I HATE roller-coasters of any kind. It looks like the 2015 stock market may have started the new year by jumping on one. It could be a short ride or turn into a very long nasty ride. My stomach never seems to get use to them. Unfortunately, you are never sure when the ride is going to be over. I used to try trading the ups and downs when I was young. However, at my age, I can’t afford losing money plus watching my portfolio drop 30% to 50% is just too gut wrenching. The last major crash took three years to recover. The dot-com bubble took even longer, no one knows if 2015 has started with a minor correction or is heading towards a crash.
Extreme volatility is not a good sign. The bears and the bulls are in a bitter battle. The inter day price movements have become even more erratic lately with big point swings in the U.S. markets during the trading day. An up swing during the morning turns into a big downward reversal in the afternoon. This is a warning sign along with a massive rush to bonds. The U.S. ten-year bond is my fear gauge, a lower yield equals more fear. The yield went from 1.92% on Monday to 1.82% on Friday. That doesn’t seem like much of a drop but takes a lot of buying to move the yield. It was much lower during the week.
Ten day chart of the S&P 500, that is one bumpy ride!
The biggest benefit of lower oil prices is the transportation industry. The fast money has made big profits in transportation stocks from Oct to Dec. Are they getting out? The spider sector EFT (xtn) has being falling in 2015 faster than the S&P 500.
Where is the fast money going? Would you be surprised to know that the best performing sectors in 2015 was the consumer staples (XLP), health care (XLV) and utilities (XLU).
In previous posts, I talked about protecting my portfolio by increasing my cash position. My U.S. cash is now worth 3% more, thanks to the fall in the value of the Canadian dollar. The lower Canadian currency has also protected my U.S. investments, which are up 1% for the year in Canadian dollar terms,despite the S&P being down 2%!
I love living in Canada but is it time to sell? I see big trouble ahead for the next few years. Our stock market has a 50% weighting in energy and materials, two sectors that will be slow to recover. Our financial industry is going to be affected by slow growth, a slowdown in housing and bad loans in the oil patch.
The Canadian business media experts point to the fact that a lower Canadian dollar should help our manufacturing sector. Yet, Magna which manufactures car parts, dropped 12% this week after reporting lower revenue expectations for 2015! Bombardier which manufactures airplanes, just laid off 1,000 workers and the stock lost 25% of its value in one day. How low does our dollar have to go?
The Toronto market was up 267 points on Friday. Mostly due to a snap back in oil future prices which could give you some false hope. However, the U.S. markets are closed on Monday, if I was short oil futures, I would have covered yesterday along with other short sellers driving prices higher! Why cover a short position? Because you never know, an oil producer could easily announce a production cut over the long weekend.
The chart below is the Toronto market in 2015 (I-shares XIC) compared to the S&P500
One last point regarding the Canadian economy. The drop in our currency will make buying imported goods more expensive which will off-set a large portion of any gasoline savings. (Target is closing all its Canadian stores) Sorry Canada but more of my investment dollars are leaving the country.