The Better Half

Since the low in March, the markets have rallied from about 7,500 to 11,600 at the peak, which is over 50%. This has surprised everyone. With the market over 11,000, is it a good time to jump into equities? Words that enter my mind are trepidation, scary, nervous and caution vs. belief, courage and conviction. Let’s explore how the bulls and bears are running these days. It appears the bulls are charging with conviction and the bears are running scared.
If we look at the technical aspects of the market, the bullish trend started in the 1st half of March. From our perspective the 1st signal was on March 19th when the current price crossed the 50 day moving average. Relative strength surged and MACD was also positive at that time. The next bullish signal was when the current price crossed the 200 day moving average on May 4th. The market has managed to maintain its status above the signals since then and nothing seems to be disrupting this momentum. If we draw a trend line from the previous tops of the market and extend it out, the next level of resistance is roughly 12,800. The floor is at about 9,600, which is where the 200 day moving average is now. Currently the signals are still positive from a technical perspective.
From a seasonal perspective we are about to enter the better half of the “six’n’six” strategy. Brooke Thackray refers to this in his 2009 Investor’s guide. Statistically speaking, the market tends to perform better during the period between November and May. The sectors that have the highest probability of performing better during the month of November are technology, consumer discretionary, health care, metals and mining and industrials. Financials, telecom, utilities and energy have tended to be the worst relative performers. Most of his research relates to the US; however this can be applied to some of the sectors in Canada.
From a more fundamental standpoint, the numbers look relatively overvalued if we look at the P/E ratio. For example the S&P/TSX Composite index’s P/E ratio is currently at 21.89 with a dividend yield of 2.75%. Interestingly the S&P/TSX 60 capped index’s P/E is at 17.89 with a dividend yield of 2.58%. The bears would point out that no long term sustainable bull market has been possible when we have a P/E ratio of over 17 times. Keep in mind there are many statistics and many ways to look at these statistics, let alone the variations of P/E ratios. The bulls might look at a variation of the P/E ratio that would suggest it was lower or argue that there is a lot of liquidity still in the system and that will keep the markets afloat and rising. Bill King who writes the King Report provides another interesting statistic. Bill reported “Art Cushin as saying that since June 2007 the Daily Sentiment Index, which polls futures traders, has reported more than 90% bulls on the S&P only once. When would you guess that would be? July 2007? October 2007? Wrong. It was last month…optimism has soared, from 2% bulls in March to 92% bulls in September.” So the question remains, will we see a better half in the next 6 months and V shaped recovery or will this be a W shaped recovery with another leg down?