Long Term Analysis - 1992 till Today
Friday, 09 March 2012

I thought I would take a minute to provide some longer term analysis 1992 to Today. I believe that the last one I did was approximately one year ago showing the wave structure of the existing cyclical bear market that rolled over from year 2000 and most likely not ending between 2014 - 2016. A cyclical consolidation phase like the one we are in ( cyclical bear market) has happened before in two previous periods in the last 100 years: 1) 1930's early 1940's and; 2) late 1960's and 1970's. The fact of the matter is that during these periods, economic activity becomes volatile and markets become range bound, stuck within a dragged out sideways movement. How do we surmise that this is a bear market cycle? Well not only are you range bound but the relative strength (bottom chart) of your peaks decline over time which simply means that there is not enough buying strength as in the previous period. So these cyclical bears tend to exhibit boom and bust periods and may create three to four tops before heading into a prolonged bull cycle.

A year ago, we mentioned that wave 3 up had developed between March to July 2011 and wave 4 down was beginning to take hold. Well, wave 4 appears to have been completed and wave 5 up has been well underway. This recent wave structure is somewhat different from previous patterns and is called a leading diagonal pattern which simply means that its wave 4 down dropped below wave 1 up which, in a typical upward wave pattern never really happens. Nonetheless, the million dollar question becomes on everyone's lips is where will it go too? Technically we should surmise by the chart that it should reach 1550 on S&P500 and begin the next decline. Obvious right? We are not yet confident about that because we still have not seen any bondholders start volume selling bonds and switching to equities. Quite the opposite actually. Markets are moving higher on lower volume and bonds are still strong. So for a 5th wave extension to take hold it needs bondholders to sell in droves. So we may actually see a very muted rise which, is typical of a leading diagonal pattern, from now till next downturn. That may take about a year and a half from December 2011 (May 2013). The other alternative or course of action is that we are in the midst of a truncated 5th wave which could be topping as we are writing this piece. But Hold on....Before you go running for the hills...Take a look at the relative strength chart at the bottom and the MACD in the middle. Both are showing you that they have still some room to go before they hit there peaks. Nevertheless my friends we are watching closely and we are quite aware that we are reaching the end of the seasonal bullish period which tends to end in April. No worries, we are watching for you.


 
Yields Are Rising
Written by Jason Polsinelli   
Tuesday, 28 February 2012

We are ecstatic this week as we are seeing the USD and CAD 10 year bond yield cross over the 50 day exponential moving average cement ceiling. I know its not much my friends but we may be starting to witness the seeds being sown for a meaningful rally back to previous highs in the stock market. In the past few months the bond market has been a major impetus to fueling any sustainable rally in the stock market. The 50 day EMA barrier has served as major resistance and prevented any meaningful money flow out of bonds since April 2011. For equity investors this is great news but for those who are borrowing or financing this could mean that borrowing costs could begin to rise from here.

The technical measurements are also divergent and looking pretty positive with the MACD developing higher lows even when the market was putting in lower lows. Since the Bond market has been in the last two years thought of as a bubble waiting to be popped, I would caution anyone to think that the bond market in North America will be starting any major long term bearish trend. Actually quite the opposite, we may see bond prices drop in the short run but long term there are just to many structural economic issues to presume rates are rising in any real meaningful way for a while. Some of the brightest minds in finance have estimated the end of this cycle between 2016 - 2020. However, my optimistic expectation is for the 10 year bond Yield to reach between 2.30 to 2.50 in the next few weeks (and I would be really overjoyed if it reaches 3.00% by April). In our portfolios in November\December, we tightened up duration, eliminated any and all 30 year provincial and government bonds and, reduced all exposures over 10 years in corporates. All of these correspondent with our repurchase strategy of the stock market. We expect to repurchase all of these bonds when yields start reaching these target ranges again.