A Comment -- General Comments From an Expert (A Commentary)

Market. Last Monday he warned that the markets were setting up for a correction. S&P just blew through his first level of support at 2700, will probably go down to 2500. The market broke 2700, retraced back to it, but automated program trading was probably the reason the market dropped again to 2650. The 5-year chart for the DOW shows a rising trend with an upward arc off the trend over the past 6 months. He calls that a parabolic move (called a “hockey stick formation”). This kind of trend doesn’t last. The parabolic move is an overbought indicator and the correction brings the market back to the underlying trend. Technical analysts use momentum indicators. One is called RSI, which showed the market as mega-overbought. The market was 12.5% over its 200-day moving average last Many. Historically, the market does not continue to be 10% or more above its 200-day average; it corrects. The market is likely to come back down to take out this excess and then be over and done with the correction within the next couple of weeks. This was a healthy correction. Getting it out of the way now is better than waiting and seeing something worse later. A 4.5% drop is significant, but it is not one of the 25 most significant declines. It is just a corrective day. Dropping to 2500 will bring the RSI back to normal levels and will probably bring a lot of buyers in.

TSX. He pays little attention to the TSX because it is concentrated in three sectors, banks, materials and oils. The chart shows a lid in the mid-1500’s, it is now penetrating that lid and if it stays above it for a little longer, it is likely to rally further.

Relative Strength Index. RSI looks back -- the default lookback period is 14 days. Compare its velocity over these days. If velocity moves too aggressively, and goes over 70, it is overbought. RSI of 70 or 80 is overbought. The RSI recently was over 90. His favorite indicator is the 200-day moving average, which shows the long-term trend. If the 200-day moving average is intact, you’ve got to be long the market. The other indicator he described was a breadth indicator. If more stocks are trading below the 50-day moving average than above, even though the market is still rising, this shows that the rise is supported by less participation on the upside.

Silver. Silver has been in doldrums for past 2 years. Even though silver might rise seasonally at this time, its trend looks negative and so there might not be a seasonal rise this year. Gold has also not broken out and silver will probably not break out before that. Doesn’t own gold or silver.

Today's sell-off. In late-December, the last time he was on Market Call, he said he was a reluctant bull. Now, he's waiting for even more than a pullback. Many reasons for a strong economy, including great monetary stimulus, but enough is enough. It's priced in. We had a great January and the market's been up the past 23 months. But now it's harder and harder to find good ideas. When he can't find a great idea, he goes, Wait a second... No one can predict a top, but he looks for things like Texas Instruments where they had a good quarter, but the stock still goes down. We're close to a top. Wants to see a pullback.

Crypto and cannabis selling off in tandem this week No real reason for correlated sell-off. Coincidence? Not areas he invests in. Prefers companies with cash flow and return on invested capital.

Market Outlook. Today’s market remembers him to 1987. But hopes not. A lot of non-sense is going on the market, like bitcoin or marihuana stocks Some of that needs to be flushed out of the market. It is good for markets to be shaken up a little every so often. The US market particularly seemed expensive. Interest rates being low can justify higher P/Es. But seem expensive considering this year earnings. There is nothing economically wrong with the system. The US is doing fine, Europe is doing fine. But remember 1987 happened when anything bad happened to the economy.

What is the marijuana stocks bottom? The problem in the space is that there is not a lot of information. Nobody indicated what taxes are going to be and how the distribution is going to operate. Investors like him needs that information. He thinks we haven’t seen the bottom yet. Another thing is that legislation he understands says that each individual can grow up to 3 plants in their backyard, so consumers can supply their needs themselves.

Revenues from Marijuana helping the GDP. The numbers are staggering but he would be cautious. Still the Canadian economy is not doing badly. Exporting lots of lumber to the States. Oil exports are significant. Farming is doing OK. The manufacturing sector is OK. The Canadian Market is lagging the Canadian economy probably due to uncertainties regarding NAFTA and lower prices for oil.

What is the impact of raising interest rates on the price of gold in the short term and intermediate term? Gold is a hedge against inflation. From that standpoint gold is a factor. He doesn’t hold gold. Not convinced that inflation is round around the corner.

Market. The 10 year bond yield is probably the one factor that will drive markets in 2018. As it gets closer and closer to 3%, things start to change with respect to relative valuation of stocks vs. bonds. The two year bond is now higher than the stock yield. Inflation is starting to creep up. 2% inflation and 2.7% bonds (10 year) is not a lot of income. Canada is losing momentum against the US. The US dollar is weak right now. The Canadian / Aussie spread is a much better indication of the relative strength of the CAD$ and it is really just holding in there. Look at energy and at the slowdown in housing in Canada, and the US looks better than Canada. He is looking at the consumer and industrial sectors as well as financials, in the US.

Block Chain. We are at a point in the cycle where psychology is getting more and more important. There comes a point where it becomes psychology and people have a fear of missing out. That is the wrong time to look at names. Fear replaces greed and out they go.

Stock Bubble. We won’t know until it’s over that we were in it. The marijuana stocks are an excellent example of it. More and more people are becoming traders rather than investors. When fear replaces greed it is all about safety. There is a lot of liquidity out there. What happens when money exits the bond market after governments bought so much.

Market Outlook The issues that the Stock Market is facing is the question of where interest rates are going. On the positive side you have good global growth. See analyst upgrading earnings estimates for companies. Good global growth and, if inflation is reasonable, it is a good outlook for stocks. People are concern that if interest rates go up a little from here then the equity market would fall apart. He doesn’t see inflation going to 4% or higher but he thinks it is probably to see inflation and rates ticking up a little from here. We will probably see a pullback this year, that we didn’t see last year, and that would be a good buying opportunity. For Canada he sees better commodity prices driven by global growth, helping the market. He sees pockets of value in financials in the US and pharma side and some utilities with good yields. The S&P500 is trading at higher multiples but analysts are not adjusting their forward earning estimates soon enough.

How can we minimize the impact on a portfolio of rising interest rate? Inflation is bad if it goes to 5 – 6% not at 2.5% Same for interest rates. Rates going to 3.25% doesn’t mean that the stock market collapses. Look for great companies that you would like to invest in and if there is a pull back then you could enter at lower prices. If you have a long-term approach high interest rates and inflation represent an opportunity.