Money Show 2014 - Donald Dony

Donald Dony is the principal of D.W. Dony and Associates Inc. out of Victoria, British Columbia. His website called Technical Speculator is here. He provides a free newsletter. His presentation today is called "Beyond Fundamental s: How to Analyze the Markets with Economics and Key Intermarket Ratios".

Investors need to look at the big picture. Economics are important. Also the price of the US$ is important. What he will talk about is section rotation, key ratios and putting it all together.

Over the long term we need to know where we are in the stock cycle and if economics is improving or declining. Over the short term we need to know the trend in the stock market, the relative price of the US dollar (i.e. US$ index), sector rotation and the position of the US yield curve.

The current big, big picture is that the market appears to be in another 1980 to 2000 style stock cycle. This started in 2013. From 2000 to 2013 we had an up commodities cycle. When commodities are strong than stocks we have a commodities cycle. When stocks are strong than commodities, we have a stock market cycle.

When we have commodities cycles, there are bigger drops in the stock market, like 40% drops. When we are in a stock cycle, there are smaller corrections. The US$ index goes down in a commodities cycle and up in a stock cycle. US$ index (DXY) is going up and commodities are going down currently. The Base Metals Index is dropping and the US$ is going up. The same thing is happening to the price of oil.

With a Secular Stock Market Cycle you have:

• Extended economic or business cycles and Bull markets,
• Lower volatility (with corrections less serve and of shorter duration),
• A stable or riding US$,
• Stocks will outperform commodities and
• Low Inflation.

With a Commodities Cycle, you have

• Deeper stock market corrections and the stock market will move sideways,
• Great Volatility,
• Higher probability of inflation,
• Declining US$,
• Commodities will outperform stocks and
• Shorter bull markets and business cycles.

At present we are in an extended business cycle and extended bull market. The current yield curve is good (i.e. it is going up). This is a normal and healthy yield curve. See Investopedia for information on the yield curve.

The US unemployment claims trend goes in the opposite direction to the S&P500. With US GDP, there is a significant low approximately every 5 to 6 years. The next low should be in 2015. Canada gets a low GDP growth rate every 5 to 6 years also. Some GDP low growth rates are a lot lower than others. The stock market follows the GDP, so if there is a drop in GDP growth, we should have a following bear market.

The last dip in the GDP was in 2010. So we will probably have the next one in 2015 or 2016. Currently US consumer confidence is at above the 6 year average. Canadian consumer confidence is going up. US housing sales are higher than average, but not in a bubble like in 2005. The stock market looks like it did in 1980.

The 5 to 6 years business cycle is nearing completion. A shallow low is expected in 2015. The past 2 years of fall commodities prices reinforces the stock market cycle. The TSX will perform worse than the S&P 500 because it is full of resource stocks.

The consumer staples sector is starting to outperform the Consumer Discretionary sector. This is a leading indicator. We will not see new highs in the S&P 500 in the short term. A shift into consumer staples is a change in consumer spending. Consumers are buying more of what they have to buy and not what they want to buy. Fr example Metro Inc. (TSX-MRU) is a consumer staple stock and it is making new highs.

The stock market is in a secular advance. This is based on 135 years of data and the average secular advance lasts 18 years. This cycle started in 2013. The commodities cycle has ended. The US economy is expected to rebound in 2015 and this is positive for the US$.

He believes that within the secular advance, the bull market and business cycle appears to be mature. These cycles last for 5 to 6 years, so there should be a low in 2015. The TSX is expected to underperform the S&P 500 because of the commodities stocks in the TSX.

Sites that might be of interest are Trading Economics and Stock Charts.

(Note that if anyone remembers the first bear market after 1980, it was a doozy. The market fell some 50% between 1981 and 1982.)

On my other blog I am today writing about Brookfield Asset Management (TSX-BAM, NYSE-BAM) ... continue ...

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

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