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Chrysler employees assemble cars at the assembly plant in Brampton, Ont. Jan. 7/2011.

Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail

'Tis the season to buy a new car. Lots of Canadians are thinking that way if the size of the crowds attending the Canadian International Auto Show over the weekend is the measure. The show runs until Sunday.

One of the reasons for the strong interest in new cars this year is the aging fleet of automobiles on the road. In the U.S., the average age of a car is 10.8 years. The average age in Canada is similar.

Traditionally, spring is the best time to buy a new car. Consumers wait until salt-crusted roads are swept clean and their credit card bills from Christmas have been whittled down. The auto industry gears up by offering "auto show specials."

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The first quarter of each year traditionally is the biggest quarter for auto sales and auto stocks. The Automobiles and Component Industry on average has gained 11.0 per cent per period during the past 20 periods from the first week in March to the end of May.

What about this year? Demand for new cars is growing rapidly in North America and the Far East, particularly in China and India. Demand in Europe is declining. Profitability of the industry is escalating. Last week, General Motors reported record fourth-quarter profits.

On the charts, the auto sector has a positive technical profile. Intermediate trend is up. The sector trades above its 50-day moving average. Strength relative to the S&P 500 index has been positive since the end of December. Short-term momentum indicators are overbought, but have yet to show signs of peaking. Preferred strategy is to accumulate exchange traded funds and equities in the sector at current or lower prices.

Investors can own the sector through two exchange traded funds, the Global X Auto ETF and First Trust NASDAQ Global Auto Index Fund . VROM holds 50 securities. CARZ holds 32 securities with a greater concentration on auto producers stocks than on auto component stocks. Management expense ratio for VROM is 0.65 per cent. Management expense ratio for CARZ is 0.70 per cent. Average daily volume in both ETFs is relatively low.







Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. . Daily reports are available at www.timingthemarket.ca/. He is also a research analyst for Horizons Investment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management.

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