Flexibility is your advantage

Ken Norquay notes that small investors can move in and out of markets without disturbing a thing. Large investors can’t. Our plans should take this into account.

Today the press is highlighting the Russian invasion of the Ukraine. Last month it was convoys of protesting truckers and the prime minister’s declaration of an emergency. Maybe next month it will be China invading Taiwan. Or the FED raising interest rates. Or the removal of the COVID restrictions. Or, or, or . . .. The media moves our attention from one exciting story to the next. There’s always some compelling story to attract our attention. This is what the news media does for a living—and they are good at it. But, do not be distracted by this circus of sensational stories. The effect of these sideshows is to distract us from our investments.

Our goal is to become better investors. We believe that investors with good judgment have greater long-term investment returns than those with poor judgment. (Caveat: in the investing world, luck counts too!) We develop judgment by keeping our attention on the trends of the various financial instruments. Our plan is to own investments in up trends and not own investments in down trends. This is different from diversification. When we hold a diversified portfolio, we own investments in both up trends and down trends. This is the main difference between our trend-following approach and the diversification approach of the overall investment.

The industry. They want us to buy and hold their financial products. We like to buy AND sell. Financial news and global events are important for portfolio managers, but not for us. Market analysts try to forecast what will happen in the future. Investment managers try to over-weight securities that will benefit from those financial forecasts. For example, in March 2020 when Federal Reserve Board Chairman Jerome Powell announced his super-easy money strategy, portfolio managers would have (should have?) realized that printing money creates inflation and would have (should have?) added to their mining stock and energy stock allocations. This is not how we operate. We follow the trends created by buying and selling these portfolio managers. It’s like the indigenous tribes following a herd of buffalo across the prairies. When the bison change direction, the tribe changes direction. Because portfolio managers are so big and control such huge financial assets, their collective buying or selling creates the trend. It takes weeks or months for the herd to turn. Because individual investors are so small, controlling only our personal few million dollars of investments, we can turn on a dime. We buy or sell quickly and easily. This is our advantage.

Let’s examine our usual financial trends to see if the herd is turning.

US Stock Market. In my last article, I stated that an up-to-down trend reversal would be signalled when the S&P500 index dropped decisively below 4,300. What does ‘decisively’ mean? On February 23, the S&P500 did drop below 4,300. Then, on February 25, it bounced back up above it. On March 1, it dropped slightly below, and bounced above again. Although this zigzagged action is not ‘decisive’, the Feb. 24 drop to 4,114 was. The explosive stock market uptrend caused by the G-7’s printing press monetary policy, has finally ended. The long-term trend of American stocks is DOWN. The peak occurred on January 4, 2022, when the inter-day high for the S&P500 hit 4,818. The low at the beginning of America’s longest bull market, was 666 on March 9, 2009. That’s a whopping 723 per cent increase in 13 years, 10 months. No wonder investors are optimistic!

Canadian Stock Market. The high for the TSX Composite Index was 21,773 on November 12, 2021. Since then, it has been drifting sideways. For now, the trend is still UP. When the index falls decisively below 20,000, an up-to-down trend reversal will be signalled. Because Canada benefits from low inflation, the Toronto Stock Exchange has been more resilient than its New York counterpart.

US Bond Market. On August 4, 2020, the US long-term bond market registered 171.58 as measured by the price of TLT, the American ETF representing long-term US Treasury Bonds. That was the high water mark. TLT is now around 140. The long term trend is DOWN. The down trend will be confirmed when TLT drops below $133.

Canadian Bond Market. Our proxy for the Canadian long-term bond market is the ETF, XLB, currently trading just over $23 a unit. The high of $28.56, occurred on August 4, 2020, and was confirmed in early February, 2022. The long-term trend is DOWN. The long-term down trend was recently confirmed by a slight up-tick in the Bank of Canada’s lending rate. Interest rates are rising.

US Dollar vs. Basket of Non-US Currencies. The US Dollar has been in a trendless trading range since early 2015. The lows are around 90; the highs around 100. From its low of 90.30 in May 2021, the US Dollar has rallied to 97.77. It has once again become a ‘safe haven’ investment. The long term-trend is NEUTRAL; the short term is UP.

Canadian Dollar vs. US Dollar. The loonie has been in a trading range since early 2016. The low extremes are just below 70 US cents and the highs just above 80 US cents. The loonie is currently around 78.5 cents. The long-term and short-term trends are NEUTRAL.

Energy. Oil prices have gone straight up since the Russian army invaded the Ukraine. This occurred on top of the already artificially stimulated uptrend caused by central banks’ too-easy monetary policy. The result has created the setup for a ‘spike top’ in oil prices. A spike top is a sudden and dramatic up-to-down price reversal. The price of oil will drop just as fast as it rose. When this happens, it will have the effect of lowering the inflation rate. This, in turn, will affect central banks’ attitude toward raising interest rates. In the financial world, everything is connected to everything else. But, in the real world, those connections are not always predictable. That’s why the US dollar is going up: financial drama scares people. And fear-filled people sell their riskier investments and put the cash in ‘safe haven’ investments.

Gold. Like the US Dollar, gold is thought to be a safe haven in uncertain times. ‘Now’ is an uncertain time! The Russians have mobilized their army and declared a nuclear alert. They have achieved their first victory. Gold has broken above a short-term sideways trading range and is now in both a short-term and a long-term UP trend.

Years ago, when I was a rookie at Merrill Lynch Canada, we were taught that gold went up because of inflation or war. Today we have both inflation and war. And gold is going up.

We need to think about this in more depth. Today we have both inflation and war. And, don’t forget the pandemic. People are being killed. But, somehow, we seem oblivious to the serious nature of war. It’s a bit like January 2020 when we all knew about the virus, but didn’t really think it was a problem. This was followed by a realization that the danger was not just another news story. Now, the Russians have mobilized their army. Historically, the mobilization of an army is a serious thing.

But today’s leaders think it is enough to impose even more economic sanctions on them. Older readers may remember the cold war of the late 1950s and early 1960s. People were scared! They were building fallout shelters in their basements. Now, the Russians have mobilized their army and people are not scared. Our government was sufficiently scared that they activated the emergency measures act to handle anti-vax protesters. Now the Russian army has attacked a sovereign state, and our government does not consider it emergency enough to activate the emergency measures act again. I wonder what it was like when Nazi Germany invaded Poland in 1939.

Were ‘the allies’ caught off guard?

Don’t be caught off guard in the financial world. No matter what investors do, they will always be able to look back and see what they could have done better. Investing is not about perfection. We will make mistakes. Let those mistakes be that we erred on the side of caution. Our advantage is liquidity. Small investors can move in and out of markets without disturbing a thing. Large investors can’t. Our long-term investment plan should take this flexibility into account.

Ken Norquay, CMT, is the author of the book Beyond The Bull, which discusses the impact of your personality on your long-term investments: behavioural finance.

This is an edited version of an article that was originally published for subscribers in the March 2022/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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