How to guard your profits if there’s a long market recovery
Markets can take time to recover from crisis, says a Canadian analyst who suggests six defensive Canadian stocks and one inverse ETF.
The markets are not happy.
There’s been a lot more stopping than starting of late.
We’ve heard plenty about the litany of woes that has been making them unhappy — a snail-like economic recovery, festering European debt, slower growth in China, and so on.
But what can we expect in the future? A bear market? A revived bull market? Neither of the above?
Expect a slow market recovery, says one Canadian expert.
Coming out of a heavy crash like that of 2008 and 2009, stocks markets can take a long time to recover, says Mr. Brian Hoffman.
We’ve had a partial recovery, he writes in Investor's Digest of Canada, but we’ve still got a ways to go.
While the market consolidates (that’s a euphemism for lurching along in stops and starts), it’s time to play defense in order to protect your gains.
This analyst likes stocks in two “defensive” industries — consumer stocks and utilities. But he also likes a pair of stocks in an industry that doesn’t always get the defensive label — mining.
Others may wish to take advantage of weakness in the markets through inverse exchange-traded funds, or ETFs.
Buy and hold in 1932
Mr. Hoffman is a member of the Canadian Society of Technical Analysis. He has made a thorough study of markets through the years.
The two-year stock market rally that began in March 2009 restored most, but not all, of the value lost during the financial crisis.
History tells us the restoration of value can take a lot longer than two years. If you can find any buy-and-hold investors who were in the market in 1932, you could ask them, says Mr. Hoffman.
It took them 26 years to regain the value they had lost.
There are more recent examples. Japan’s Nikkei Index shed 60 per cent of its value in the 1990s and bottomed out at an 80 per cent loss in 2002. The Nasdaq index lost 80 per cent even faster — from 2000 and 2002 as the dot-com boom imploded.
Both are still well off the peaks they achieved before they fell.
Mr. Hoffman does not believe that we are going to see a plunge of 60 to 80 per cent in today’s markets. But investors should remember, he says, “that even a 20 per cent drop can do a lot of damage to their portfolios.”
A big correction
Technical analysis seeks to catch the market’s gains by spotting price breakthroughs and trend reversals. Then it seeks to cut losses after support levels have been breached and the market slides.
“Protecting gains in either bull or bear markets from being wiped out in a serious correction is crucial to a portfolio’s success,” writes Mr. Hoffman.
And the trend lines in market indexes suggest there’s an even greater probability of a big market correction now than there was in 2008.
For this analyst, the key to understanding today’s trends is the wedge formation. This is a continuing pattern — when it rises, it signals a temporary pause in a falling price trend, and vice versa.
In May, tracing the TSX Composite Index from its March 2009 low, this formation suggested support at 13,700. If the index dropped 10 per cent below this, it could be headed for a serious correction.
A 10 per cent loss would put the index at 12,330. Today it is at 13,224.
Studying further indicators, Mr. Hoffman notes that the index today faces resistance (that is, a high point) at 14,000. It has a lower level of support at 11,000. Below that, it would become “quite bearish.” If it slides as far as 9,500, watch out.
While we follow these movements in the market, it is high time to play defense, says this analyst firmly.
A defensive strategy
Those who did not already “sell-in-May and go away” may wish to start putting a defensive strategy in place. This begins with ETFs.
Mr. Hoffman has one in mind. Horizons Beta Pro S&P/TSX Inverse ETF (TSX-HIX) goes up when the S&P/TSX 60 Index goes down. This allows investors “to play offense during a correction or manage risk while holding equities through a correction.” It is trading at $10.68.
You could also give serious consideration to six defensive stocks. The first is a consumer stock. George Weston Ltd. (TSX-WN) owns the Weston Foods bakery and Loblaw Cos. Ltd. (TSX-L), which is Canada’s biggest food distributor. Weston has price support at $65, says the analyst. It trades at $71.29 and yields 2 per cent on a dividend of $1.44.
Three utilities also get Mr. Hoffman’s vote. The first is Fortis Inc. (TSX-FTS). The Newfoundland-based power firm recently added a Vermont utility to its stable. Its price made a significant break past $30 last year, notes the analyst. It’s now at $32.07 and yields 3.6 per cent on its $1.16 dividend.
Ex-income trust Northland Power (TSX-NPI) produces electricity and steam in natural gas-fired plants and has price support at $15. It trades at $16.96, yielding a robust 6.4 per cent on a $1.08 dividend.
AltaGas Ltd. (TSX-ALA) was also an income trust. This energy infrastructure firm may break through its $30 resistance level, says the analyst. At $24.27 today, it yields 5.4 per cent on the dividend of $1.32.
The right mining stocks can also be defensive, Mr. Hoffman informs his Investor's Digest of Canada readers. Newalta Corp. (TSX-NAL) has a rather unique role to play. It recovers and recycles residues from oil, manufacturing and mining. It trades just above its $12 support level at $12.72 and has a tidy 2.5 per cent yield on its $0.32 dividend.
And yes, there’s a gold mining stock. Argonaut Gold (TSX-AR) has support at $4.50, says the analyst. It recently announced a big increase in its reserves at its main mine in Mexico. The shares are at $5.02, and this is the only stock in this defensive group without a dividend.
This analyst’s message is simple. Don’t wait for the market to get better. And don’t wait for it to get worse. Play defense now.
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