Bullish signs seen in markets' about-face

Bullish signs seen in markets' about-face
DAVID PARKINSON
From Wednesday's Globe and Mail

May 7, 2008 at 8:26 AM EDT

The upturn in equity markets is fast evolving from a temporary bounce into a full-fledged baby bull, some technical analysts believe.

North American stocks, now seven weeks into a rebound from their March lows, are sending off increasingly bullish technical signals that imply the gains are more than merely a short-term recovery in a bear market. In fact, some technical analysts suggested this week that the Canadian market is already back in bull mode, while the U.S. market is on the verge.
"The strong performance of the past four weeks ... provided further evidence that a new bull market is indeed developing," Ron Meisels, head of Montreal-based technical analysis firm Phases & Cycles Inc., said in a research report.

"Over the past couple of weeks, we have become increasingly intrigued with the possibility that ... the broad indexes could actually break out and run substantially higher," Ray Hanson, technical analyst at RBC Dominion Securities, said in a note to clients.

While the S&P 500's move back above 1,400 last week was seen by some observers as a bullish psychological signal, analysts say a more telling indicator of a burgeoning technical bull market has been the about-face of major stock indexes relative to their key moving averages.
After trading below the closely watched 50- and 200-day moving averages since the end of last year, Toronto's S&P/TSX composite index has traded above both averages for the past month. In the U.S. market, the S&P 500 index has been above its 50-day moving average since mid-April, and yesterday's gain (it closed up 10.77 points at 1,418.26) put it within spitting distance of its 200-day moving average of 1,431.

Mr. Meisels also noted that the markets have established "a clear pattern of higher highs and higher lows," and that they have shown a propensity to shake off negative news - both of which are bullish signs.

The TSX is up 13 per cent and the S&P 500 is up 11 per cent from their respective March lows. Analysts suggested we might see a brief consolidation before the North American markets take a run at the last big hurdle to solidifying a bona fide bull trend: the S&P 500's 200-day average, a major point of technical resistance.

"Short-term data is getting overbought for the S&P and [Nasdaq], and it's likely we'll see more tug-of-war near the 200-day moving averages over the next couple of weeks," RBC's Mr. Hanson said.

"We expect that after a brief consolidation, the next surge should confront this resistance and put the indexes firmly above it," Mr. Meisels said.

Canadians sitting on $45 billion

TheStar.com - Business - Canadians sitting on $45 billion

Keeping more money than usual in cash has already cost investors $9 billion since Jan. 21
May 08, 2008 James DawBUSINESS COLUMNIST

Canadian investors are showing a record level of caution in the face of turbulent stock markets.
Economist Benjamin Tal of CIBC World Markets Inc. calculates we are sitting on an extra $45 billion of safe money.

It's languishing in money market mutual funds, brokerage accounts, savings and chequing accounts and government securities, barely earning enough to keep ahead of rising prices.
"The overall liquidity position held by Canadian households is now rising at a year-over-year rate of 15 per cent – the fastest rate in more than six years," Tal writes in a report released yesterday.

"When measured in both nominal and real terms, the current value of personal liquid assets is at a record high (with about $45 billion or 10 per cent more than what) would have been consistent with a risk aversion level seen at the eve of the current financial crisis."

If the entire excess sum were suddenly redeployed to earn capital gains from Canadian stocks, it would not be enough to change markedly the direction of Canada's leading stock index, valued at about $1.7 trillion.

Nor will the sidelining of this amount of money ruin retirement or pension plans, assuming the money is spread thinly across the whole spectrum of retail investors.
Yet Tal worries ordinary investors will repeat errors of the past, hold excess cash too long after markets have started to recover and sacrifice a higher return over several years. Already the timidity of investors has cost them a potential $9 billion.

The extra cash, if it had been put into the S&P/TSX composite index before Jan. 21, would have grown nearly 20 per cent. The recovery of the Toronto market since then has left it as the only major market in the world to post positive results for 2008, a modest 4.2 per cent as of yesterday.

That sort of gain could be quickly reduced, or lost altogether, of course.
The risk of stock prices falling with the United States near or in a recession may explain why investors have set money aside.

They haven't poured it into stocks, bonds or mutual funds, or even real estate, as investors did during the scary times of 2001 and 2002.

Donald Drummond, chief economist at TD Bank Financial Group, says that, "when there are downturns in the market, people do tend to exit fairly quickly and they do stay out and, on balance, miss the bottom.

"That's a bit of human nature, isn't it?

"But sitting here at the beginning of May, who is to say that is wrong, and that we are necessarily at the bottom? I think there is a lot of grief to come, and for an extended period of time in the U.S., and I find it hard to believe that won't spill over into Canada."

But Tal says he is taking a longer-term perspective, and not making a prediction on the direction of the market, when he cautions against keeping more money than usual earning short-term interest rates.

Based on historical stock-market returns, the difference could be 35 per cent over five years, he estimated quickly during an interview.

"We are bullish on the stock market, (because of the relative health of the Canadian economy and outlook for commodity prices) but that is something that is secondary and not part of this analysis," he insists. "We know from history that cash has underperformed the stock market in general.

"Basically, what we are saying is, if you sit on $45 billion extra cash, down the road you are basically sacrificing return, without getting into the timing of the market, whether or not the market has already rebounded or whether or not we have another small correction."
The securities industry does, however, have a vested interest in seeing investors assume more risk and shift money from low-cost mutual funds to higher-cost equity and bond funds.
An extra 1 percentage point of management and distribution fees on $45 billion translates into $450 million over a year if the investor earns zero return, and more if his or her investments grow in value.

Both Tal and Drummond say the extra funds held in low-return, readily cashable investments are not an indication Canadians have stepped up savings.
With home prices rising and employers still hiring, consumers are continuing to buy, although sales of homes have been falling.

"In 2001, real estate was like comfort food. You sell your (equity) mutual funds and go to money market, or you go into real estate. Today, you are not doing that," Tal says.

"Today, the real estate market is perceived, maybe rightly so, to be at the peak, and therefore more money is coming into cash. That is why the cash position is larger than in 1987 or in 2001."