Behavioural finance analyst Ken Norquay says: “If your monthly statement shows big losses, change your mind; change your view; change your strategy. If your monthly statement shows big profits, stick to your guns and stay alert: if it seems too good to be true, it usually is.”
In the summer of 2018 the Canadian and US stock markets registered all time highs. Does this confirm their long-term up trends? Most market commentators say yes, some say no. Market forecasting is the business of stock market analysts.
In the 1970s, a technical analyst named Joe Granville created a great reputation because he picked several major market reversals in a row. He was rumoured to have sold millions of dollars of newsletter subscriptions in a single year. That’s the newsletter business model: Develop a good reputation for accurate predictions, sell a lot of subscriptions. [ed. — Mr. Granville then missed the start of the 1980s bull market and his overall record was described by investment newsletter performance analyst Mark Hulbert as “very poor”.]
That is NOT the business you are in!
Your job is to successfully manage your investments by continually improving your financial judgment. As you get savvier about the markets, your investment decisions will become more profitable and your long-term rate of return will rise. Your success is dependent on being invested in securities that are rising and not being invested in securities that are falling. It’s not about predicting or forecasting: it’s about matching your investments to current financial trends. How?
What motivates others?
In my stock market book, Beyond the Bull, I discuss the five important actions required to become a better investor. The fourth action involves knowing what other market participants are doing. By knowing their motivation you will develop judgment about how you should behave in the marketplace.
Your goal is to increase your long-term return on investments by avoiding losses and participating in financial up trends. The investment advisory letter publisher’s goal is to sell subscriptions. The financial planner’s goal is to build a large client base: to accumulate a large AUM (Assets Under Management). The financial media’s goal is to attract large readership. The federal minister of finance’s goal is to manage the country’s economy in such a way that his/her political party will get re-elected.
Please continue this exercise as thoroughly as you can within the scope of your own personal investment knowledge. Think about what motivates all the various participants in the stock market. Assume everyone is interested in succeeding in his/her own field. By performing this mental exercise, you will get a feel for who are your financial friends and who are your financial foes. You will gain judgment: to whom you should listen and to whom you should not.
But, no matter who you follow, the TSX Composite Index did touch a new all-time high in July, confirming the uptrend that began in 2009. And the American NASDAQ Composite Index and the S&P500 also went to new all time highs. Does that mean we should be fully invested in the stock market right now? Is this market commentator now joining the bullish side and recommending a 100 per cent stock market position?
Is now a good time to jump in?
It’s because of divergences. (For example, the Dow Jones Industrial Average was well short of a new high when the current short-term down trend began.) Let’s pay attention to divergences as we examine the financial trends that most affect Canadian long-term investors.
■ Stock US Market. Most of the major American stock market indices recently made new highs. Most of the bullish action occurred in high tech sectors. Then Netflix, Facebook and Twitter dropped suddenly; the high tech stocks buying frenzy had ended. Does any of this news help us decide whether or not the stock market is in an up trend?
No. We need clear, decisive evidence to help us make our investment decisions. Clear evidence occurred in February of this year: the US stock market collapsed 11.8 per cent from high to low. That’s significant. That sudden sharp reversal signaled that the up trend had ended after 106 months. The downtrend had begun. Market statisticians tell us that the new highs we witnessed this summer make the longest bull market in history: March 2009 to August 2018. Please keep your expectations in line with this reality. We are near the end of the up trend, not near the beginning.
■ Canadian Stock Market. When the TSX Composite Index moved to a new high last month, how did the various sub-indices perform? Did they also register new highs? Here is the list:
Consumer Discretionary: decisive new high
Consumer Staples: marginal new high
Global Mining: marginal new high
Real Estate Investment Trusts: decisive new high
Real Estate: decisive new high
Industrials: decisive new high
Energy: decisive new high
Info tech: decisive new high
Healthcare: marginal new high
Gold: decisive failure
Financials: marginal failure
Telecom: decisive failure
Materials: marginal failure
Utilities: decisive failure
Sub-industries making new highs outnumbered those that did not by 9:5. The only clear observation is that there has been no stock market progress so far in 2018.
In the long term . . .
The most useful clue as to the long-term trend of the TSX, is that the Canadian market always follows the US. Based on this, the TSX Composite is near the end of a record long up trend.
■ US and Canadian long-term interest rates have been in an up trend for two years. That up trend has been confirmed by the up trend of short-term interest rates in both countries.
■ The US dollar vs. the basket of non-US currencies has stopped going down; last month it surpassed a significant resistance level and re-entered the neutral zone. The long-term trend of the US dollar has changed from a downtrend to no trend.
■ The Canadian dollar vs. US dollar has been in a long term up trend since the oil price crisis ended in January 2016. The up trend is holding, but weakening.
■ Gold. My last article established an objective basis for our analysis of gold’s trend. If the price of gold breaks decisively up or down through certain specific parameters, that break will follow the major trend.
The price of gold did drop below the lower line, indicating a trend change from up to neutral. This change was confirmed by the price of silver. Both precious metals are in a trendless sideways drift on the long term; a downtrend on the short term.
■ Warning: as global trade embargoes continue, today’s currency stability will turn to instability. Be ready.
■ Oil vs. US dollar. The up trend that began in winter 2016 is still intact. The long-term trend is up.
Formulate your investment strategy
Because the stock market is near its top right now, it’s a good time to look over your portfolio and decide what events would cause you to sell. (Take into account the recent action in Facebook stock. It closed one day at $217.50 and opened the next day at $175.33: a drop of 19 per cent overnight. The next day Twitter stock dropped 13 per cent while the market was closed. Once this bear market gets under way, these occurrences will be a common experience.)
Because long-term interest rates are rising, bond-market investors should favour short-term maturities over long term.
Because the currency markets are stable (boring?), there is no particular reason to favour Canadian investments over other foreign investments.
Gold is going nowhere: the trend is unclear.
Oil is in an up trend: if you have a way of investing in oil without buying stocks or mutual funds, consider it.
What’s the message?
In this world of fake news and relentless advertising, the words of Canadian media philosopher Marshall McLuhan ring out: “The medium IS the message.” Our world is a mental world, not a physical world. The stock market is made up of minds, not bricks and mortar. Minds have opinions, ideas and theories. The media reflects society’s collective mind. Through the media, other participants in the market tell the rest of us whatever is necessary to make us believe what they want us to believe. Find out what motivates the other market participants, and you’ll find out why they say what they say. I hope Mr. McLuhan will forgive me if I paraphrase his brilliant slogan: “In the investment world, the ‘bull’ is the message.”
Question: How can we develop market judgment in a world of bull? If we can’t believe the market’s bull, what can we believe?
Answer: In our world, the media is NOT the message; i.e. the ‘bull’ is NOT the message. Your monthly statement is the message.
If your monthly statement shows big losses, change your mind; change your view; change your strategy. If your monthly statement shows big profits, stick to your guns and stay alert: if it seems too good to be true, it usually is.
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 September 2018/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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