13 Day Rally for the TSX – What Now?

Posted by Ryan Irvine: Keystone Financial

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Market Buzz – 13 Day Rally for the TSX Closes in on All Time Record

Ed Note: Scroll down for KeyStone’s analysis of stocks to buy. Be sure to focus on the risk category of each recommendation, which is spelled out by Ryan in each recommendation from Small-Cap, High Growth that can Produce Big Gains thru more conservative undervalued Dividend Paying Growth Opportunities. 

The TSX index closed the week on Friday at 14,206 points capping off 13 straight days of gains. Not only is this a feat not seen since January 1985 but if the market posts another positive session on Monday, it will actually set an all-time record.

It will be interesting to see how the market reacts Monday and whether or not investors will pay any heed to the potential record setting event. Will we see unusual volume and price activity or nothing out of the ordinary at all? Ultimately, setting a record for consecutive days of gains is pretty much irrelevant to a fundamental investor and outright annoying to a value investor. But what this does say is that investor sentiment has been particularly positive in the recent weeks and perhaps we should be on guard for a little return to reality.

When we look at the Canadian market over the last 3 years, we have seen a pretty consistent pattern. Investor sentiment has been strong in the opening months of the calendar year. More often than not this is the case as interest in the stock market is generally strongest (although not always) between January and April/May. But in each of the last 3 years, we have seen a noticeable reversal in sentiment that runs from mid-Spring to well into the summer. Each of the last 3 years has born witness its own cause for the volatility it produced. In 2011, it was concerns about the U.S. economy, its fiscal situation and persistent unemployment. In 2012, the fear was centered on Europe, with the collapsing debt structures of the PIGS (Portugal, Italy, Greece, and Spain) and the possibility of the contagion crushing, what was a fragile recovery in North America and the rest of the world. Last year (which ended spectacularly strong), it was rising interest rates which while indicating that a global economic recovery was in motion, also hampered the market performance of a number of important defensive industries which had lead the market recovery from the trough of the crash and were perceived as shelters of safety. Whatever the reason, investors have been quick to flip the switch from extreme optimism to pessimism and back again without a moment to waste.

When we try to make sense of all this we should take to heart a very important fact. Investors who bought into the hype and sold into the fear have suffered whereas those that have remained level headed in the face of volatility have actually had a great ride over the past several years. Although 2013 generated double-digit returns, this has resoundingly been a stock pickers market since immediately after the crash of 2008 and we expect this to continue. We would never analyze the trading patterns from recent years to produce a seasonal investing strategy as the best-in-bread stocks do not necessarily follow these market fluctuations. But what we can gather from these patterns is that overall investor sentiment has been a horrible guide for anyone looking to time the market (unless you are a contrarian). Intelligent and successful investors will assess individual stocks based on their own merits, they will analyze fundamentals such as financial position, growth, earnings, and cash flow (or have a good advisor do it for them – www.keystocks.com) and will refrain from paying too high a price for a stock no matter how much they like the underlying company. If one absolutely must incorporate some kind of market based trading strategy then our advice would be to center it around this…. “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” (Warren Buffett). 

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