I recently posted an article about the Canadian sectors showing up as a predefined page on both the CandleGlance view and the sector PerfChart view.
I received a reply asking about the cycle line on the perfchart and how to use it. It can be a significant help in pointing us to where the market outperformance will migrate to next. Thus the reference to Wayne Gretzky. He wanted to skate to where the puck was going to be. As investors, we want to do the same and look where the market is likely to be moving to next.
First of all, here is a link to the Chartschool article about PerfCharts. PerfCharts. This will open in a separate window.
If you click on a PerfChart from the free charts tab, it comes up in line mode. You have to select histogram mode on the bottom left. Now lets talk specifically about the cycle line overlay that can be applied by 'right-clicking' on the chart and selecting 'Show Cycle Line'.
This puts the yellow cycle line on the chart. Now you can slide it sideways as you wish to make it a best fit.
Here is where I think it currently fits best.
This orange box area is generally regarded as sectors related to growth. The right side is generally regarded as sectors related to defence like Consumer Staples and Utilities.
The economy generally follows this left to right order. Over an 4-5 year market cycle each sector usually has its time to rise and shine. As well, on a very long term secular cycle, each sector rises to the fore. You may remember the major exuberance of the commodities in 2008. A good example of the major strength of commodities at that time. So currently, based on the 3 month period, the growth sectors for Canada are not outperforming the SP500 (It is grayed out on the top left so everything is relative to the SP500). In simple English, the SP500 is the biggest broad average of the large cap stock market. By comparing each sector to the SP500, we can see which ones are outperforming and which ones are under performing. By investing in outperforming sectors, we have a better chance of beating the index. Our Healthcare sector is currently doing best with Valeant having a good run and Consumer Staples/consumer discretionary are up with the Weston merger activity kicking things up.
So if we were to really start performing in growth sectors that would be very bullish. We could shorten the timeline (bottom right) to one month and watch closely for changes. The breakout in Mullen and the upturn in Transforce are bullish and may be clues we should start to see consumer cyclicals turn up next and the health care and utilities underperform.
Then the Information Tech and Industrials start to outperform etc. etc.
So this left to right process takes place and then goes from the far right and starts back on the left hand side. You just keep sliding the cycle line to see what should start rising next and then start to watch that sector.
Currently, the Federal reserve is concerned about deflation and the commodities (Materials) histogram shows the problem. Vast underperformance. September is seasonally good for materials and energy, so we'll see if they can start turning higher. $Copper made its first move above the 50 DMA last week so that could be the start of something better. Unfortunately for $Copper, every time it starts to gain and gets above the 50 DMA, it has rolled over and went down to even lower lows almost every time since March 2011. Eventually bear markets end!
By setting the timeline on the 200 day setting, you can go back and see how the market turned all through 2006,2007 and 2008 in a big picture way. You can also do this with the US Sectors as well. As a mutual fund manager, you will use long term settings. As a trader, you will use shorter term settings. Feel free to let me know if this article was helpful!
Good Trading,
Greg Schnell, CMT
