Despite months of rising markets, the bears have found it increasingly difficult to change their tune. If one wondered if there was yet another excuse investors could find to be negative, the political circus filled this void perfectly. Doom-and-gloom preachers reappeared just in time to help induce a small correction from mid-September to early-October. However, as anticipated, the maturation of the 105-day cycle put an end to the correction. Not only were the distance objectives reached, but the cycle low also arrived on schedule near the projected October 11th maturation date. Not bad for what some call a “tea leaves” exercise.
The markets certainly provided us with impressive action as we entered into a new 105-day cycle: The DJIA immediately rallied 324 points and was followed by another up-day. This all happened despite the threat of the US default and the abundance of “financial Armageddon” scenarios in the media. Such strong behaviour in light of political chaos is a classic bull market at work.
Action in Toronto.
For the last two years, while the U.S. indices have been reaching new highs, the S&P/TSX Composite Index has been locked into a horizontal trading range with the ceiling at 13,000. During this time, we have said repeatedly that Toronto is most likely to come alive in the final upleg of this bull market (Leg 5). Such a breakout has now occurred and it puts the Toronto market at the forefront of this bull market.
The DJIA and S&P 500 may take a back seat. In fact, many leaders of the previous up-legs (Legs 1 and 3) may well slow down and underperform the market making way for new leaders to fill the gap. Therefore, stock selection will become vital. The first signs of market segmentation are already visible in many stocks. For example IBM (IBM-N; a leader in Legs 1 and 3), has recently violated its 200-day Moving Average and started a new downleg, as we predicted (see IBM-4, September 13, 2013). On the other hand, stocks such as Bombardier (BBD.B-T) or Suncor (SU-T) are just joining this bull market. They may well become the leaders of the final up-leg.
There are many investors who worry that “it is too late to get in”. Two areas of the market where investors may find plenty of buying candidates are in the Energy and Technology sectors. Both sectors have underperformed the market in Legs 1 and 3 and both have a large number of stocks with massive, multi-month base patterns which, if confirmed by breakouts, could produce significant gains.
In sum, the market has not only shown an impressive resilience during the political commotion but has also responded well to the forces of a new cycle. It all bodes well for the market going into the festive season. Some back-and-forth activity is still an option for a while, as the new 105-day cycle evolves, but technical and cyclical evidence points to higher targets for both New York and Toronto. The latter, in particular, should take over the bullish torch from its U.S. counterpart and run with it until the end of this bull market.
Investors, however, shouldn’t stay complacent. It is time to review portfolio holdings very carefully. Take profits in some tired names (leaders of Legs 1 and 3) and inject some fresh blood into portfolios. Watch for our upcoming reports and additions to our List of Trade and Investment Ideas.