from the torontostar today...
Get set for Toronto market's third up-leg
The Street has an old saying: Sell in May and go away. This year the bears can point out several compelling reasons to do just that. But don't take the advice too fast.
The bears would have you consider the legal problems of the late, great Microsoft Corp. and the sudden meltdown of technology stocks, which washed away most of the remaining bullish sentiment on the group. Last week's mugging of Cisco Systems Inc. also caused another round of panic selling in the shares of Nortel Networks Corp. and that in turn sent the Toronto Stock Exchange 300 composite index lower for much of the week. And how about the current inflation scare that may cause the U.S. Federal Reserve to hike interest rates next week?
The bears may also remind you about the strong U.S. dollar, which is crushing European and Asian currencies. The Japanese stock market has fallen out of bed in response to investors fearing currency-related losses. The financial press has finally lightened up on bullish e-business stories and we now read about investors suing their brokers and about failed or postponed initial public offerings of stocks.
I would remind the bears, though, that such negative scenarios are typical of conditions at bottoms, not tops. Keep in mind that most bull markets run for about 20-plus months. If this bull market began in October, 1998, simple math will give us the top in August or September.
Most bull markets also contain three up-legs, and we have just witnessed the termination of the second up-leg. A third and final up-leg is likely to have its origin in May.
So, the sell-in-May rule may not apply this year.
At the moment I think the TSE should be the stock market of choice for equity investors. A pending third up-leg in this stock market should be led by a strong resource sector. A rally in selected technology stocks, and in financial stocks, should give us the breadth needed to advance through the summer months.
To check out my bullish scenario, I examined weekly charts of the TSE subgroups. I found that in spite of the recent correction eight were still in up-trends and three were undergoing positive trend changes. That left only three subgroups in down-trends. That is not a symptom of a pending bear market.
Our chart this week is that of the weekly closes (and last Thursday's close) of the i60s (XIU-TSE). The i60s are also known as iUnits, or units of the S&P/TSE 60 Index Participation Fund. The fund is a trust organized by Barclays Global Investors Canada Ltd. and seeks to match the performance of the new S&P/TSE 60 index, which tracks 60 large-cap stocks. The i60 units can be traded like a stock at any time during the trading day. You can buy them on margin or sell them short, just like a stock. The units can also be a cheaper replacement for index mutual funds.
I chose to chart the i60s instead of the TSE 300 index because of their recent correlation problems. I find no point in applying technical studies to the TSE 300 and then trading i60s. I hope the TSE soon scraps the TSE 300, 200 and 100 indices and introduces a new index tracking small-cap stocks.
A broadly based composite index like the TSE 300, which contains both small- and large-cap stocks, can never work in a small, domestic bourse such as the TSE that is dominated by a handful of large-cap stocks.
The trend line on the i60s illustrates the origin of the current bull market at the lows of October, 1998.
The first up-leg was completed at the lows of September, 1999, and the second up-leg was just recently completed at the low in April this year. A third and possibly final up-leg may take the i60s above the recent high of about $60.
Predictions on the timing and magnitude of third up-legs are not reliable, and investors should consider themselves at risk, because these up-legs are historically very sensitive to bad news.
Stop losses should be used to protect capital. |
