New Highs All Around

by Craig on 18/11/09 at 2:11 pm

One, two, three.  During the past three days the S&P 500, Dow Jones Industrial Average and the S&P/TSX Composite have all reached new cycle highs!   So is it onwards and upwards or are there some cracks in the foundation?

TSX Sitting at a Pivotal Point

Canada’s TSX Composite appears to have at least pierced the double top resistance level of 11,650 we highlighted last week in our report (Critical Resistance Level for TSX). Earlier in trading the TSX reached a new high of 11,702, but has since dropped back down into negative territory. We continue to believe closing above the 11,650 level is crucial to extend this rally.  Breaking the 11,650 level then finishing well below is not a good sign.  From a market breadth perspective, 65% of the constituents of the TSX are above their 50-day moving averages (Market Breadth Report).   This is a bit of a weak reading to be confirming new highs. The next few trading sessions will prove critical for the TSX.

Our current thinking on the TSX: If we see a retracement lower, to the 11,300 or 11,400 level, we would consider shorting or reducing exposure to the market. If the market closes above 11,650 either today or later this week, we would be adding to our long TSX position via the XIU.

S&P 500 has some issues

While the S&P 500 has reached a new high for this cycle, there are a few areas of concern. A very positive earnings season has come to a close and now the index must rely more on economic data.  Case in point, the U.S. market is down today mainly due to some weak U.S. Housing data and a bit higher Consumer Price data. Market breadth for the S&P 500 is sitting at 68% which is not very strong for making new highs. But the larger concern is the dramatic underperformance of small capitalized stocks in the U.S. market relative to large capitalized stocks (chart #2). Ideally when reaching new highs for the major indices, we would prefer to see the broader market following more closely, not lagging behind.  

Our current thinking on the S&P 500: We would be aggressive in using stops 2% below current levels.  Don’t want to watch these gains dissipate as they did in October. Also next Tuesday we have consumer confidence readings which sent the market into a tizzy last month.

Past Trade Updates and links to original reports:

iShares TSX 60 (TSX:XIU) – Raising our Stop Loss Once Again. We are moving our stop loss up from $16.75 to $17 for our XIU position opened November 2nd. (TSX Sitting on the Edge).

 Horizons USD Bear (TSX:HDD) – closing this position out as the U.S. dollar does not appear overbought anymore and this was viewed as a short term trade. (US Equity Currency Hedging)

iShares S&P 500 Hedged (TSX:XSP) – putting a stop loss on this position at the $12.50 level.  (US Equity Currency Hedging)

Updated Table