Checking The Roadmap....                                                                                                              PDF VERSION

A special edition of Technically Speaking exclusively for our clients 

Good analysis and forecasting is like going on a long road trip its generally a good idea to look back at the map to ensure you are on the right road. This special edition of Technically Speaking is to provide you with our review of where we have been, and more importantly where we are going. Where appropriate we will include discussions on the indicators we follow and how we use them and more importantly identify why we think we are closing in on a turning point for the market. 

The good news is so far 2010 has shaped up pretty well as expected. The bad news is the market is down. That bad news however, is not all that bad. Let’s take a moment and recap what our expectations were for 2010 and why.

At Young & Frederick Investment Solutions we entered 2010 with a strategy that significant risk still existed in markets. We felt clients would be better served by keeping away from trading rallies until the low risk re-entry point for the next bull market clearly presented itself. Since the market set a bottom back in March of 2009 at the 7556 level we have believed that the first bounce off that bottom was not a low risk opportunity. Yes the market has moved up sharply, but the risk in the market had not been removed. Nothing had been done about the runaway financial institutions in the U.S. which were the root cause of the decline in the first place. The gamble could have been a very expensive one. 

We have believed for some time that the correction would take the shape of a W. Namely a sharp decline followed by a rally then another shorter correction followed by the start of a new bull market which would form the far right angle of the w. This rally would be a low risk opportunity. The false start rally and corrections over the preceding period had helped to align investor’s expectations with economic reality over the 18 month period of the average bear market.

Today we find ourselves approaching the second bottom of that W and its time to start looking for opportunity. We have always thought that the market would make its second low sometime in Q3 2010 or early Q4. That takes us 18 months out from the low of March 2009 but also it puts us in a place where the new regulatory regime for banks and financial institutions has been passed in the states. While the impact of that is not fully known yet the market looks ahead and sees steadier times.

From a technical analysis perspective the evidence of a bottom is also piling up. Copper, Oil and Financial service stocks have yet to break below the lows they set in early June. This is a good sign especially when the TSX index has set a new low as it did in early July. This is not to say the market will not go lower, we think it will. But note it is not unusual for the market to continue to move down even when attitudes are changing. This measure is called momentum and while it hasn’t turned up it is slowing down.

Long term readers know I also follow buying power and selling power. This simply is that buying volume rises on up days and selling pressure falls on down days. This indicator shows us what the institutional investors are doing. If they buy on up days and stop selling so aggressively on down days then ultimately prices will rise. This is a major turning point in institutional behaviour we have been looking for.

THE BOTTOM LINE:

Our low risk buying opportunity lies ahead. Just down the road.

Respectfully

Stephen N. Frederick B.Comm

Director Wealth Management ScotiaMcLeod
Partner Young & Frederick Financial Solutions

This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division;of Scotia Capital Inc. SCI, but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice.