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Stock Trends

A short-term bet for Canadian blue-chip bears Add to ...

The Stock: Horizons BetaPro S&P/TSX 60 Bear Plus Fund

Recent price: $9.04

The trend

A tough spring for equities is behind us, but the market’s future beyond the summer months may be even more dismal. There is no glossing over the current picture: The number of TSX stocks burdened by downward trending prices has begun eclipsing those still hanging on to long-term bullish trends.

Since the Stock Trends indicators were first published by The Globe and Mail almost two decades ago, there have been seven occasions, prior to the current one, when the trend distribution of the Toronto Stock Exchange has dipped toward a bearish weighting after a significant bullish trend distribution (periods where bullish trending stocks outnumbered bearish ones by a ratio of at least 2 to 1).

Most of these bearish backwash moments proved to be doorways to periods of market losses: Spring 1994, Autumn 1997, Spring 2002, Spring 2004, Spring 2006, and Summer 2007. However, last summer also brought about a flushing of the bulls, only to have the market promptly recover. Nevertheless, the current rate of attrition among bullish trending stocks on the TSX is a dark cloud in this year’s summer sky.

Also worth noting is a divergence of the TSX’s trend distribution from that of U.S. equities. On the New York Stock Exchange, bullish trending stocks still outnumber bearish ones by a margin of 2.4 to 1. The ratio is only 1.4 to 1 on the Nasdaq, but over all, U.S. equities are holding their bullish long-term trends much better than the resource-heavy Canadian stock market. Canadian investors should consider either investing in defensive U.S. sectors, or take a bear market position on the TSX.

The trade

With the exception of a brief pause in the summer sun last year, Canadian blue chip stocks have enjoyed a pretty good ride since the S&P/TSX 60 index turned Stock Trends Bullish in mid-2009. But over half of stocks in the group are now struggling with either bearish trends or have retreated below their still upward sloping trend lines. The materials and energy sectors account for about 48 per cent of the index, so the retreating commodity trend lines have been a real setback for the index.

Also dragging on the index are financials, which account for 30 per cent of the S&P/TSX 60 index. The big banks looked good for further advances along their bullish trends in the spring, but have since turned in an uninspired performance. The end result of withering share prices in these critical sectors: the blue chip index is about to turn Stock Trends Bearish, so trend-following investors can take their cue to exit, or perhaps – more boldly – short the index with the Horizons BetaPro S&P/TSX 60 Bear Plus Fund, an inverse fund that moves up when the market moves down.

The upside

The underlying index is technically at risk of retreating to the level it hit a few weeks ago – which would translate into a 7-per-cent advance for this bearish ETF.

The downside

A leveraged fund like this should usually be considered only as a short-term trade; it carries risk that makes it an unsuitable investment for many investors. A sudden resurgence of commodity stocks or financials would hit hard and fast. Dips back to the $8.25 area should turn the knuckles pale.

 
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