Bill Carrigan is an independent stock-market analyst.
Why a new bull market?
Because bear markets usually trade to new lows about every 12 to 18 weeks in a series of lower highs and lower lows. We technicians call that a down trend.
In the U.S., as of mid-week, only three of the 10 Standard & Poor's stock sectors have violated their 2008 October through November lows of more than 20 weeks ago and so far, the large cap benchmark S&P 500 and the small cap Russell 2000 have not violated their 2008 October through November lows.
In our local market the TSX composite, the TSX mid cap and the TSX small-cap indexes have all held at or above their 2008 October through November lows.
At this time the only technical argument the bears can table is the new lows posted by the Canadian and U.S. financial sectors. There is no doubt that if we have a new bull we need the participation of the financials and we need it now.
This observation creates a money management problem in that we need to manage risk exposure by the careful selection of non-correlated stock groups or sectors
My best low-risk returns tend to occur when I take large positions in the early stages of a rising stock sector and hold for about six to nine months. When this position is sold the proceeds are "rotated" into a new and different emerging stock sector.
At this time to two stock sectors with the greatest inverse correlation are the gold stocks and the financial stocks. It could be the next big trade would be to get the timing right on the switch from those hot gold stocks into those cold bank stocks.
Believe it or not, there is growing evidence that reducing exposure to some of the gold stocks and increasing exposure to some of the financial stocks may be a prudent decision.
Technically, at mid-week, many gold stocks over extended on the upside and many financial stocks over extended on the downside. For example, Eldorado Gold (TSX-ELD) is sitting about 35 per cent above its 200-day moving average and Bank of Nova Scotia (TSX-BNS) is sitting about 35 per cent below its 200-day moving average.
These are at historical extremes.
As an Eldorado shareholder I did not welcome the Feb. 23, 2009 news that Eldorado Gold was intending to raise approximately $275 million through a public offering of common shares. The offering was cancelled the next day but the damage was done. If the management thinks the time is right to sell maybe I should also be a seller.
Now, let's consider a bullish case for the Bank of Nova Scotia.
Most investors know that the TSX financial group has lost about 55 per cent in value since its price peak in May 2007. Over the same period the U.S. SPDR financial sector has lost a stunning 80 per cent of its value.
CNBC host Jim Cramer claims that the UltraShort Financials ProShares ETF (NYSE-SKF) is the culprit. The fund is supposed to be a play on the financials' decline. As the Dow Jones U.S. financials index goes down, the two-times levered SKF shares go up. Cramer argues that what this ultra-short fund really offers is the chance to sidestep the SEC's margin restrictions.
Short sellers are now double the threat they once were, and their exchange-traded fund-enabled positions are hammering down the financials, hurting common-stock shareholders and the markets as a result. In Cramer's words, "it is a manipulator's dream come true."
On the flip side, any recovery in the U.S. financials could trigger a bearish stampede out of the SKF resulting in a stunning rally in the North American financial stocks.
Our chart this week is that of the daily closes of the Bank of Nova Scotia plotted above the daily closes of Eldorado Gold. The inverse correlation is obvious.
Some exposure to both stocks would be a prudent way to reduce the volatility in your portfolio.
Bill Carrigan is an independent stock-market analyst.
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