market moves. The truth is that the current Bear Market is a normal retracement of portions of Bull Markets that have lead up to it. The real question is... where did the Bull Market start, the one being corrected by this Bear Market?

As time goes on, if the market creates patterns I can recognize, and I'm paying close attention rather than out enjoying the outdoors somewhere, I may be able to see a possible bottom forming. Stay tuned for updates.

TSX Composite Index Forecast October 15, 2008: I Expect the Bear Market to Go Lower

I just finished my most recent analysis of the TSX Comp Index, as well as the charts for POT (Potash Corp) and RIM (Research in Motion). All three are telling me the same thing. The Bear Market has not ended and the next leg down could be a relatively strong one.

Forecast Details
TSX Comp Index, at 9,625 points, going below 8,851.
POT at $98, going below $85.
RIM at $69, going below $58.

These forecasts are about $10 moves for the stocks and about an 8 % downward move for the index.

As always, the market will do whatever it needs to do and nothing is guaranteed. The timing is uncertain for these events but I'm expecting sooner rather than later. It may have already started downward.

SP500 Index

The US stock market is currently down by about 43 percent. It is approaching the lowest level of Bear Market that began in 2000. If the index breaks below that level this will be a large red flag. In comparison, the TSX Composite Index in Canada is down by about 40 percent. However, it is not yet close to breaking below low of the 2000 Bear.

TSX Bear Fund

Not all mutual funds are dropping like stones these days. This Bear Market fund is bought and sold like a stock without any minimum holding period. It is a convenient way to short the market. It has a leverage factor of times 2 so it moves up nicely when the TSX 60 Index drops. The TSX Composite and TSX 60 are very similar charts.

This is the only investment I hold today for the stock market. I just sold the last of my long position mutual funds (TD Energy) yesterday. I took a $500 loss on this last small long position but expect to make it back later when the market is closer to the bottom of this Bear Market. Until then the rest of my investment money is safely put aside in things like money market funds and bond funds. I'm betting on a significantly deeper Bear Market. Time will tell if this is correct.