Click HERE to hear Don Vialoux and other masters forecast market risk and opportunity on January 22 – 23rd 2010 at the World Outlook Conference Vancouver.
The Bottom Line
The seasonal trade is lining up, but its not there yet. Please be patient. Stay tuned.
More below:
Technical Action Yesterday
Technical action by S&P 500 stocks was quiet yesterday. One S&P 500 stock broke resistance (Hasbro) and one stock broke support (Genuine Parts). The Up/Down ratio slipped from 1.96 to ((267/137=) 1.95.
Technical action by TSX Composite stocks was non-existent despite weakness in the Index. No TSX stocks broke resistance or support. The Up/Down ratio was unchanged at (126/57=) 2.21.
Setting Up for the Seasonal Trade in the Canadian Energy Sector
Seasonal influences
The TSX Energy Index has a period of seasonal strength from February 25th to May 9th. The trade has been profitable in 14 of the past 15 periods. Average return per period was 13.7%. Following is a seasonal chart on the sector recently developed by Brooke Thackray:
The period of seasonal strength in the TSX Energy Index coincides with the period of seasonal strength in North American gasoline and crude oil prices. Other annual recurring events that favourably influence the sector during this period include fourth quarter results, results from the winter drilling season, annual reports, annual meetings and annual revisions to reserves.
Technical Influences
The TSX Energy Index currently does not have an attractive intermediate technical profile. The Index recently broke support at 273.30 and established an intermediate downtrend. In addition, the Index closed below its 200 day moving average yesterday. Strength relative to the TSX Composite has been negative during the past month.
The TSX Energy Index is short term oversold on the charts. MACD is oversold, but continues to trend down. RSI at 32.52% also continues to trend lower, but is more oversold now than last February. It is near the 30% level where a bottom frequently occurs. Stochastics recently fell below 20% and are showing early signs of bottoming.
In conclusion, the technicals are lining up at an oversold level for the seasonal trade, but are not sufficient yet to trigger the trade.
Fundamental influences
Fourth quarter reports released by companies in the sector to date have not been greeted favourably by the market. Stock prices quickly moved lower on news. Cash flow and earnings by companies such as Imperial Oil and Suncor were significantly lower in the fourth quarter compared to the same period last year and compared to consensus estimates. Other major Canadian companies are scheduled to release fourth quarter results later this week and into next week.
And now the good news! Cash flow and earnings by the sector resume a strong upward trend beginning in the first quarter of 2010 thanks to a year-over-year increase in crude oil prices. Crude oil prices have more than doubled since December 2008.
Seasonality in key energy equities in the sector
Seasonality by key stocks in the sector varies significantly. The following table shows the frequency of profitable trades and average return per period from February 25th to May 9th based on the past 10 periods:
Stock Frequency of Average Return
Profit out of 10 Per Period (%)
Nexen 7 12.3
Imperial Oil 8 6.7
Penn West Energy 8 8.8
Husky 8 11.1
Suncor 9 15.5
Cdn. Natural Res. 9 19.4
Encana 8 14.8
Talisman 8 12.7
Cdn. Oil Sands 8 16.0
The Bottom Line
The seasonal trade is lining up, but its not there yet. Please be patient. Stay tuned.
Possible ETF Candidates for the trade:
They include iShares TSX Energy Index (XEG), Claymore Oil Sand Sector (CLO), BMO TSX Equally Weighted Oil Index (ZEO) and Horizons BetaPro TSX Bull + ETF (HEU)
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.