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Message: Don Vialoux & Michael Campbell
| Written by Don Vialoux & Michael Campbell |
| Tuesday, 11 January 2011 12:53 |
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Michael Campbell: I’m glad you’re with us and what better way to start off the New Year than to welcome back to the show Don Vialoux. We love Don, he’s been 38 years in the investment industry and he’s probably Canada's best known technical analyst when it comes to looking at the seasonality of the markets. Don, I'd like to reintroduce people to exactly what you do and I know they find it absolutely fascinating. Talk a little bit about the kind of analysis you do, especially as it pertains to seasonality. Don Vialoux: Every market, every stock or security has a period of seasonal strength and a period of seasonal weakness. And by concentrating on stocks which have seasonal strength and checking out their technicals and fundamentals, we put all three of them together and we make investment decisions. The great thing about the process is that there's a starting point, and probably the most important, there's an ending point for all these trades. Normally a trade in a seasonal move could be as short as two to three months, could be as long as six to seven months. The key is you do have a buy point and you do have a sell point over a period of time. Michael: And let’s start as an example the broad markets, give us an example. An illustration, of seasonality "Sell in May and Go Away" Don: That’s actually an interesting expression because unfortunately it’s very false. Sell in May actually doesn’t work. It turns out on average during the summer time, from May to September, markets tend to be random, some years higher some years lower. The reason for that is there are no annual returning events that have an impact on markets during that time. The key is that there are times in the market like normally from the end of October till the end of April when there are a series of events which have a positive impact on markets. So rather than saying sell in May and go away, the real expression is: Buy when it Snows, Sell when it Goes. Buy in October and you sell in April. Michael: What kind of probability do you assign to those kinds of general trends like that? Don: Generally seasonal trade is possible if you have success 70% of the time or more. Frequently you can get as high as 90% in some of these seasonal trades, but 70% is probably the minimum you want to see over a period of time. The key is not only the frequency of success but also the returns relative to the market. You not only want to have something that works quite frequently but you also want to have an investment that outperforms the market. I'll give you an example of something which is current it might give you an idea on how some of these things work. The one I’m going to focus on is on platinum: its period of seasonal strength is from the beginning of January right through till the end of May. Now this trade has worked 20 of the last 24 periods, and the average return on investments has been 9.2%; so that's a seasonality. The next thing to look at is the reasons why the seasonality occurs, and a lot of that has to do with the demand for platinum as we begin the car season in the spring time. New cars are manufactured, they use platinum for catalytic converters, the more cars that are manufactured the greater the demand for platinum and platinum moves higher. So that’s the annual recurring event that causes the seasonality. The next thing to do is look at the fundamental reason why it should work this year, and it turns out it’s fascinating this year, there's a reason why it’s starting to work very nicely. Its not to do with demand, it has more to do with the supply. 77% of platinum is produced in South Africa; in order to produce platinum you have to have power, and right now the power source in South Africa is basically at full capacity. If there's any kind of disruption in their power production then that quickly will shut down the platinum mines. And during the past few weeks they’ve had some rain storms over in South Africa that have closed down some of the coal mines that provide the coal for the power plants. So you’ve got kind of an interesting situation that if there is any kind of disruption in power production in the next little while, that could have a significant impact on platinum just coming into the spring time. That's the fundamentals now the technicals? The technicals you want to watch short-term momentum indicators to give you an indication of when do you want to enter this particular trade. And in this particular case the buying point didn’t happen on January 1st, it actually happened in the second week of December of this year; a little bit earlier than usual. So we’re currently in that mode when you want to be in this particular trade; any kind of weakness on platinum during the next little while is just an opportunity to buy. Michael: An Absolutely Fascinating Approach to Markets. Don, is there any other thing that lends itself seasonally to this next month or two? Don: The answer is no, but for kind of a strange reason. First of all for background: I am very bullish on equity markets for the current fiscal year. I think this is the pre-election year in the US, the presidential cycle says that in the pre-election year that’s the strongest year of the four year cycle. Normally the presidential cycle is strongest from just before the mid-term election right through until about a year later; and on average the S&P 500 has gone up 24% during that period of time. Now, we’ve already gone up 10%, so that implies that we have upside potential between now and this October of another 15%; and that implies upside technical targets for the S&P 500 of 1450, and for the TSE composite 15500. So we’ve got another 15% to go. That's the good news. Let’s take it a little bit closer: the next two months could be difficult because the markets are way over-bought and we’re starting to get some technical indicators that the market on a short term basis has started to roll over. It started appearing in just certain sectors during the last week or so, most notably in the materials sector. We’ve also seen what's happened with the gold stocks, consumer staples, and consumer discretionary stocks. Negative rotation likely will continue for another let’s say four to eight weeks, but the important thing to remember is that this weakness is a buying opportunity to fully take advantage of the four-year presidential cycle. I’m calling for a 5-8% correction in this market from the recent peak, but will provide a buying opportunity. In short, be very careful short term, but we’re going to have some fun before the spring is out. Michael: Don, you mentioned gold. Can you give us some seasonality numbers on gold, or where we are right now? Don: We’ve probably seen most of the correction in gold during the last ten days or so. Gold actually broke support at the $1,360 level on Friday. The next important support level is the $1,330 level. So we’re not that far off from that level and you’re probably going to get some support at that level. The technicals are oversold, very short term so we don’t have much farther to go on the downside. Now on the seasonal basis gold usually has a bit of weakness in early January then moves very strongly right through till the third week in February. So look for that as a possibility once again. If you’re currently long in the sector you want to stick with it for now. If you are looking for an exit opportunity look to do so around the third week in February. Michael: What is your take on silver? Don: The case of silver is very similar to gold; it’s had some technical weakness during the last little while. Its technical pattern is very similar to gold, and actually because it has an industrial component where it is in greater demand for consumer electronic goods. Silver has significantly outperformed gold and that likely will continue. But just like gold it’s under pressure right now, looking a short-term low, probably around the middle of this month, followed by a nice move coming into say the end of February. At that point in time that’ll be the end of the seasonal trade for silver. The key is you’re now getting closer to the end o the period of seasonal strength for silver and the next bounce you get into February is an opportunity to take some really good profits. That's also applies to the silver stocks, congratulations if you’ve been in some of these silver stocks, you’ve done very well despite the correction that we’ve seen during the last little while. Michael: We’re excited about the World Outlook Conference that's coming February 11th & 12th. A great roster of speakers: David Bensimon, Jack Crooks, Peter Schiff is going to broadcast with us from New York, Joseph Schachter is going to be there, Dennis Gartman is going to broadcast form Virginia, Ryan Erving is going to be there, Ozzie Jurock is going to be there, Dunnery Best, Tyler Bullhorn, Mark Leibovit, and of course Don Vialoux. Don, let’s talk about oil and the Canadian Dollar. Don: Great question, particularly on the oil. First of all I wanted to thank you for asking me to the conference last year, it was really a great conference. I particularly remember a presentation by Joseph Schachter. Joseph said at the conference that now was the time to start looking at energy stocks, right around the second week in February last year when your Conference was on. Lo and behold anybody who was at the conference did very, very well for the next three months as that’s when crude oil took off very strongly. Anybody who was in energy stocks did very well. So what about crude oil? On a seasonal basis, I’m looking at a chart right in front of me at a free website, www.equityclock.com, showing what crude oil futures do over a long period of time. Historically they’ve weakened right through until around the third week in January, that tends to be a bottom for crude oil prices, and then they tend to move significantly higher right through until august of each year. That trend is expected to continue this year. Technically, crude oil rolled over last week, gave a series of momentum sell signals, implying that we’re currently into a very shallow but important period of weakness. You’re looking for an opportunity to accumulate crude oil and energy stocks in general as we get into February. Historically, the bottom of the energy stocks themselves has been around the second or third week in February; look for that to happen again. We’ve got this on our radar screen; we’re looking very closely at when we want to enter this particular trade. Michael: Is there a seasonality with the currencies? Don: Very important; this is the time of year when the Canadian Dollar tends to go flat. But of more importance is the US Dollar which has a period of seasonal strength from the beginning of January right through till the end of February, that has a direct impact on commodity prices. That has a tendency to dampen commodity prices during that period of time. That’s also happening this year; we’ve seen the US Dollar being very, very strong, particularly last week. Look for it to continue to strengthen as we get into early February. That will probably be peak for the US Dollar for a while and set the stage for commodity prices, particularly crude oil, to go up significantly higher. Michael: Don there's always so much to talk about with you. People can go to Don's Analysis at www.timingthemarket.ca, as well as www.equityclock.com for Seasonal Analysis. |
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