Two weeks ago I defined a bear market, as measured by the S&P500 or the S&P/TSX60 indices, to post a series of new 52-week lows within a rolling, 26-week time period. The last 52-week low in either market was posted 12 months ago and with most global stock indices at 18 month highs the bear market argument is without any technical foundation.
We also know the average bull is at least 30 months in duration and with the origin of the current bull somewhere between the November 2008 and March 2009 window we could anticipate another 15 months of advancing markets.
Unfortunately that may not be the case because this is a rare rebound bull, such as we had in 2003. The rebound bull will usually follow a granddaddy bear, which is a sharp, nasty bear introduced by some crisis. The last modern granddaddy's were the Fed tightening shock of 1987, the technology bubble of 2000 and the U.S. housing bubble of 2007.
A rebound bull emerges from a deeply oversold bear market and is normally of great upside magnitude, but also of shorter duration than the average bull. Rebound bulls tend to have an in like a lion and out like a lamb structure with the subsequent bear market being typically mild and also of short duration, much like the 2004 to mid-2005 window.
In the early stages of the rebound bull all stock sectors tend to have a high degree of price correlation, which produces a broad linear advance without any significant corrections. That was the condition operating during the great March 2009 to July 2009 advance. There was no need for stock picking or sector selection during this period because any long strategy worked. The idea was to recognize the new bull and get invested.
As the rebound bull matured through mid-2009 the high sector correlation unwound and introduced a sector rotational period when in late 2009 the materials sector advanced and the financials sector drifted lower through year end.
We had a shift of capital away from the front end of the market as represented by the interest rate sensitive financial, consumer and telecom sectors and into the inflation sensitive back end as represented by the energy, metals, materials and precious metals sectors.
In early 2010 the process reversed and we experienced a shift of capital into the front-end sectors which, led by the banks, enjoyed rolling series of new 52-week highs through late March 2010.
We know the early bull market strategy of getting invested in the broader stock indices will not work during periods of sector rotation. That means we have to identify investment products that will give us exposure to specific stock sectors.
This is when we take advantage of the growing exchange-traded fund complex. Sector ETFs are baskets of related stocks that trade on the TSX like individual stocks. That means with the purchase of one security an investor can "own" the entire TSX financial index or the TSX materials index.
Currently the TSX financial sector is cooling off and the red-hot stock sector is the TSX diversified metals and mining sector.
Now here is how we can get into trouble when we search out a mining sector ETF, because in this case we wish to gain exposure to the hot metals and mining sector. The S&P/TSX capped diversified metals and mining index has 14 names of TSX-listed base metals companies.
Now the only metals and mining ETF I could find is the Claymore S&P/TSX Global Mining ETF that "seeks investment results that correspond generally to the performance, before the fund's fees and expenses, of an equity index called the S&P/TSX global mining index.
This ETF has 50-plus names having exposure to several diverse metals groups such as aluminum, diversified metals and mining, gold, precious petals and minerals and coal and consumable fuels.
Our chart is the weekly closes of the TSX diversified metal and mining index plotted above the TSX Claymore Global Mining ETF spanning about 20 months. We can clearly see the upper plot has surpassed the prior May 2009 price peak and the lower plot is well below the same relative peak. Clearly these two stock sectors while with similar names are entirely different asset classes so investigate before acting.
Bill Carrigan, is an independent stock-market analyst