from Kerm's NEWSLETTER 991024
Picking that winning winter
Analyst says buy when it snows, sell when it goes
As long-suffering investors in Canadian stocks know too well, things could be far worse. And yet, with the market rallying strongly this week, things just might be shaping up to get a lot better.
Don Vialoux, a veteran technical analyst at a leading brokerage, says the statistical odds are that the Canadian market will perform better between the end of November and the end of March.
He says of this seasonality of our market: "Buy when its snows. Sell when it goes."
The Toronto Stock Exchange 300 composite index is hardly setting the world on fire with its gain of 8.6% this year. But considering the TSE's woeful underperformance over this five-year bull market stretch, we should be grateful for small mercies in light of the capital punishment meted out to Canadians over the years.
At the International Federation of Technical Analysts annual conference this week in Niagara-on-the-Lake, Ont., Mr. Vialoux told delegates that the TSE 300 has gone up in the end-November to end-March period 13 out of the past 17 years.
The average advance was 6.3% in the period, which is impressive given that the average annual gain over the 17 years was 7.7%. So the winter rally accounted for 82% of the total market gain over those 17 years.
Mr. Vialoux says there are good reasons that our market heats up in winter: tax-loss selling late in the year; general acceptance by investors that the Christmas season generally spreads good cheer in the market; RRSP contributions made to the end of February; and the RRSP funds still being invested in March.
The importance of RRSP contributions to the seasonal upswing can't be overstated. Mr. Vialoux says that since the RRSP program began in 1972, the reliability of November-March investing was 21 out of 27 periods, or 78%. The market went up only 11 out of 26 times, or 42%, outside the target season.
The U.S. market, which usually leads its Canadian counterpart, also does best from November to March, rising 14 out of the past 17 periods and accounting for almost half the market's average annual advance of 16.7%.
Mr. Vialoux says the seasonal strategy can be refined by picking entry and exit points. The average return from the November low to March high in the past 17 periods was 12.3%, and the strategy produced a gain 16 out of 17 times. Indeed, if you were able to pick the November low and March high for the Standard & Poor's 500 composite the past 17 years, you would have picked up 95% of the whole year's gain.
Mr. Vialoux says the seasonal strategy can be further tuned up by picking sectors. Of the TSE 300's 14 subgroups, the economically sensitive stocks fare best, with the interest rate-sensitive stocks underperforming.
Over the past 17 years, the paper and forest group has advanced 12%, communications and media 10.9%, industrial products 8.7%, metals and minerals 7.2%, transportation 7.2% and consumer products 6.6%, versus the TSE 300's 6.3%. The worst-performing group was the pipelines, with just a 2.1% average gain in the period.
The oil and gas sector doesn't fare well in the November-March period. But Mr. Vialoux notes that the best strategy for the group is to buy when it's coldest at the end of December and sell when it's hottest at the end of July. The average return during the past 13 periods for the oils was 10.8%.
If you had bought energy stocks at the end of July and and sold at the end of December, the average loss during the past 12 periods would have been 4.9%.
Mr. Vialoux notes that his seasonality strategy is worthwhile, but not totally reliable. He suggests it is much more reliable when it's used in conjunction with fundamental and technical analysis of the market, subgroups and individual stocks.
"Fundamental analysis tells us what to buy and sell. Technical analysis tells us when to buy and sell. Seasonality tells us what and when to buy and sell."
Though the market has had a nice bounce this week, it may be too early to deploy the seasonality strategy. But snowbirds who just happen to be market timers may want to take a close look next month before heading south.
Kerm's Komments
Sez I, invest early March and sell late July. Of course, the annual state of the industry must be determined for any given year.
This past year was a no brainer, perhaps an occurrence that occurs every 5-6 years. However, this year more so, than any previous year in the past few decades. Early on this year, market sentiment for investment in oil and gas issues was at a low. The price of crude was down to almost $10.00/barrel. Total gloom and doom hung over the industry, a definite BUY signal for me. One had to believe that the price of oil only had one direction to go over the longer term.
Actually, I had hoped the price of oil would increase to about 20% over the comparable year ago average price as we progressed through the year and hopefully an $18.00 price sometime in year 2000. Enter OPEC. Never in my wildest dreams did I think that at one point this year, we would be looking at $25.00/barrel.
What's more, companies leveraged in natural gas offered a great investment opportunity for their shares were dragged lower by low oil prices. Even at this time, the future for natural gas was in favorable terms among most experts in the industry. This was an added plus in my mind.
I tend to look at the overall picture for a given year in simplistic terms.
Let's take the balance of this year and year 2000 as an examples. The way I see it at this point in time, growth companies will be reporting robust cash flow and profit numbers through the first half of year 2000. Thereafter it is going to be difficult to continue such a trend.
The prices of both crude oil and natural gas will present the major problem -- year to previous year's numbers may tend to be negative in relation to prices. Thus, a company must grow on strength of production and reserves alone.
Backing up to the balance of this year, I think share prices will travel up and down in a narrow range. Why? The investment community is caught up in pricing of crude oil and natural gas. That's where the focus is and will continue to be over the short term. Personally, I don't anticipate higher crude oil prices over the near, intermediate or even longer terms of time -- barring unknown events such as conflicts. Rather, a see a slippage in crude oil prices with eventual trading in the $18-$21 range over the longer term with averages running between $19-$20.
In regards to natural gas prices, I'm not absolutely sure in my mind as to where they will go. Near term is very attractive, however the longer term is rather cloudy to me. What I will be watching is the effect of added pipeline capacities to the U.S. in relation to supply and demand from Canada. A key factor here will be the type of winter we will experience.
I've always said buy in early March and sell in late July. I firmly believed this to be the case in 1999 and that's my thinking for the coming year. But keep I'm mind, I'm just a mere investor and offer just one man's opinion - this time it was mine. |
