Market outlook: Loonie likely to continue to fall

– Keith Richards

Take advantage of short-lived reprieves to buy U.S. Dollars

The loonie recently cracked $0.93, a key support level against the U.S. dollar, fueling the likelihood of an even bigger decline.

Moreover, it is expected that the loonie’s next support level will be around US$0.85.

Still, over the near term, there are some indications that our dollar is not only slightly oversold, but could also bounce back a bit.

Price momentum indicators, such as stochastics and the relative strength index, have moved into oversold territory. This suggests we could see a reprieve from the loonie’s free fall fairly soon.

And our dollar has rallied, albeit only temporarily, many times in the current market when momentum indicators flashed “oversold.”

But the operative word here is temporary. So, any upside on the loonie is likely to be short-lived.

Further evidence that our dollar is likely to keep falling is the greenback’s strength compared with other world currencies.

The greenback, which bounced off a support level back in November, is now aiming for 83-84 world currency units.

Of course, the potential for the U.S. dollar to show world-leading strength will once again put more downward pressure on the loonie over the long term.

Should the loonie rally over the near term, it might be a good time — especially for snowbirds — to buy more U.S. dollars. They certainly won’t regret doing so.

It goes without saying that the loonie’s decline has been good for Canadian investors who hold stocks and exchange-traded funds denominated in U.S. dollars.

Indeed, its fall has added to profits from America’s already outstanding stock market returns.
And those returns could very well continue, given the strong possibility that U.S. stock markets will flourish following a correction in either the second or third quarter.

But as I’ve noted in many of my previous columns, U.S. stock markets are increasingly becoming a place primarily for stock pickers, rather than for plain-vanilla investors. In fact, because the easy returns have all been made, I’m shunning ETFs tied to the broad market.

Moreover, I’m wary of some of the big caps that have led the stocks market over the past five years. Many of them are becoming overvalued.

One of the technical market analysis indicators I like watching is moneyflow, a measure of volume and price movement of a particular stock or of a market itself.

Metric tracks money

Simply put, if a company’s shares are rising on heavy volume, more money is likely piling into that stock. But if the same stock rises on weak volume, its moneyflow will be lower.

There are many ways to watch moneyflow, most of which are available through on-line charting software.

And although I do watch a few of them, the easiest one to interpret, I find, is the accumulation/distribution line, which cumulatively tracks moneyflow in or out of a stock, or market index.

Trend is key

For a simple interpretation of this indicator, watch this line’s trend. If it’s trending up, money is flowing into the stock.

But if it’s flat or even down — particularly when the stock itself is rising — you’d best consider pulling out.

A flat or falling moneyflow line suggests there’s less conviction behind the rallying stock.
In other words, while the weaker players may be buying up the stock, the smart money may be dumping it.

In the meantime, it’s now evident that investors are swapping cheap value stocks for overvalued blue chips.

From watching early signs of positive moneyflow, I’ve noted many new opportunities in the American markets.

If you buy a stock denominated in U.S. dollars — one whose fundamental and technical profiles are positive — you’ll get the opportunity to profit from the stock’s movement, as well as from the currency play.

So, let’s take a look at a few American stocks that have solid fundamentals, a positive technical profile, along with a moneyflow picture that’s encouraging.

We’ll start with Alcoa Inc. (AA-NYSE, $11.99), the Pittsburgh-based aluminum maker.
Not only has Alcoa broken out from its two-year base, but it’s showing positive money flow on its daily chart.

Nonetheless, investors should hold off buying Alcoa until its shares confirm this positive trend.
Other U.S. stocks showing positive moneyflow, as well as encouraging charts, include such high-tech giants as Google Inc. (GOOG-NASDAQ, $1,106.92 ) and Microsoft Corp. (MSFT-NASDAQ, $36.66), whose shares we own.

In healthcare stocks, you might consider GlaxoSmithKlein plc (GSK-NYSE, $52.04) and Johnson & Johnson (JNJ-NYSE, $88.90).

Although we have yet to buy either company, they are now on our watch lists. They should also be on yours.

Exposure is important

Of course, you can always benefit indirectly from a rising greenback by buying Canadian companies with a big exposure to U.S. and the global market.

One such outfit is CAE Inc.-TSX, $12.70), a maker of flight simulation systems that’s based in suburban Montreal.

Another such firm is Chemtrade Logistics Income Fund (CHE.UN-TSX, $20.12), a Toronto-based maker of sulphur products and performance chemicals.

CAE has been successfully bagging business in the U.S., as well as in other foreign markets, while Chemtrade recently expanded into the U.S. through a major acquisition.

I’ve mentioned both companies in past columns. And readers who took my advice and bought CAE and Chemtrade have seen the shares of both go up.

In the meantime, the positive technical profile and rising moneyflow analysis suggest both companies have additional upside.

Canadian investors who want to diversify in 2014 would do well to buy U.S. stocks, as well as those Canadian companies with big exposure to U.S. revenue.

 

 

Keith Richards is portfolio manager of Value Trend/Wealth Management in Barrie, Ont.
He’ll be appearing on BNN’s MarketCall on Tue., March 11 at six p.m., Eastern Standard Time. Phone in with your questions on technical analysis during the show. Call toll-free at 1-855-326-6266, or e-mail your questions ahead of time (specify they’re for Keith) to market-call@bnn.ca.

 

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

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