Stay on your toes

Leon Tuey's TSE Momentum Index (or the Tuey Special, as I like to call it) was, as usual, right on the money. A buy signal is given when the TSE is down 10% or more from exactly where it was one year ago. Then you wait two months and buy.

At the end of last August, the Index stood at -16.4%. Wait two months, which was the end of October, and you know what happened then. Leon was even written up in Barron's.

Now that we've had a buy signal, we have to start looking for a sell signal. That will be given when the TSE is up 30% or more from exactly where it was one year ago. Note that I said 30%, not 10%. It's down or -10% for a buy signal, and up or +30% for a sell signal. Here, for the next six months, are the levels that the TSE will have to reach in order for it to be up 30%.

So, if you see the TSE at any of these levels at the end of any of these particular months, you will know that the market is high-risk and that you had better consider taking defensive measures within your portfolio.

Now, Leon would be the first to tell you that you have to look at more than the Tuey Special. The time of year is important: between May and October is traditionally a poor time to be in the market, whereas, between November and April is traditionally a good time for stocks. You should also consider what the other indicators are telling us. Are they over-bought? Are they giving sell signals?

Let's look at the current situation. On January 8, 1999, the New York Stock Exchange Composite Index made a new all-time high which was confirmed by a new all-time high for its volume line. One week later, the Nasdaq did the same thing. Nothing wrong with any of that.

On January 8, the volume lines of the TSE 300 and 35 made all-time highs and did so again the following week. That's telling us that the indexes are also going to make new highs down the road. The last weekly high for the TSE 300 was 7,765.75. That's just over 1,000 points from where it was on January 15. Now glance back at those TSE levels and you'll see that March and April come pretty close. That's just about when the market enters the poor time of year, isn't it? Hence the old adage "Sell in May and go away." If the TSE is up there, be careful!

At the moment, the market has some short-term problems, which might be useful for those wanting to add to their holdings. The RSIs are, for the most part, up in the high 70s and 80s. The Nasdaq's is at 98%! In other words, the indexes are over-bought. The sentiment is also excessive. The Bullish Advisory Services have been above the 55% mark for the past 10 weeks and over 60% for the past two. I don't remember seeing a string that long in a long while. The only saving grace is that the Bears have remained around the 30% level and have steadfastly refused to throw in the towel and drop down to the 20% area which would be a very real danger signal. So, I think you can expect some weakness until the RSIs and Bulls back off.

In any event, the volume lines on both sides of the border have not only been confirming but also leading the indexes up. That, coupled with the fact that the Tuey Special was -3.2% (a long way from +30) at the end of December, makes me think we have a whole lot to worry about at the moment.

Toronto is, to a very large extent, a resource market. We can get a reasonably good idea about what natural resource stocks are likely to do by looking at the commodities.

Gold's volume line gave a buy signal back in August last year. While the price has not come back to a new low, it doesn't appear to be in any hurry to rally and the volume line is beginning to lead down. So, at best, the yellow metal is in limbo for the moment and so are the stocks.

The volume lines of copper, crude oil, and natural gas are still making new lows and the stocks have accordingly been unable to make much headway. Lumber began to rally at the beginning of last October without the benefit of a buy signal. Now the RSI is over-bought at 79%, so it's not likely to get too much farther. The performance of the "trees" (lumber and paper stocks) has been lacklustre at best.

If we could just get these commodities to turn around, we'd probably have a pretty good run by the TSE. That may be in the cards but I don't see it yet. At the moment, it's still an interest-sensitive and technology game.

Copyright Canadian Shareowner Magazine Inc. Mar/Apr 1999
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