Buy in July?

The consensus estimate from Thomson Reuters Research puts S&P 500 earnings at 35% below year-earlier levels. Quarterly earning kicked off with a bang last week and appears to be maintaining momentum. In the Globe and Mail on Saturday July 18, 2009 an article by David Parkinson titled “Plain old earnings drive markets now” he points out that so far this quarter actual earnings have beaten analyst expectations by 11.2%. So does this mean that the bearishness was overdone?

The iShares CDN S&P 500 Hedged to Canadian dollars index fund (XSP) replicates the performance of the S&P 500. Since it is hedged to Canadian dollars it performs better when the Canadian dollar increases relative to the US$. The index is a market capitalization-weighted index of securities of 500 of the largest U.S. public issuers provided by S&P. the top sectors include Information Technology (18.8%), Health care (13.33%), Financials (13.23%), Energy (11.84%) and Consumer Staples (11.83%). You can get further information about this if you go onto Barclays iShares website.

The S&P 500 gained 7% last week and is up 4.1% year–to-date, however if we look at the XSP it was trading at $10.65 on December 31, 2008 and closed at 10.93 on July 17, 2009. This represents a 3% return. TD Asset Management reported The S&P 500 is down –4.9% in Canadian dollar terms. The difference between the XSP and the TD figures is likely due to tracking error. Since the low in March XSP has risen about 36%. The current price crossed the 50-day on March 20 and has maintained its position above that mark with the exception of a brief interlude in the last month. It is now trading above the 50, 100 and 200-day marks and relative strength and MACD are both signalling bullish signs.
The latest data supports a sustained rally. Goldman Sachs raised their year-end 2009 S&P 500 price target to 1060, 13% above their current level. TD Economics weekly bottom line reported in their highlights of the week that The Fed has upgraded its economic growth forecasts. The central bank now expects a contraction of –1.5% to –1.0% in 2009 and growth of 2.1% to 3.3% in 2010. Retail and housing starts recorded gains in June and the domestic economy looks set to recover as both auto and home sales improve. Although things are looking brighter Goldman Sachs does warn “US Economy is the key risk to our forecast…. the risk of a ‘double-dip’ recession remains significant.” Further to this, Credit Suisse reported short interest is on the rise so this run may be short lived.

US Financials lend support to Canadian Financials

Last week the financial sector dropped 5.1% amid the steepest drop in the S&P/ TSX since early March. The S&P/TSX dropped 5.2% on concerns that the economic recovery is going to be slower than previously thought. As of today, the S&P/TSX is still selling off in a number of sectors including energy and materials yet the financial sector seems to have some life left in it.

A representation of the financial sector is the Barclay’s iShares CDN Financial Sector Index Fund (XFN). It replicates the performance of the S&P/TSX Capped Financial Index through investments in the companies that make up this index. Some of the top holdings are Royal Bank of Canada (20.96%), Toronto Dominion Bank (15.94%), Bank of Nova Scotia (13.55%), Manulife Financial Corp (10.19%), Bank of Montreal (8.26%) and Sun Life Financial (5.17%).

YTD the financial sector is up 15.8%, second only to technology, which is up 47.8%. Since the double bottom in February and March of this year, the financial sector is up over 60%. On March 12, 2009 the current price crossed the 50-day moving average, on April 2, 2009 the current price crossed the 100-day moving average, and on May 20, 2009 the current price crossed the 200-day moving average. Last week the current price dropped back to the 50-day moving average and seems to have bounced off it today. Both the 50 and 100 day moving averages are in a rising trend, which is a bullish indicator, however, the 200-day is still trending downward, which could be construed as a bearish signal.
In the Globe today things appear to be positive for further movement in Financials. The article by Kevin Carmichael, “Canadian businesses adopt rosy outlook”, reported some 61% of senior mangers polled by Bank of Canada predict faster sales growth over the next 12 months, the most in records dating back to 1998. That being said, they expect credit conditions to remain tight, however a separate survey showed restrictions were mostly directed at the automotive, forestry and transportation industries and borrowing conditions are easing. Further to this, inflation is expected to be contained. This will give the financials further support. In the short term the US financials are lending support to the Canadian financials. Earnings in US Financials are expected to be out this week and Meredith Whitney, an analyst in the US, upgraded her view on Goldman Sachs driving up financials in the US today. The Globe reported, “At least the Whitney-effect crossed the border, driving Canadian financial stocks 1.4% higher.”

Lighten the load

The iShares CDN Materials Sector Index Fund (XMA) replicates the performance of the S&P/TSX Capped Materials Index less the fund expenses and tracking error. The top holdings as of July 3, 2009 are Barrick Gold Corp 17.7%, Potash Corp of Saskatchewan 16.48%, GoldCorp Inc. 14.90%, Kinross Gold Corp 7.5%, Teck Resources Ltd-Cl B 4.73% and Agnico-eagle Mines 4.73%.

On a year-to-date basis the materials sector is up 15.3% and was up the most of all sectors last week at .9%. Since the low in November last year the materials sector has been on a steady climb, up almost 70%. Most of that move occurred in November and December. The current price crossed the 50-day moving average in December last year the first time and has remained above that indicator for the most part with the exception of March, April and more recently in June and July. Interesting that it only crossed the 200-day moving average in May and that signal is downward sloping. The relative strength, volume and moving average convergence divergence signals are all negative. From a technical perspective the signals are bearish.

Fundamentally, the materials sector relies on worldwide recovery and the news of late has been a downer for the materials index. In the last month the Canadian dollar has been declining as the US$ regained its safe-haven status. On June 2, 2009, the Canadian dollar closed at .9246 vs. US$ and is now closer to .86 vs. the US$. The unemployment rate in the US is the highest since August 1983 at 9.5% up from 9.4% in May. The consumer confidence numbers for June came in under 50. Asian markets are declining on concerns the economic downturn could be longer than anticipated. In the short run materials don’t have too many positives but I think it should be a long-term core holding. A good article to read is in the June issue of National Geographic on the global food shortage “The Global Food Crisis, The End of Plenty” by Joel K. Bourne Jr. This supports the theme of materials being a core holding in your portfolio longer term. From a seasonal perspective the end of the run is usually June so it maybe time to lighten the load for the summer.