Last week I capitulated on my thinking that the market had to have a near-term correction after such a prolonged and convincing run-up since the March lows. While that correction will occur sometime, I continue to adhere to the disciplined investing guideline that “the trend is your friend”. At the same time, I also look ahead and try to anticipate where that trend is going.
As we head towards the winter months, I am reminded of the dangers of walking or skating on “thin ice”. The “danger” signs for the market are popping up, but the indexes continue to ignore and rise ever higher.
Last week, the Dow Jones Industrials furthered their advance, rising 2.5%. The S&P 500 was up 2.3%, and the NASDAQ 2.6%. The S&P/TSX Composite Index has been lagging but, it too, rose last week, although only by 1.4%. The S&P/TSX is highly geared to the energy, mining, and financial stocks, and oil has plateaued, only gold has been on the up in the metals sector, and the financials have been marking time for a while.
The DJIA is following a perfect up-trend line, with three points: March, July and end of October. With higher “highs” and higher “lows”, there are no danger signals there. The S&P 500 and the NASDAQ are following pretty much the same pattern, although both are at a critical point, having just returned to their respective mid-October highs. They need to continue their advance or the danger signs will be pulled out. The S&P/TSX Composite Index is the most vulnerable. It is back to two previous highs made in mid-September and again in mid-October. Failure to follow through to new highs would represent a triple-top and set the red lights flashing.
What all this means to me is that, normally, the S&P/TSX follows the trend of its American cousins. That trend is up. For the S&P/TSX to rise would mean the energy, mining, and financial sectors would have to lead the charge. If the S&P/TSX breaks down and falls victim to the triple-top, shares in these three sectors may be headed for a fall.
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Bob Weir, B. Comm, B.Sc., CFA. - eResearch
Mr. Weir has 43 years of investment research and analytical
experience in both the equity and fixed-income sectors, and in the
commercial real estate industry. He was at Dominion Bond Rating Service
(DBRS) from 1994 to 2001, latterly as Executive Vice-President
responsible for supervising the firm’s 34 analysts and conducting the
day-to-day management affairs of the company. He joined eResearch in 2004 and has been its President, CEO, and Managing Director, Research Services since May 2005.
