Market mavens get it wrong – again

Just when folks are told to steer clear of certain investments, the trend changes. But that’s typical, is it not?

At the start of this year, the market mavens told investors to lighten up on Canadian stocks, but to load up on U.S. ones.

Therein lies the rub. Yes, U.S. stocks did well in 2013. But they’ve taken a back seat to their Canadian counterparts so far this year.

Not only does this reflect the strength of commodities producers, but it also reflects the pluck of Canada’s high-tech wunderkind: Black Berry Ltd. (BB-TSX, $11.48), formerly Research In Motion.

For U.S. stocks, the weak start to 2014 is unfortunate, having set a sour tone for the rest of the year.

Still, near the end of February, the S&P 500, the main index for U.S. equities, had pushed past 1,840 en route to setting a record high.

Yet, with the seasonally strong half of the year for stocks about to end in less than two months, the recent strength in U.S. equities could suddenly cool off.

Perhaps more important, should the S&P 500 fail to hold at 1,750, the index could pull back to roughly 1,625 or even lower — as far down, say, as 1,550.

There are several reasons why there could be a big correction in U.S. stocks this year.

For starters, valuations are stretched, given the big rise in U.S. markets to their all-time high in 2014 from their low in October 2011.

Then there’s the length of the bull market itself. Five years on, it’s now long in the tooth, making us overdue for the bear’s growl — in effect, a decline of over 20 per cent.

Sure, equities fell roughly 20 per cent in the summer of 2011. But when that happened, stocks recovered in a few months.

So, it’s been a while since investors have had to slog through a big decline in broader stock markets — the one that takes several months to grind out a bottom.

Meanwhile, Canadian equities have enjoyed strength in recent months with the S&P/TSX Composite Index pushing past 14,000. Should Canadian stocks weaken, they could find support at about 13,500, perhaps even at 12,800.

In the commodities column, precious metals and crude oil usually receive the most attention.

But the market has also been watching natural gas, prices which have moved up sharply during the cold snap across North America this winter.

On New York markets, gas at one point spiked above US$6 per million British thermal units.

Admittedly, gas prices typically weaken during the summer. But massive consumption of the commodity over the past few months may put a higher floor under the price — perhaps as high as US$4.50 per million BTUs.

Gas prices in Canada are lower than in the U.S. Still, prices have more than doubled from their low set in the spring of 2012.

Moreover, North American inventories could take a hit over the next few years, as exports of dry natural gas grow.

Prices could also get a boost should gas-powered transportation in North America become more popular.

After all, a growing number of truck and bus fleets in both Canada and the U.S run on either liquefied or compressed natural gas.

Admittedly, under this scenario, a lot of money would have to be spent building gas fueling stations across the continent.

But within the next decade, rapid growth in everyday vehicles powered by natural gas is more than a remote possibility.

Nevertheless, given the depressed prices for dry gas over the past few years, there are no companies that are entirely focused on producing the commodity.

Rather, they tend to focus on drilling for natural gas liquids, such as condensate, propane and butane. Essentially, they produce natural gas as a by-product.

That way, they have a more balanced production mix, although they’re still a contrarian play on an ongoing recovery in prices for dry natural gas.

In the meantime, prices for both gold bullion and crude oil have also increased. Oil, which faces resistance at US$110 a barrel, may find support at US$100.

By contrast, gold, which faces resistance at US$1,350 an ounce, may still test its June 2013 low over the next few months, notwithstanding the strength it’s recently shown.

So far this year, share price gains for gold and silver producers have been impressive — particularly for junior miners.

And producers’ shares could rocket much higher should bullion prices firmly establish a trend reversal to the upside.

For a low-risk way of benefiting from the recent strength in commodities, consider the commodity-based exchange-traded funds I’ve profiled in recent months. But keep in mind that the potential for reward from these ETFs is lower.

Still, for diversified exposure to senior gold miners, buy the iShares S&P/TSX Global Gold Index Fund (XGD-TSX, $12.78).

It’s broken through resistance at $11.75 a unit — a level that may offer support during a pullback in precious metals.

By contrast, the iShares S&P/TSX Capped Energy Index Fund (XEG-TSX, $17.74), a diversified bet on big-cap oil and gas producers, boasts support around $16.75 a unit.

Keep in mind that because the shares of both oil and gas producers have jumped over the past eight months, they offer less potential for capital gains than before.

As an alternative to investing in oil and gas producers, consider the Market Vectors Oil Services ETF (OIH-NYSE, US$48.05).

It’s an exchange-traded fund offering diversified exposure to U.S. big caps that specialize in oil and gas services.

In addition to such heavyweights as Schlumberger Ltd. (SLB-NYSE, US$92.35), this ETF includes Halliburton Co. (HAL-NYSE, US$55.16) and Baker Hughes Inc. (BHI-NYSE, US$62.05). The fund appears to have support around US$46.

In the meantime, as the end of the seasonally strong half of the year edges closer, investors need to start thinking about rebalancing their mix of stocks and bonds.

In any event, the rest of 2014 could give equities a wild ride. So, watch for breaches of key support levels on broader stock market indexes and, particularly, on your own ETFs and stocks.


Brian Hoffman, CPA, CA, is a member of the Canadian Society of Technical Analysts. He’s based in Toronto.


Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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