Technical analysts are hailing a golden cross formation – when the 50-day moving average moves above the 200-day moving average – as a sign that U.S. markets are set to rally sharply. There’s only one problem – the golden cross doesn’t work as an indicator of future performance.
In a report from Reuters: “The golden cross is far from a bulletproof signal. According to Sam Stovall, chief investment strategist at CFRA Research in New York, using a ‘golden cross’ strategy yielded a lower return than the compound annual growth rates for the Dow and small-cap Russell 2000 index since 1990.”
Finance is full of these investor ‘hacks’ – simple rules that allegedly lead to dramatic returns – because the audience is huge. Faced with the complexity and seeming randomness of market activity, the idea that one single indicator is all that’s needed becomes as attractive as a miracle diet pill to someone trying to lose weight.
Technical analysis (which I do believe is helpful, but primarily for finding entry points only after fundamental research uncovers a compelling investment) is rife with buy and sell signals with dubious long-term results, but there are many non-technical indicators like single insider buy and sell transactions that might provide hints, but are far from foolproof.
Merrill Lynch has shown that professional portfolio manager sentiment can be a useful indicator – but in reverse. Merrill’s quantitative strategist Savita Subramanian uses a proprietary sell-side indicator that has proven effective by selling equities when portfolio managers get overly bullish.
What about buying cheap stocks, that has to work right? Sort of. Ms. Subramanian’s exhaustive study on the effectiveness of valuation-based investment strategies found that over 10-year periods, investing in attractively valued companies was by far the most effective strategy. However, valuations were proven to be very poor indicators of short-term stock performance. In other words, value strategies are effective, but investors have to wait the full decade afterwards to benefit.
Simple rules for investing (and I would distinguish these from broader concepts like diversification, which has been proven successful) don’t work because they can’t, at least for any longer periods. If golden crosses were bulletproof buy signals, for example, then algorithms, acting far more quickly than any individual investor could, would immediately bid markets prohibitively higher any time the signal was triggered.
The temptation to follow simplified trading rules is understandable and strong. But investors acting on any advice must research the strategies’ performance history with a skeptical eye, knowing that if it really worked, everyone would have gotten rich doing it already.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Pizza Pizza Royalty Corp. (PZA-T). Tempted to feast on Pizza Pizza Royalty Corp.’s 8.5-per-cent dividend? Remember the old saying: There’s no such thing as a free lunch. Back in August, after Pizza Pizza’s same-store sales had fallen for a fourth consecutive quarter, John Heinzl sold the shares (PZA) personally and in his model Yield Hog Dividend Growth Portfolio. Since then the company’s troubles have only deepened, as same-store sales skidded 0.8 per cent and 2.1 per cent in the third and fourth quarters, respectively. For Canada’s largest pizza chain, the competitive landscape has rarely been so challenging. The proliferation of third-party delivery apps such as SkipTheDishes and Uber Eats, growing competition from U.S. pizza giants Domino’s and Papa John’s and a fast-food consumer hooked on discounts have all contributed to Pizza Pizza’s woes. So far, management’s efforts to stem the slide haven’t worked. John Heinzl reports (for subscribers).
CannTrust Holdings Inc. (TRST-T). There are five cannabis stocks on the positive breakouts list (stocks with positive price momentum) and this is one of them. The company is currently profitable with an explosive earnings growth forecast. Looking ahead, the Street is anticipating the company will report EBITDA (earnings before interest, taxes, depreciation and amortization) of $50-million in 2019, $88-million in 2020 and $130-million in 2021. Earlier this week, the stock was added to the S&P/TSX composite index, broadening the company’s shareholder base. Founded by pharmacists, Ontario-based CannTrust is a licensed marijuana producer with operations in Ontario. The company has marijuana supply agreements with nine provinces. Jennifer Dowty reports (for subscribers).
Vanguard plots next disruption to Canadian investing: Cutting the cost of advice
Vanguard Group Inc. last year introduced a breakthrough product that slashed the cost of a simple buy-and-hold balanced portfolio to a new low in Canada. Now, the exchange-traded fund giant is preparing for its next disruption: the cost of advice. Clare O’Hara reports (for subscribers).
Federal government looks to quash tax loophole for ETFs in new budget
The federal government is moving to close a loophole that allows investors in certain exchange-traded funds to defer taxes, but the main provider of the products says it’s too early to know what the eventual impact of the proposed legislation will be. One of the government’s main targets is believed to be swap-based ETFs – also known as total return ETFs. These complex products don’t hold any securities directly but deliver the same performance as an index through an agreement – called a total return swap – with a financial institution. The structure is popular in non-registered accounts because no dividends or interest are received and no income taxes are payable until the units are sold, at which time the investor’s total return is taxed advantageously as capital gains. John Heinzl and Brenda Bouw report on what this all means (for subscribers).
Bond market sends scary signal about where Canada’s economy is heading vs. the U.S.
The bond market is telling an ugly story about how Canada’s economic outlook compares with that of the United States – one of the ugliest stories in three decades, in fact. The difference between the yields on 10-year government bonds in the two countries has recently swelled close to its largest level since 1989. There are various ways to interpret this growing gap, but one reasonable explanation is that investors see considerably stronger prospects for growth in the United States than in Canada. The increasing spread reflects the precipitous decline in Canadian bond yields. In early October, a 10-year Government of Canada bond was yielding a hair under 2.6 per cent. Today, it is paying just more than 1.7 per cent. Ian McGugan reports (for subscribers).
Capitalizing on share buybacks may be a fleeting trend. Here’s how to take advantage now
Stock buybacks in the United States hit a record level in 2018 and some legislators in Washington are not happy about it. Companies repurchased more than US$1-trillion worth of shares last year, in part using profits produced by the Trump administration’s big corporate tax cut. That number has angered some U.S. politicians. They expected the tax savings to be plowed back into the economy through increased business investment, job creation and higher wages. Instead, a lot of those forgone tax dollars have been used by companies to buy back their own shares. Gordon Pape takes a look at some exchange-traded funds that try to capitalize on this buyback trend.
Federal budget 2019: Liberals offer some help in resolving one of the country’s biggest personal-finance challenges
The affordability of houses for first-time buyers has somehow become one of the country’s biggest personal-finance challenges. The Liberal government has produced a full life-cycle budget – help for students, for young home buyers, for Gen Xers thinking about buying electric cars and for retirees and those looking ahead to retirement. But the measures for first-time buyers are what really stand out on the personal-finance side. One of them, the First-Time Home Buyer Incentive, looks helpful in a preliminary way. Important details, notably on repayment terms, will be released later this year with a planned September, 2019, start date. What we know so far is that a fund administered by federal agency Canada Mortgage and Housing Corp. will provide 5 per cent of the cost of an existing home and 10 per cent of a new home to qualified buyers through what amounts to an interest-free loan repayable when the mortgage is repaid. Rob Carrick reports (for subscribers).
Others (for subscribers)
Others (for everyone)
Ask Globe Investor
Question: May I ask what your interest rates are for tax free savings account (TFSA)? This saving would be used by the fall of 2020. What is my best option for this length of time?
Answer: We do not have a specific interest rate for TFSAs. Generally, TFSAs can invest in various financial securities, such as GICs, mutual funds, Exchange Traded Funds (ETFs), stocks, bonds etc. It is the return on the mix of investment(s) you choose that would determine the rate of return. The increased value of any investment made inside the TFSA is not subject to taxation. As well, any income, be it interest or dividends, is not taxed either. The negative to that is if an investment decreases in value inside the TFSA, the capital loss is not deductible from capital gains declared outside of the TFSA.
Since you have a specific and relatively short timeframe when you will need the funds, I suggest you keep your investment choices quite conservative, and get professional advice to make sure your capital is protected.
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What’s up in the days ahead
Equity markets are closely following the path of inflation-adjusted bond yields and the relationship highlights the extreme influence of the Federal Reserve and the Bank of Canada on the 2019 equity rally. Scott Barlow will explain.
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Compiled by Gillian Livingston