Michael Campbell: Can you sum up what you are seeing in the overall market? 

Don Vialoux: Look for markets to have recovery balance starting some time this week, exactly which day I am not sure but the key is we are substantially over sold and we’re due to a bit of a bounce here. The bounce could be as short of a couple of weeks. The other thing to remember during summer time is very volatile to the latter direction but in the case the volatility is going to be in your favor. We have already seen the volatility in the down side now we’re due to the volatility on the upside, at least in the next couple of weeks. A sector which looks very interesting on a technical and on a seasonal basis at this time of year is Gold stocks. Also Agriculture and watching very closely the natural gas play.

“A Rally of Significance”

Michael Campbell: Don Vialoux has been involved in the investment industry for 38 years. He’s been President of the Canadian Society of Technical Analysts and a former technical analyst at RBC investments its perfect time to get Don view as he specializes in market trends and market cycles.

Don, the devastating drops in markets, from your studies of seasonality, is this a period of time that’s normally weak?

Don Vialoux: What we normally have in summer time, from usually around the beginning of May right until around the third week in October,  is lots of volatility. During volatile markets anything can happen. Markets can go higher they can go lower, obviously they decided to go lower quite significantly.

Michael: When you joined us last you always remind us it’s the old sell in May and go away. 

Don: Actually the best expression is buy when it snows and sell when it goes. There is a series of annual recurring events which are predictable and which are favorable for markets. Unfortunately from May to October there aren’t any of these annual recurring events that have an influence on Markets. Therefore the markets can be very, very volatile. Trying to figure out what direction we are going to go is virtually impossible. A good example during the last 10 years from May to October, the TSE composite’s gone up six times, it’s gone down four times. However when it’s gone down it’s gone down big time. You really can’t predict with any kind of assurance during the summer period, just a very, very volatile markets.

Michael: What shall we make of the kind of technical damage that’s been done, was it a wash out day?

Don: Great question. First of all we’ve had a shock with S&P and downgrade of the American sovereign debt. But what’s happened during the last little while the markets have become so over sold that they are due for a rally of significance.

An analyst named John Rogan came up with a very interesting analysis showing that when the percentage of stocks in the S&P 500 above their 200 day moving average gets below 20% that is a very extreme oversold level. It’s only happened on seven occasions since 1994. On every one of those seven occasions the market has recovered sharply.

On average it’s gone up 5.3% during those seven occasions within two weeks and after three months it’s up 15%. So look for a major recovery rally starting next week.

I have done some of my own work and I have done it slightly differently. I have used both the 200 day and the 50 day moving average and it shows identical data. When you get the low next week that is going to be a very important low because look for a very important recovery coming in at least the next two weeks and probably the next three months. This weakness we’ve seen during the last little while provides a unique opportunity that you only get but once every three or four years.

Mike: That’s good because I started to buy a little on Friday. I always look for opportunities to buy quality stocks when they are on sale. As an example bought some agricultural stocks, I like that area and I want to have more in that area of the market. Canadian Banks too, as I am a believer in their ability to continue to pay their dividends.

Don: One of the things to watch when you have got a major sell out is to watch the volume and boy did we get that bump in volume last week. Its a classic sell off which is typically what happens at the bottom of the market. That’s important, your choice on agriculture a very excellent choice, you are a seasonal investor I can tell.

Seasonality can work very, very well for the agricultural sector. From normally around mid July right through until the end of the year. This year it’s actually working okay. The fertilizer stocks like Potash Corp and Agrium bottomed actually right around the beginning of July. They’ve come down a little bit during the last couple of weeks but already they are starting to show signs of good moves to the upside. Agriculture is a good area, there’s all kinds of choices, whether you do it with fertilizer stocks or you do it with John Deere. The key is the weakness we are seeing in that sector during the last couple of weeks is providing a classic opportunity to buy. We want to wait until the technical indicators are showing signs of bottoming which we probably we’ll get next week. But clearly that’s one of the better choice to be involved in during the next couple of months.

Michael: When a market breaks down the way this one did, we got well below our 200 day moving averages on virtually anything I looked at. But the trend lines have also all been broken to the downside. Is that a problem for the markets?

Don: Yes, it was an amazing week last week, for example we had over 250 stocks in the S&P 500 break support levels, that’s huge. In the case of TSE composite, we actually had 91 TSE composite stock breaking key support levels. But selling pressure so intense is what we are looking for when things are going to start bottoming and start to go higher.

Another sector which looks very interesting on a technical and on a seasonal basis at this time of year is Gold stocks. Historically they bottom right around this time of year,  move very strongly in the month of September, tend to take a bit of a break in October and then move strongly right through until the end of the year.

Obviously gold’s been going higher and with this crisis over the weekend, we are probably going to see gold even going higher in the next couple of months. The gold indexes here in Canada actually bottomed right around the third week in June. They popped quite nicely and are actually if you can believe up  almost 20% before collapsing the last 10 days or so by about 10%, so they’ve actually lost about half of their gains. But this is classic an opportunity to buy a favorite sector that has positive seasonality on weakness. This sector looks very interesting going into the next week.

Michael: One thing just before we go any further is that people have to assess whether we talking about their short term trading money, or their longer term investment money. As you say, we’ve been in a very over sold position and it sounds like you’re looking for the market to find a significant low that could produce a short term trading bump of as much as 15%. That’s sound like a shorter term time frame. You’re not actually commenting on what the longer term may hold are you?

Don: That’s fair, we find that the average investor has a difficult time with markets because they become emotionally involved., You need a very distant approach to make money consistently on markets. Using the short term trading opportunities most people are just don’t have the emotional control to do it. Fortunately there is a way around it, actually we have our seasonal rotation fund, an ETF that trades on the Toronto exchange. We’ve really played these seasonal trades very closely going in and out of markets and actually on Friday our fund actually went up and we’re very close to hitting an all time high. The funds up almost 19% since we launched it about 20 months ago. The reason that we’ve done so well during the last couple of months is that we’ve mainly been in cash, right now we’re 75% in cash and we’re looking forward to opportunities like we’re seeing right now to reenter the market and to take full advantage.

Michael: It sure must be a lot easier to jump into the markets with this level of uncertainty and threats that are out there when you are in 75% cash than if you were already caught heavily committed.

Don: The key is that you have to have to have a disciplined approach towards markets and being in cash during short periods of time it is often is a very wise strategy particularly in the summer when markets are very very volatile. After saying that there are opportunities even in the summer time to take advantage of sector trades and we just mentioned a couple of them, gold and also agriculture. Another one which is not there yet, it is very important to mention this, the trade has not shown up yet but it’s getting lined up,  it’s on our radar screen as a possible interesting trade coming up around the end of August. Now here’s the story, we are just about to go into hurricane season in the United States and this is going to be a very interesting hurricane season this year. The national Ocean and Atmospheric Administration in the States says on average you get 9 – 12 name storms a  year, 5 to 7 storms that reach hurricane strength and one to three that reach major hurricane levels. This year the NOAA is predicting 12 to 18 name storms which six to 10 storms that reach hurricane strength and three to six storms will become major hurricanes. Now how do you take advantage of that? Well, if you look at seasonality of natural gas its, real sweet spot is from the end of August right until the end of October which corresponds very closely to the hurricane season in the United States. We have already had four minor storm so far and things are heating up very much this fall and looks like there’s good reason to believe that there is going to be a major hurricane season coming up during the next couple of months. So what about natural gas now? Well technically it doesn’t look good, technically its still negative but the key is to watch it very closely because as those technicals start to show signs of bottoming over next couple of weeks, that will be a sign that its time to enter the seasonal trade.

Michael: Can I ask you about oil then while we are talking energy?

Don: Yes, oil tends to be less seasonal at this time of the year, it tends to be more of a gassy play and so you want to focus on natural gas during this period as opposed to crude oil and there’s lots of ways to play it, you can play the natural gas, ETFs. I kind of reluctant to mention them because they are extremely volatile and they also have contango problems, the best way to play the sector is to do it through gas stocks and gas ETFs.

Michael: I am interested to hear you talk about exchange traded funds compared to stocks because you just alluded to it earlier. You could buy an exchange traded fund for gold (GLD) but the gold stocks didn’t perform. Does that worry you or does that tell you get into the stocks?

Don: What‘s happened in the case of Canadian gold stocks in particular, they’ve been dampened by what’s happening in the currencies but the key is that the Canadian gold sector actually did bottom around the middle of June, we had a correction no question during the last two weeks but this correction in Canadian gold stocks is a classic opportunity to be a buyer on any kind of weakness. I could say that I would like to see things that we have got a technical bottom in that sector, it will probably happen sometime next week.

Michael: Can you sum up what you are seeing in the overall market? 

Don: Look for markets to have recovery balance starting some time this week, exactly which day I am not sure but the key is we are substantially over sold and we’re due to a bit of a bounce here. The bounce could be as short of a couple of weeks. The other thing to remember during summer time is very volatile to the latter direction but in the case the volatility is going to be in your favor. We have already seen the volatility in the down side now we’re due to the volatility on the upside, at least in the next couple of weeks.

Michael: You have got a huge cash component in your ETF HAC.TO, please reiterate what sectors will you be watching because you like them longer term but they may also have a bounce up?

Don: The sectors which look interesting most of all right now on a seasonal basis are Gold, Agriculture and watching very closely the natural gas play. I’ll mention a couple of ETFs in the natural gas side which might be of interest. The big one is in the state as FCG that’s the symbol for natural gas equity ETF and in Canada we have a very interesting one the symbol being ZJN. So there is a couple of equity ETF’s in the Gassy side which might be of interest, individual institutions will have their own natural gas favorite so  pick your choice and go for it.

Michael: Can you tell about some other sector’s from the seasonality or technical point of view, what about the financials?

Don: Financials normally under perform the market at this time of year, they have a fairly seasonal strength from October to December. That’s the next period to watch but we’re clearly not to that stage yet. We’ll keep you in tune with that seasonal trade but you’re just way to early on the trade at his point.

Michael: What about base metals?

Don: Base metals have a difficult time at this time of year, and historically they have gone down right to until November.  At that point in time that’s when you want to be buyers of base metals in general.

Michael: Don, lets just finish with your advice to investors.

Don: Well the key is that most investors, mostly when they’re making investment decisions the preferred strategy is to have a very disciplined approach, those that have a disciplined approach will do best. If you feel that you don’t have the discipline approach buy my fund.

Michael: I am right with you on that one. Don I want to thank you,  I know it’s everybody’s summer holidays but very important to get you on today.  Thank you.

Don: Thanks Michael it was great.

About Don Vialoux of Timingthemarket.ca

Don Vialoux has 37 years of experience in the Investment Industry. He is a past president of the Canadian Society of Technical Analysts (www.csta.org) and a former technical analyst at RBC Investments. Don earned his Chartered Market Technician (CMT) designation from the Market Technician Association in 1995. His CMT paper entitled “Seasonality in Canadian Equity Markets” was published in the Spring-Summer 1996 edition of the MTA Journal. Don also has extensive experience with Exchange Traded Funds (also know as Index Participation Units) as well as conservative option strategies. In 1990 he wrote a report that was released in the International Federation of Technical Analyst Journal entitled “Profiting from a Combination of Technical and Fundamental Analysis”. The report introduced ” The Eight Phases of the Stock Market Cycle”, an investment concept that continues to identify profitable entry and exit points for North American equity markets.   He is currently a member of the Toronto Society of Fundamental Analyst’s Derivatives Committee.   Now he is the author of a daily letter on equity markets available free on the internet. The reports can be accessed daily right here at www.dvtechtalk.com.