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Technical, fundamental and seasonal influences point to another volatile period for equity markets around the world this week. Economically sensitive sectors are following their seasonal patterns. However, most sectors currently are short term overbought after huge moves since October 4th. Preferred strategy is to accumulate economically sensitive equities and related ETFs on short term weakness, particularly if they benefit from favourable seasonal influences.

With all eyes on the unemployment report and Europe, the CME Group’s PR Department nearly created an all out panic with their announcement after the market close on Friday relating to futures maintenance margin. The original statement was vague and I was quite concerned until I checked out the CME Group’s web-page and the PR Department sent an update clarifying their position. At this point I think the crisis has been averted, but this is just another reminder that we live in “interesting times.”

Keep in mind that if the CME starts raising margin rates across the board for futures contracts in order to protect themselves stocks and commodities could collapse. Silver recently has is margin rates increased and silver since then dropped 25% in value. So imagine if they raised the rates for more commodities…

The current price action in the marketplace pales in comparison to the world’s geopolitical tensions and deteriorating social mood. In my trading career, I have never seen the price action in the indices react so violently to intraday headlines and rumors. Risk is high and the types of traders profiting from this market are day traders and very short term traders with trades lasting  just a couple hours to 24 hours in length. Aggressive trading which small position sizes is all that can be done right now. This is not meant to be investment advice, but more as a function of the market environment in which we find ourselves currently trading within.

Right now it is hard to say where price action in the broader indices heads in the short-run.  One headline out of Greece or Italy could dramatically alter economic history. In the intermediate term I remain neutral to bearish for a number of reasons. One indicator I follow is the bullish percent index on the S&P 500 which at this point is arguing for lower prices.

 

Market Buzz – Canada’s Economy Losses 54,000 Jobs in October while the U.S. Unemployment Rate Falls Slightly to 9.0%


On Friday, November 4th, the TSX Composite Index closed the week at 12,408 points, ending the five day trading period down 111 points, or approximately 0.9%.

On Tuesday morning, we saw the global markets decline sharply during the first few hours of trading when Greek Prime Minister, George Papandreou, announced that he would be holding a referendum on his country’s bailout package. Immediately after the announcement political pressure from both inside and outside of Greece began to mount on Papandreou leading to speculation that the referendum would not be carried through as planned. Only two days after the initial announcement was the referendum officially called off helping to ease the market’s short-sighted fears as it rallied slightly for the day.

The last day of the week brought some negative news to the Canadian employment front with the total economy losing a reported 54,000 net jobs in October, mostly from the construction and manufacturing sectors. This was the worst month for employment numbers since March 2009 and well below expectations, with economist forecasting modest job growth in October. Ontario in particular was the key contributor losing a total of 75,400 jobs during the month, most of them full time. While employment in Canada is still up 237,000 over the last year, the last four months have proven to be fairly dismal on an overall basis. The employment picture was more positive down south of the border with the U.S. economy reporting 80,000 new jobs in October, bringing the unemployment rate down to 9.0% from 9.1%. October marked the 13 consecutive month in employment gains for the struggling U.S. economy, leading some to the conclusion that the economic picture over the next several quarters is not as bleak as previously thought.

Others are not so optimistic, pointing to the fact that while job gains have been positive, they have also been sluggish. Some economists are indicating that the economy would need to generate a minimum of 125,000 jobs per months to create any meaningful economic growth. Rather than draw any firm conclusions from the recent string of economic data we see these numbers as a continuation of the string of mixed signals being delivered in the market. There seems to be no clear indication where the global economy is heading, but the consensus range seems to be neutral to negative and we expect to remain on shaky ground for the foreseeable future.

In an environment such as this, we continue to stress a strategy of focused diversification. Investors need to build their portfolios based on a mix of quality companies from a variety of different risk categories. By including a healthy combination of both defensive and cyclical stocks in the portfolio, investors can help to protect themselves from a down market whiling maintaining the potential to generate more attractive returns in a more robust market. We also advocate focusing on stocks that offer their shareholders an income yield and have the ability to grow their dividends over time. During the period from 2000 to 2010, often referred to as the ‘lost decade,’ studies indicated that dividends accounted for approximately 70% of total investment returns. Over a longer period of 50 years, the number is still 40%. The inclusion of income stocks in a portfolio has always proven itself to be a prudent strategy for investment success and we think this argument is as relevant to today as it has ever been. 

 

Looniversity –  Avoid Fear and Greed


Volatility is inherent in the stock market. When investors lose their comfort level due to losses or market instability, they become vulnerable to the emotions of fear and/or greed, often resulting in very costly mistakes.

Try your best to avoid getting swept up in the dominant market sentiment of the day, which can be driven by either of these emotions, and stick to the basic fundamentals of investing. It is also important to choose a suitable asset-allocation mix. For example, if you are an extremely risk-averse person, you are likely to be more susceptible to being overrun by the fear dominating the market and therefore your exposure to equity securities should not be as great as those who can tolerate more risk.

One of the world’s most successful investors, Warren Buffett was once quoted as saying, “Unless you can watch your stock holding decline by 50 per cent without becoming panic-stricken, you should not be in the stock market.”

Mr. Buffett also showed us just how important and beneficial it is to stick to a plan in times like the dotcom boom. Buffett was once heavily criticized for refusing to invest in high-flying tech stocks. He stuck with what he was comfortable with: his long-term plan. By avoiding the dominant market emotion of the time – greed – he was able to avoid the losses felt by those hit by the bust.

 

Put It To Us?

Q. A friend of mine recently suggested I always use a limit order when buying small stocks. Can you elaborate on why?


– Josh Erikson; Calgary, Alberta

A. Excellent question, Josh. A limit order is any order in which you, the investor, set a specific price at which the transaction may be executed – or a better price if the trader can obtain it. Often limit orders are used when the market for the stock is illiquid and/or the stock is thinly traded (Small-Cap stocks). Place your buy or sell order at a price you feel is fair and be patient. It may take a day or two, but in most cases your patience will be rewarded and your order will get filled. This strategy will prevent you from chasing and possibly overpaying for a stock.

A variation of a limit order is the limit order with price discretion by which you permit the trader some price discretion in executing your transaction.

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Dawn of Commodity Imperialism

James Dines: My prediction in fact was the coming end of the age of jobs and it’s usually met by incredulity and understandably so. But the fact is there will not be enough jobs for everybody. The whole world is coming to a disjunction; this century is different from any other. You know we finally control the planet, we control the ability to destroy all life on it and we need to sit back and really think about what’s happening. There will not be enough to eat; we’re now at the coming age of what I call, the coming age of robots. America is dismantling its manned air force and womaned air force, and they’re replacing them with robots, with these cruise missiles. You know the whole world is moving towards eliminating jobs and there’s going to be something in the order of Aldous Huxley’s, Brave New World coming. Something different, I still don’t have an idea but I think the capitalist model is broken. China instead of trading is going to be buying it – it’s not only China, its Japan and several other countries, Russia. Russia’s buying real estate all over the place; it’s not a racial thing at all. And we’re going to get a breakdown of the capitalist model and the communist model has been discredited, although China is changing from seizing the means of production, to buying it and they have enough money to do it – $3 trillion. So something very different, a new form of civilisation is knocking on our doorstep and I’m writing in the Dines Letter as to what that might be, trying to figure it out. And I’m watching it carefully, I know something big is happening I know something very big is coming, but I’m still trying to discern its shape in the hazy mist of the future.

 

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