Introducing the 'Map of Stock Trends'

The Stock Trends Inference Model is a quantitative approach to interpreting the categorical data that is the core value-added analysis presented here. The Stock Trends indicators are derived from base tenets of the market technician’s encyclopedia - a toolset designed to reduce a complex market dynamic to a categorical, and hierarchical framework. By evaluating the statistical significance of this framework we can apply meaningful algorithmic trading methods.

However, the first step is to understand the data and interpret the Stock Trends Inference Model results. Every week we sample 30-years of data to assign a probability for future returns on over 7,000 North American stocks. Using combinations of categorical data and making assumptions about the distribution of returns, we apply statistical inference methods to differentiate stocks (ETFs and income trusts, too) by the estimated returns in the coming periods (4-weeks, 13-weeks, and 40-weeks). You can see the result of that analysis in the Profile section of each Stock Trends Report.

I’ve already introduced the Stock Trends Inference Model in previous editorials. Subscribers to Stock Trends Weekly Reporter can interpret this information weekly, as well as review the reports on issues with the best expected returns. The Stock Trends ‘Select’ report, as well as the Top 4-wk/13-wk/40-wk returns expectations reports give users a new way to make the Stock Trends reports actionable.

However, these reports can be augmented by data visualizations. Graphical presentations of data are always useful in translating vast data points into more accessible interpretations. A good graph saves us time and points us in the right direction.

The Stock Trends Profile reports include heatmaps which help us compare returns expectations among industry group member stocks. Another useful display method for this data, especially when we want to broaden the use of the data hierarchy, is a treemap. A treemap is specifically designed for hierarchical data and is commonly used. A popular example in our equity analysis space is the Map of the Market.

Today I am introducing a treemap of the Stock Trends Inference Model - the Map of Stock Trends. It takes the data results from the weekly analysis, sorting 4-week and 13-week returns expectations by trend category.

In the treemaps displayed below large capitalization stocks (U.S. stocks with a market cap greater than $1-billion, Canadian stocks with market cap greater than $500-million) are grouped by Stock Trends indicator (Bullish , Weak Bullish , Bearish , Weak Bearish , Bullish Crossover , Bearish Crossover ). Each stock within these groups are visually differentiated in two ways: spatially by their relative probability of a return greater than the base 13-week mean random return (2.19%) , with larger cells (higher probabilities) sorted and displayed from the upper left quadrant and moving down to the lower right corner for the lower value. Secondly, the 4-week returns expectations are differentiated visually by color gradation, with darker green hues representing stocks with higher probabilities of exceeding the base average 4-week random return (0%) and darker red hues representing the stocks with the poorest probabiltity of a positive return in 4-weeks.

 

 

Dark green cells in the upper left of each trend category are stocks with the best statistical trend characteristics. Dark red cells in the lower right quadrant of each trend category are stocks with the worst statistical trend characteristics.

Below are the current Map of Stock Trends treemaps for the U.S. and Canadian stock markets. Each Stock Trends trend indicator category grouping is identified by the translucent indicators in the background of each box. In the future the treemap will be developed in an application that allows users to click on an individual cell and go directly to individual Stock Trends Reports, but for now the visualizations help direct us to the stocks with the most favourable current Stock Trends Reports.

 

U.S. stock exchanges - big cap stocks

Toronto Stock Exchange - big cap stocks

Bearish sentiment builds

Investors are always looking for the door. Even when returns are abundant and investor sentiment is wildly bullish, shareholders know that plump investment accounts are but paper profits - only real when the trigger is pulled and equity is once again cash. The degree to which investors look more nervously to the exit is proportional to the degree to which their equity positions are compromised. How we measure that compromise helps us identify critical shifts in investor sentiment and recognize high-risk market periods.

Stock Trends is by design a categorical reporting framework that gives us a measure of aggregate investor sentiment and a metric for determining when market participants are feeling the squeeze and most ready to dash for the cash. The Stock Trends Bull/Bear Ratio is now serving notice that the exit doors are wide open.

Most market analysts look at benchmark indexes of price level, pointing to areas of support and resistance to anticipate market rallies and corrections. Certainly, the 6% drop in the S&P 500 index from the market high in September sounded alarm bells. But we have had corrections of 5% and more multiple times during the bull market run since 2009. Can we expect this is just another typical and expected correction that will soon be subdued? Price level analysis can conjecture about that, but a measure of market breadth is the best barometer of how sentiment has truly shifted.

The Stock Trends Bull/Bear Ratio measures the distribution of Stock Trends trend categories and tells us something quite simple: are the majority of stocks trending positively or negatively? Are the diversified holdings of investors buoyed by a rising tide or sinking in aggregate?

The Stock Trends trend indicators categorize individual trends by the conditions of a simple moving average study. The base categories -Bullish or Bearish - are determined by the relationship of the 13-week and 40-week moving averages of price. If the 13-week average price is above the 40-week average price the stock is categorized as Bullish. If it is below the stock is categorized as Bearish. This is a factual reporting of past price performance.

The price smoothing aspect of average prices gives us a clearer idea of trends, and although these longer-term time parameters are lagging in nature, they do make it possible to characterize long-term price movement. It is this long-term price movement that most shifts the balance of investor sentiment and creates heightened periods of anxiety about equities.

Stock Trends tabulates the Bull/Bear Ratio for individual North American exchanges. The New York Stock Exchange Bull/Bear Ratio has been plummeting since August, and is now at 1.07. The Nasdaq Bull/Bear Ratio dropped below 1.0 in June and is now at 0.66. When we look at the composite of both major exchanges - some 5,660 common stocks that currently have Stock Trends trend indicators - we get a good look at the trend breadth of the U.S. stock market.

The graph below highlights periods where the Stock Trends Bull/Bear Ratio for the combined Big Board and Nasdaq exchanges has been rated as 'Bullish'. These shaded areas tell us when investor sentiment provides more fertile ground for market rallies and rebounds. There will be times when the S&P 500 index rallies without broader market support , like in late 2006, but these can represent divergences between large cap and small cap performances. Generally, a strong bullish investor sentiment is characterized across the stock market. The Stock Trends Bull/Bear Ratio gives us that representation of market breadth.

Where are we at now? The U.S. market Bull/Bear Ratio has been flirting with a Bearish investor sentiment reading since the market top in the summer, and has now dropped to 0.7. Canadian investors sentiment has also dipped into Bearish territory - the Stock Trends TSX Bull/Bear Ratio fell below 1.0 this week (now at 0.85).

Investors should take note that this aggregate North American trend condition makes the market vulnerable to a crash as investors increasingly weigh in about making an exit. The S&P 500 index's 4.1% recovery last week may be heartening, but fading investor sentiment should keep investors on high alert.

Canadian financials

Canadian financial stocks are due to join any market revival. The sector flushing has left no country unaffected, but Canadian institutions should be poised for some relative performance gains if the current market rally has legs. The iShares S&P/TSX Financials ETF (TSX:XFN) is Stock Trends Weak Bearish and is in our watch. The share price ($15.47) is rapping the resistance overhead that dates back to mid-February.

An important component of the S&P/TSX Financials Index is Manulife Financial (TSX:MFC) – it has shown some prospect of battling out of its bearish trend in recent weeks, although the stock is still Stock Trends Bearish. MF will be an significant signal toward a qualified turn in the TSX’s financial sector. Clearance through the 13-week moving average trend line should allow the stock to regain the $20 level. Look for MF to turn Stock Trends Weak Bearish soon.

Stock Trends TSX Portfolio out of hibernation

A sign of the improving trend picture for the TSX is renewed activity in the Stock Trends TSX Portfolio. There are two new buys currently, the first since February. The bear market put the lid on trades for this trend following system. There have only been 20 trades from the summer of 2007 until these most recent buys.

Investors coming out of hibernation

Relative market stability is starting to bring back anxious investors. January was the first month since August to have net inflows into Canadian mutual funds. Much of that went to fixed income funds, but stocks also benefited from this gradual renewal. This is another sign of hope.

Golden opportunity

Gold stocks advanced again last week, finishing with a 10% gain after a strong trading session on Friday. The gold sector has outperformed the S&P/TSX Composite Index by 96% since the sector’s October low. Investors are clearly gravitating toward the portfolio insurance afforded by precious metals. Poor broad market performance – both the Toronto market (down 7%) and the S&P 500 Index (down 5%) have lost ground in the last quarter – has investors turning to gold as an anchor in the market downdraft. With the price of bullion tipping $900 again there will be even more buying presence lifting the sector. The S&P/TSX Global Gold Index has been categorized as Stock Trends Weak Bearish since early December, signalling the sector’s move above the short-term trend. In the absence of any competing strength in another sector, momentum traders will extend the current rally.




Investors can either trade gold stocks or use a number of bullion commodity funds. The iShares COMEX Gold Fund (TSX:IGT) has been categorized as Stock Trends Bullish since early December, and shows the quality of the asset even in the face of a weakened Canadian dollar. The bullion fund, denominated in Canadian dollars, is up 19% over the past three months – well below the 81% return gold stocks have generated over the same period - but solid ballast in the stormy waters. However, if the loonie has bottomed, or at least stabilized, Canadian investors can expect to get more traction out of their bullion fund investments as we move further into the first quarter of 2009. Another fund that gives investors heavy exposure to bullion is Central Fund of Canada (TSX:CEF.A). It currently sports a Stock Trends Bullish Crossover indicator, a signal that the short-term (13-week) average price has moved above the long-term (40-week) average price. This intersection of trend lines is a primary buy signal for trend traders with an investment time horizon of two-months and beyond.


The iShares S&P/TSX Global Gold Index Fund (TSX:XGD) joins a growing list of TSX gold stocks that are triggering Stock Trends buy signals. Among these are Iamgold Corp. (TSX:IMG), Eldorado Gold (TSX:ELD), Kinross Gold (TSX:K), Barrick Gold (TSX:ABX), and Agnico-Eagle Mines (TSX:AEM). Kinross failed to advance last week, in contrast to the rest of the big cap gold stocks, but it is the first of this group to have a Bullish Crossover. Only 3% of TSX stocks are currently categorized as Stock Trends Bullish, so the addition of every new one should not go unnoticed.


Risk tolerant investors should consider the leveraged gold funds listed on the TSX: the Horizons BetaPro Global Gold Bull Plus Fund (TSX:HGU) and the Horizons BetaPro COMEX Gold Bull Plus Fund (TSX:HBU). These funds deliver 200% of the daily return of the respective underlying bullion and stock funds. More active investors betting on continued short-term performance of the sector can take a more aggressive gold position with these funds.

15-year Trading stats

The Stock Trends TSX Portfolio has been active for 15-years now. Last year was a losing year, with losses totaling about 20% on average investment. Trading activity was low, reflecting the bearish market conditions, and helped avoid the market downturn to some extent. By comparison the S&P/TSX Composite Index dropped 35%. The lifetime annualized return on investment of ST Portfolio, though, remains at 40%.

The following table provides some pertinent trading statistics for the trading strategy:


ST TSX Portfolio Trading Startegy Trade Analysis

Total Gain: $ 240,164 607%
# of weeks: 788
Total # of trades: 419
Winning Trades: 169
Losing Trades: 250
Winning %: 40%
Average # of weeks each position held: 7.5
Average # of positions held each week: 4.0
Average Gain: $ 2,922 29%
Average Loss: $ (1,015) -10%
Average Investment: $ 39,566
Average trade: $ 10,000
Maximum Drawdown (%): -34.2
Largest Gain $: 40,880 409%
Largest Loss $: (3,542) -35%
Maximum losing trades in Succession: 12

Losing Runs Frequency

2 losers in a row: 22
3 losers in a row: 11
4 losers in a row: 9
5 losers in a row: 4
6 losers in a row: 1
7 losers in a row: 2
8 losers in a row: 1
9 losers in a row: 0
10 losers in a row: 3
11 losers in a row: 1
12 losers in a row: 1


Sharpe Ratio: 5.2

Martin Ratio:4.2

Ulcer Index: 9.2

Profit factor: 1.95

Pessimistic Return Ratio: 1.92

More embarrassment for the TSX

The Mickey Mouse operation of the TSX defies belief sometimes. Yes, the impressive trading volume that passes through a modern exchange like the TSX goes without much heralding. Performance, no matter how active the market, is expected. Failure is not. When a market is unable to function properly, even for a short period, it is not acceptable. When it is halted for a whole day - well, that is absolute failure. Gone are the days when you can blankly blame the technology and the people behind it. This is a management problem. After today's failure, heads should fall.

A little sweetener in your portfolio

According to a recent Businessweek table there are some commodity prices that have actually risen in the past year. While wheat prices have fallen almost 30%, the prices of refined sugar are up over 20% over the past year. Some may take this as proper incentive to cut down on fattening sweets and sweeteners, but investors like to follow the pricing power. Not surprisingly, Rogers Sugar Income Fund (TSX:RSI.UN) is showing signs of a change in trend. It is now a Stock Trends Weak Bearish stock and is one of a few encouraging trading opportunities in the consumer staples sector.

S&P/TSX Composite drops below 8,000

It's been 5-years since the S&P/TSX Composite Index scaled the 8,000 level. Today it dipped to sub-8,000, a mark that tells us a bottom has not been found yet. We may be at risk for another 20% slide to the 2002 low. Worse, bullish stocks on the TSX now only number about 5% of trending stocks. This brings us back to the bearish depths of the previous commodity stock bottom in 1998.

UnBearable

The breadth of the bearish sentiment on the TSX now matches that of October 1998 - precisely 10-years ago. The Stock Trends TSX Bull/Bear Ratio has been published since 1993 and is represented in the graph below:

Commodities set to rebound

The dark cloud of financial Armageddon was lifted last week. Or so the market was told. Whether systemic failure was imminent will be left for the historians, but certainly the overlords of the U.S. financial system had a compelling and frightening storyline for the stewards of the American taxpayer. The end result is a massive backstopping of U.S. credit markets by the U.S. Treasury and Federal Reserve, an intervention that seeks to put the financial system back on its feet. The worrisome prospect of a 1930s style bank-run was the picture painted, and the crippling flight at mid-week toward U.S. Treasuries at the expense of money market funds gave Thursday night’s bipartisan bailout commitment the sombre resolution of a nation at war, fighting for its own survival. The stock market breathed a huge sigh of relief. Of course, the sound of the U.S. printing press revving up was sweet music for the recently toppled commodities market. The smell of inflation is in the air –crude oil rebounded above $100 and gold bullion rallied 14% to close at $864.70. The TSX bounced mightily on Friday an astounding 7%! Indeed, the U.S. move is a game-changer – it puts a quick stop in the global credit crunch and opens the stage for a new round of money flow as the consequences – both good and bad -bear fruit.

The dramatic shift in the market that has resulted from this prospective rehabilitation (socialization) of the credit market has traders embracing the short-term volatility. The incredible shift in late-week trading made for some exciting and profitable trades. But now that the house of cards has been cleared and shoved off onto the books of the U.S. taxpayer, what can we make of the current trend situation? Although last week may have ushered in a stock market bottom, there are – as always – lingering questions about the consequences of this government solution. Regardless of whether the bailout costs the American taxpayer as much as it is feared - $700-billion to $1-trillion estimated now, who knows if that is a lowball or exaggerated figure – there will be huge shifts in capital flows as nimble capital market participants deal with this huge shift in financial liability to the U.S. Treasury. Illiquidity triggered the intervention. Renewed liquidity will cap the knees of the greenback. Investors can expect the TSX and other global markets to revive.

The S&P/TSX Composite Index currently remains firmly in Stock Trends Bearish territory. The Stock Trends TSX Bull/Bear Ratio is 0.3, with 60% of trending stocks categorized as (strong) Bearish. That trend picture will not be reversed so easily. The cathartic moment of last Friday will be defining – the tremendous amount of trading is testimony to that. The Sector Select SPDR Fund (AMEX:SPY) recorded over 5.2-million trades last week, just short of the 5.7-million trades the entire Toronto Stock Exchange logged in (which is a considerable increase over its recent weekly average). As an indication of just how wild the market was last week – especially for financial stocks - the SPDR Financial ETF (AMEX:XLF) had over 2.7-billion shares traded! And the turmoil knew no borders. The iShares S&P/TSX Financial Fund (TSX:XFN) had a 326% increase in average weekly trading volume. The tremendous price swing that occurred over a very short period of time, ignited by the panic and frenzy that accompanied the collapse of the credit market and systemic failure of venerable financial institutions, was capped by the white knight appearance of public money. Although this moment may prove to be the bottom for many financial stocks, the Stock Trends barometer tells us to remain indoors. Our trend following approach dictates that others take the lead.

Gold stocks were the winning TSX sector last week. The S&P/TSX Global Gold Index jumped 12.5%, with Kinross Gold (TSX:K) leading the blue chip precious metal stocks with a 22% gain. But the sector has much ground to make up before it triggers our trend interest. With the prospect of a U.S. dollar weakening looking a renewed probability, gold bullion should develop solid price momentum. We should see $1,000 gold soon. The flight to safety last week – U.S. T-Bills were yielding close to 0%! – was an indication of the crisis of confidence that gripped money markets. But the move to shore up the financial system has an almost certain implication – the greenback will lose the shallow footing it had gained over recent months. Commodity inflation appears imminent. Investors will again look for safety in a world where dollar inflation has once again been triggered. Nevertheless, this expectation is not our game. Trend followers must wait for the forces of momentum to build. The gold sector is still down 14% in the last three months and qualitatively in a bear trend. The S&P/TSX Global Gold Index`s primary trend line is flat, so only a sustained move over the final quarter of the year will change that picture.

The epic undoing of Nortel

For even zen-like investors rarely ruffled by reminiscences of painful matters past, this week’s salt on the open gash we all know as Nortel Networks (TSX:NT) is a morbid spectacle. Dropping another 24%, NT has dipped into virtual penny-stockdom - if we measure by its pre-consolidation stature. Recall the 1:10 consolidation of late-2006 and Friday’s close of $8.48 tells shamefully of this once mighty stock. Not to be deceived by meaningless shuffles of the capital stock, the telling score of NT’s colossal fall from power is simply put: NT’s market cap in 2000 made up a whopping 30% of the TSX’s total domestic capitalization. If it were to have the same stature today it would be a $550-billion enterprise - a whole Exxon Mobil Corp away from the $3.7-billion market cap it currently sports. How the mighty fall.

Loonie weakness + gold strength = IGT

If the recession risk in the U.S. heightens, despite the recent Fed easing, investors can continue to build gold weightings in their portfolio. The implication of a weaker Canadian dollar also lends itself to trading the iShares COMEX Gold Trust (TSX:IGT). The gold trust has been outperforming the iShares S&P/TSX Global Gold Fund (TSX:XGD), and represents a more profitable option for Canadian investors as the loonie weakens in a bullish bullion environment.

Canadian Oil Sands Trust

Stock Trends shows a number of energy stocks in Weak Bullish territory, including Encana Corp (TSX:ECA), Imperial Oil (TSX:IMO), and Husky Energy (TSX:HSE). Canadian Oil Sands Trust (TSX:COS.UN) is another. It is recovering and should move back into a Stock Trends Bullish category as it trades above $36. Positive earnings and improved unit distributions will help COS.UN regain its lost ground.

Gold Reserve Inc

Showing signs of a developing intermediate trend, Gold Reserve (TSX:GRZ, AMEX:GRZ) is a new trend trade found in the Stock Trends Weak Bearish camp. The stock has advanced from a low of $3.91 in the autumn and has traded with growing and high volume in recent weeks. Weekly highs for GRZ have been rising in each of the past seven weeks, giving traders a strong pattern as the stock moves through $6.

Fording Canadian Coal stokes

Fording Canadian Coal Trust (TSX:FDG.UN) pounced to a new 52-week high today, jumping to a high of $44.33 before settling back into a 7% gain in mid afternoon trading ($42.74). The positive pop and robust trading volume brings the 35-week Bullish trend back in order.

TransAlta support?

Holders of TSX-listed utility TransAlta (TSX:TA) have reason enough to be disgruntled. The stock has now dropped to the $30 level from its $34 perch, jeopardizing its bullish trend. Some institutional holders are calling for corporate streamlining and asset sales. The Stock Trends Weak Bullish alert last week certainly puts investors on call. But as the stock tests the current support level - the 40-week moving average trend line - traders might look for signals of strength. If TA holds and rebounds off the primary trend line, the stock should benefit from the broad market's turmoil.

Sino-Forest gumption

Canadian forestry stocks have been wet kindling for an eternity. Only TSX-listed Sino-Forest Corp. (TSX:TRE), with its timber harvests in China, has been in our good trend books. The stock has been trending positively since November of 2006 when it first entered the Stock Trends filters as a Pick of the Week at $6.88. Its Bullish trend elevated it to a peak of $26.15 last autumn. TRE faltered in November and amid the January market collapse it has been driven back to its primary trend line (40-week MA). With last week's 11% drop TRE turned Stock Trends Weak Bullish, but it could be in a position to recover from the brutal slip earlier this week when TRE dropped to a low of $15.11 on Tuesday. Today's advance of 4.3% on moderate volume brings the current price back to $18.50. We'll have to see if the stock can gain some traction on the slippery market slopes, but this is a materials stock investors need not give up on yet. A further advance to above $21 will reassure shareholders and help buoy TRE in these troubled waters.

Materials sector still noble

Investors looking for direction in the current market disarray should review the sector trend strengths evident in the exchange traded funds reports posted at Stock Trends. The relative strength of materials stocks, despite the haircut the sector has suffered in recent sessions, is still a steady railing. Toronto Stock Exchange listed funds that stand out currently include Claymore Global Agriculture Fund (TSX:COW), iShares COMEX Gold Fund (TSX:IGT), Horizons BetaPro Global Gold Bull Plus Fund (TSX:HGU), iShares S&P/TSX Global Gold Fund (TSX:XGD), and the iShares S&P/TSX Materials Fund (TSX:XMA). Look for a rebound in these funds as equity markets stabilize. XMA recovered 6.7% today to close at $36.48, sitting perhaps not coincidentally at the ETF's 13-week moving average trend line. Volatility has made this a rough ride, but sticking with the commodity play should be rewarding.