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Portfolio Strategy

Where to hunt in an aging bull market Add to ...

There’s still time to make some money in today’s bull market.

Energy, materials and gold stocks tend to do well in the late stage of a bull market, veteran technical analyst Ron Meisels says. Stocks on his recommended list include Husky Energy, Yamana Gold and Endeavour Silver. “Numerous investment opportunities still exist at reasonable prices,” he said in an e-mail to clients of his firm, Phases & Cycles Inc.

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It may come as a shock to some investors that the term bull market has been used to describe the past three and a half years. According to the analysis firm Investor Economics, there’s $1.1-trillion in assets in Canada sitting in safe investments earning little or nothing. But Mr. Meisels says we have indeed been in a bull market since the post-crash lows hit in March, 2009, and now that bull is getting old.

Let’s map out the next few months according to Mr. Meisels’ analysis, which largely sets aside what central bankers are doing or the level of corporate profits. As a technical analyst, he pays attention to price and volume moves for stocks and indexes.

Mr. Meisels said a stock market pullback is possible this month that would take the Canadian and U.S. stock markets down roughly 4 per cent from this week’s levels. In round numbers, that would mean about 12,000 for the S&P/TSX composite index, 1,380 for the S&P 500 and 13,000 for the Dow Jones industrial average.

From there, he sees a final move higher by the S&P 500 to roughly 1,550 by the end of the first quarter, 2013. His target for the S&P/TSX composite index is 15,000 by the end of the second quarter of next year. “Usually, Toronto lasts a little longer than New York. If New York tops out in March, then Toronto would often top out in May or June.”

Mr. Meisels said the bull market will end “when everybody is once again convinced that we’re in a bull market.” By that reasoning, the recent announcement that investment dealer Canaccord Financial will close 16 branches in Canada can actually be seen as good news for stocks, if not for investment advisers.

The stock markets have risen steadily in the past three or four months, but many individual investors haven’t shown much inclination to take on more risk in their portfolios. What could get them into the stock market? Mr. Meisels listed three possiblities:

A comprehensive bailout package in Europe that calms markets.

An agreement in the United States that would avoid the “fiscal cliff,” which refers to tax increases and spending cuts that will automatically kick in at year’s end unless politicians can agree on adjustments.

A sharp decline in the bond market, which would rattle the many investors who hold big positions in bonds and bond funds.

Market bottoms are easier to spot than market tops, Mr. Meisels noted. Check out a five-year chart of the S&P/TSX composite index or the S&P 500 and you’ll see a clear “V” pattern in March, 2009. A market top can take longer to become apparent, which means investors venturing into the market now need to think about managing gains and losses. Consider using stop orders, where you have your broker put a sell order through when a particular stock either rises or falls to a pre-set level.

Mr. Meisels’ forecast for the Toronto market is notable because there’s so much more upside than in the U.S. market, which has outperformed for the past two years or so. It suggests there may still be some satisfaction for investors who have over-weighted Canada in their portfolios and missed out on big U.S. returns.

In highlighting stocks for his clients, Mr. Meisels distinguishes short-term trading ideas and longer-term investments. We’ll look at his investment ideas here, with the proviso that they are not necessarily ideal buys right now. Rather, they’re stocks that stand out for showing technical trends that suggest some upside remaining.

The commodity stocks that account for about 45 per cent of the S&P/TSX composite index will propel the expected final kick higher for Canada’s stock market. In addition to Husky, Yamana and CCL, stocks Mr. Meisels is watching in these sectors include Cenovus, Mullen Group and Alamos Gold. U.S.-listed stocks he’s watching include Chevron, Exxon Mobil and Total SA.

The biggest sector in the Canadian market by size is that of financials, which Mr. Meisels considers to be momentarily sidelined based on his technical point of view. “All of these stocks could break out if there is a monetary or economic change that would induce people to pay up for them.”

Financial stocks he singled out for having no apparent upside right now include Power Financial, IGM Financial, Industrial Alliance Insurance and Financial Services, and AGF Management. Insurers, which never recovered from their financial crisis lows like the banks, are in a phase that Mr. Meisels calls base-building. “It’s too late to sell them, but maybe too soon to buy.”

If you’re an investor who has found refuge in bonds and guaranteed investment certificates lately, take a cautious approach to getting into the stock market right now. Stick to broadly based exchange-traded funds or mutual funds rather than specific stocks and consider making a series of gradual monthly purchases rather than a big lump-sum investment.

Academic studies show lump-sum investments generate better returns than a series of gradual moves into the market. But if you edge back into stocks, you’ll have less on the line if the bull market ends sooner than expected. Remember this: Nervous investors losing their fear of stocks is exactly the sign of a market top that Mr. Meisels is looking for.

For more personal finance coverage, follow me on Twitter (rcarrick) and Facebook (Rob Carrick).

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