Getting ready for the last summer stock market rally
Before a bigger sell-off comes, says this Canadian analyst, there should be one more summer rally, and he has some ETFs to help profit from it.
This Canadian analyst isn’t going to say he told you so.
But he did.
In late March, Mr. Keith Richards advised readers in Investor's Digest of Canada to shorten the term of their fixed-income securities as the long bond market lurched toward a correction.
“Investors who elected to follow this advice have been well served,” he says laconically in his latest article for the advisory.
In the three months since then, nothing has changed his prognosis for a bearish market.
This veteran investment executive does see another stock market rally coming before autumn, however (or should we say fall, as in tumble?).
Mr. Richards puts his technical analysis and long experience to work to assess the economy and the markets in the months ahead.
He suggests four exchange-traded funds (ETFs) that may help you profit from a summer rally before it’s time to batten down the hatches.
Most aggressive rally
The global stock market rally that began in March 2009 “has been the most aggressive rally seen in the past 100 years,” states this analyst flatly.
A rally can always be expected after a sharp correction like the one that hit with the financial crisis. But this rally was far greater than those that followed the bear markets of 1932, 1974 or 1982, says Mr. Richards.
What’s more, stocks were cheaper before those other rallies began. He cites Yale economist Mr. Robert Shiller, who created the inflation-adjusted price/earnings (p/e) ratio as a long-term measurement of value.
Generally, p/e ratios are very attractive below 10 and unattractive above 20, says the analyst. The average ratio on the S&P 500 Index, Mr. Shiller found, is 16. It was below 10 before the rallies of ’32, ’74 and ’82.
Yet when the market hit bottom in March 2009, the p/e ratio was 15. It roared up to 22 in April of this year before the markets corrected again.
So why didn’t more money managers, investors and financial advisers sell equities, or recommend selling them, as the market got expensive?
Herd behavior
“I believe each of these groups (institutions, individuals and advisers) is motivated by herd behavior,” says Mr. Richards firmly.
Fund managers want to be fully invested in a surging market in order to avoid the embarrassment of being left out, he adds. What’s more, the growth of ETFs has injected more money into the market. So more capital was chasing higher prices, creating a “self-fulfilling bullish prophecy.”
Many individual investors, seeking to recover their losses from the crash of 2008, “jumped in with both feet.” They were encouraged by their advisers, who are influenced by the industry’s bias to “buy, hold and watch us prosper from your wealth,” comments the analyst acidly.
All of this frantic activity has come at the risk of creating a new bubble, in Mr. Richards’ opinion. So where do we go from here?
One more rally
Is the market going to bottom out this summer? It hasn’t exactly been bouncing up lately. The technical charts offer no simple answer, this analyst tells us.
Rather than a clean “V-shaped” movement, the market is more liable to form what the technicians call “complex tops and bottoms,” that is, a series of rallies and troughs.
Under these circumstances, says Mr. Richards, “we will have at least one more rally during the summer, before a final and even more severe sell-off occurs.”
Ultimately, he sees the Dow Jones Industrial Average sinking to 9,000. It opened the day at 9,870, headed in the wrong direction. Mr. Richards thinks the 9,000 barrier will be breached by November. He admits that even this may be too conservative. Markets could go even lower.
Meanwhile, he says, forget “buy and hold” — grab the opportunities that should arise in the next few months. In short, time this market.
Holding some cash
Seasonal cycles for gold and utilities will come into play in mid-July, Mr. Richards advises the readers of Investor's Digest of Canada. Look at two bullion ETFs, he says.
iShares COMEX Gold Trust (NYSE-IAU) is trading at $12.08. SPDR Gold Trust ETF (NYSE-GLD) is a good deal richer at $120.66. Both are denominated in U.S. dollars.
For a currency-hedged investment in July, the analyst suggests Horizons BetaPro COMEX Gold ETF (TSX-HUG). This ETF hedges any U.S. dollar gains or losses back into Canadian dollars. It is trading today at $12.88.
For utilities, you might consider SPDR Utilities Select Sector ETF (NYSE-XLU), which trades at $28.55. “Pay close attention to market conditions,” the analyst advises.
If the markets have a big sell-off (they started badly again today), it may be time to buy these ETFs for the follow-up rally. Then investors should consider selling into strength if the Dow approaches 11,000 again.
If you buy into Mr. Richards’ prognosis of a substantial correction after the rallies, your goal should be to hold some cash heading into autumn.
We will leave him the last word. “So play it safe with cash, or play the rallies as best you can during the summer. If you’re like me, you’ll be holding some cash as the summer comes to an end.”
As the summer begins, have a very happy Canada Day. We’re back on Friday.
|
E-mail this article
Printer-Friendly
