Now Is The Time To Buy

In the May issue of Canadian MoneySaver, I noted that the flow of “Dumb Money” into the market was at dangerous levels. Dumb Money—as far as we Technical Analysts are concerned—represents investors who typically buy and sell equities at the most inopportune times. Such investors consist of the least financially sophisticated equity participants, such as retail mutual fund buyers, small capped stock investors, small speculators and the like. I also noted in my May column that “Smart Money” was selling out of equities. Smart Money, according to technical analysis, represents investors who tend to be right with the timing of their buy-and-sell timing. Members of this group include large pension managers and other such institutions, commercial hedgers and corporate insiders. As a long-time follower of the money-flow patterns between these groups, I can attest to the foresight provided by following the decisions of these two groups. They have consistently given us a head’s-up on market turning points— and my message in May for readers to consider selling some of their equity exposure was driven by the bearish Smart/Dumb Money flow of capital.

In the July issue of MoneySaver, I covered market breadth—which is a measurement of the total participation of all listed stocks versus the indices we typically watch. For example, there are almost 3000 stocks listed on the NYSE—yet market participants (myself included) tend to monitor much more concentrated indices of capitalization weighted stocks. When we note that the “market” went up or down today, we are usually referring to the S&P500 (consisting of 500 stocks) or the Dow Industrials (consisting of 30 stocks). When watching market breadth indicators—I am interested in total market participation—compared to those indices. A drop in the number of rising stock during a bull market often gives us a head’s-up for a market correction. Conversely, an increase in the number of rising stocks in a bear market can signal a bottom or turnaround is pending. My article in July noted a drop in market participation—which I felt might lead us into a strong correction. Declining market breadth and a large discrepancy of Smart Money/Dumb Money capital flow gave us plenty of head’s up for the summer sell-off of 2015.

The good news is, that for those of us who followed my advice and held cash for the summer, there may be a buy point coming to the markets soon. In fact, by the time you read this it may have already arrived. As my article in the October issue of MoneySaver suggested, the Smart Money/Dumb Money ratio has become favorably skewed towards Smart Money purchases and Dumb Money Sales. Further, at least one of my market breadth indicators is showing early signs of a turnaround, although I am still waiting for further confirmation from some other factors I watch.

While I typically like to hold some cash right to the end of October in respect of the seasonal “best six months” strategy, I’ve noted that the best buying opportunities can often be in that last week of September—or very early into October. Because of this, I have prepared a list of stocks and sector ETFs that I expect to begin buying very shortly. I’d like to provide you with a few of those ideas in today’s column.

On our shopping list at ValueTrend are seasonally favourable sectors such as technology and consumer discretionary stocks and special situation individual positions. Here are a few ideas within those areas that you might want to consider for deploying cash you held over the summer.

Within the technology sector, we feel that some of the larger capped names like Microsoft (MSFT-US), Intel (INTC-US) and Google (GOOGL-US) are worth examining. We may hold positons in these by the time you read this article, but at the time of writing we do not.

You could also consider some names in the Consumer Discretionary sector. Walt Disney (DIS-US) is a stock that we’ve held with fantastic results over the past couple of years. Its sell-off this summer and return to its long-termed trendline is likely a buying opportunity for new investors. Sector players can also consider the SPDR ETF (XLY-US) for a broad play in consumer discretionary stocks.

As for special situation stocks, we’ve owned a position in WSP Global (WSP-T) for over a year, and the chart continues to show a healthy “step ladder” uptrend since its breakout about a year ago. We continue to be impressed by the company’s progress in accretive acquisitions by its strong management. We are also looking at some out of favour sectors such as the Canadian banks and certain small caps. The banks in particular might be presenting a buying opportunity if they complete a bottom formation shortly. Tune into my blog at www.valuetrend.ca where I present shorter termed technical timing on sectors such as these. Finally, we like the Canadian Telecoms quite a bit—particularly BCE (BCE-T). There’s also Telus (T-T) and Rogers (RCI.B-T) in that group. All of the telecoms are worth looking at for your consideration.

If you agree with my thesis of a near termed buying opportunity, you might want to take advantage of the cash that you’ve hopefully held over the summer’s volatility. As noted above, we have a list of stocks and sectors that we will have likely moved on by the time you have read this. You might want to start activating some stock purchases from your shopping list too.

Keith Richards, Portfolio Manager, can be contacted at krichards@valuetrend.ca.

Keith Richards may hold positions in the securities mentioned. Worldsource Securities Inc. – Member: Canadian Investor Protection Fund, and sponsoring investment dealer of Keith Richards. The opinions expressed are those solely of Keith Richards and may not necessarily reflect that of Worldsource Securities, its employees or affiliates. The contents are for information purposes only and do not represent investment advice. ETFs may have exposure to aggressive investment techniques that include leveraging, which magnify gains and losses and can result in greater volatility in value, and be subject to aggressive investment risk and price volatility risk. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the prospectus before investing.