Financial life in a big town

Nasty bear markets tend to stimulate demand for information, and sometimes I wonder how private investors cope with all the noise and clutter of the business media. There is too much information out there. Who with a life can make an investment decision based on retail sales, the leading indicators, housing starts, jobless claims, the Philly Fed and ISM manufacturing indexes?

While we’re at it, why not pile on the inflation-deflation debate, the potential for a U.S.-China trade war and the U.S. Federal Reserve’s latest decision on interest rates?

Now, you need to know if you’re a "value" investor or a "growth" investor because of where we are in the business cycle. If you’re not sure of the difference, here is a clip from a recent item claiming value investing beats out growth.

"As a first step, we formed quartiles by sorting stocks by price/earnings (P/E) ratios and then stocks within each P/E quartile were sorted by price/book value (P/BV). As is typical for this type of study, we defined the low P/E—low P/BV group of stocks as value stocks and the high P/E—high P/BV as growth stocks. …

"To prevent problems from the inclusion of negative or extremely positive P/E- and P/BV-ratio firms, and eliminate likely data errors, we excluded negative P/E and P/BV ratios, as well as P/E ratios in excess of 150 and P/BV over 20."

Moving right along, you could switch to exchange traded funds (ETFs) and dump those expensive actively managed mutual funds.

You could ignore all of the above and adopt a less complex strategy of rebalancing your asset mix once or twice a year. As a last resort, you could fire your full-service adviser and switch to a discount broker to at least lower your trading costs.

Now that I’ve tabled some strategies, I should mention that none of the above works in a bear market.

In a bear market, economic numbers mean nothing. In a bear market, both value and growth investors get slaughtered. In a bear market, ETFs and actively managed mutual funds get slaughtered. And lower costs do little to offset losses.

In a bull market, all strategies work. ETFs go up, managed mutual funds go up, value goes up, growth goes up and our current adviser is well worth those extra fees.

In a nutshell, all we really need to know is the current status of the equity markets no fax cash advances. Are we in a bull or bear market? The rule here is: In a bull market, be an investor, and in a bear market, be a trader.

One of the most reliable tools for confirming the bulls or the bears is to monitor the financial stocks, as that group typically leads the other stock sectors in both cycles.

Technically, the 2007-09 bear became official in November 2007, when the S&P/TSX financials index quietly slipped below the 200-day moving average five months after the price peak on June 2007.

A prudent person, however, does not act on one isolated technical event but rather seeks out more evidence to confirm the possibility of a new bear market.

I have found that wealth management companies – mutual fund companies and investment dealers – tend to lead the broader financial services group, which includes banks and life insurance firms.

If we know the broader S&P/TSX financials index peaked in mid-2007, we need to know if the wealth managers "confirmed" by posting earlier price peaks.

The following confirmed the financial bear: CI Financial Corp. peaked in April 2006; Canaccord Capital Inc. in May 2006; AGF Management Ltd., April 2007; and IGM Financial Inc, May 2007.

Now we have good news, because we know the S&P/TSX financials index rebounded from the March 2009 low to rally above the 200-day moving average in early May.

Once again our wealth-manager test has confirmed the bull market, with many of them posting their last new 52-week low ahead of the broader S&P/TSX financials index.

One example of the strong wealth manager group is shown in our chart this week, which plots the weekly closes of the S&P/TSX financials index above wealth manager Canaccord Capital’s.

I have identified the December 2008 lows of each plot at (A). Note now the respective lower March 2009 lows at (B) for the financial index and the respective higher March lows at (B) for Canaccord.

This tells me the wealth managers are outperforming the broader financial services industry and, until that changes, I remain a bull.

Bill Carrigan, CIM is an independent stock-market analyst. He can be reached at info@gettingtechnical.com.

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