Monthly Market Chit Chat

Monthly Market Chit Chat October, 2021

By David Cox, CFA, CMT, FCSI, FMA, BMath

Portfolio Manager COX DAGGETT ADVISORY GROUP

Most of you know that a lot of music gets made in our household and we’re back in full swing with piano, violin and drums audible most days at our place. Music has been important to me for most of life and hearing the kids develop their own talents is extremely rewarding. I’m now content to know that it’s easier for me to have one of my son’s learn to play a Bach Fugue for me than to pretend I could master it myself! Eloise, 7, and I continue to take violin together and we’re playing lots of the “Twinkle, Twinkle” variations, recently even playing with our eyes closed to master our “feel”. Despite all the letdowns from COVID restrictions, three of the kids are playing hockey this fall, which started last week. So great to get some ice time! And Iko, 17, just signed up for an indoor soccer league (and is finally learning to drive), all of which keeps us busy driving around on any given night! The News - Headlines Canadian election – other than lost time for politicians to actually work during the run-up and the cost to run the election, nothing changed. Evergrande, the Chinese property company, teeters with over $300 billion in debt. Economy rebounds in Canada amid wider business reopenings. Fidelity’s Wolf sees Bank of Canada forced into early (interest rate) hike. Ontario universities struggle to control growing number of rowdy weekend parties. Canadian companies delay return to office amid Delta variant concerns. Port of Vancouver sends record numbers of empty shipping containers to Asia. The Bottom Line The U.S. stock markets continue to dominate the global scene from a relative strength standpoint (see Chart of the Month) and while a short-term correction is underway, the long-term trend remains upwards. We are just about into the bullish, most positive time of the year, seasonally for the markets which tends to run from October through May. The Bigger Picture Finally, the market has succumbed to some selling. We have fallen below the 13-week moving average and have a more pronounced weekly MACD sell signal. In the

Monthly Market Chit Chat David Cox, CFA, CMT, FCSI, FMA, BMath October, 2021 Portfolio Manager

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short-term, we’re very oversold and the number of bullish divergences and market signalling models suggest we’re near a short-term inflection point. The quality and sustainability of the bigger picture market health will be made more clear as we assess the bounce that will likely happen in the near term.

Source: Optuma * as at October 4th, 2021 Market Summary 13-week 34-week Price Moving Moving Above/(Below) Average Average 200-Day S&P/TSX Composite (Canada Stocks) NEGATIVE POSITIVE ABOVE iShares DEX Bond (Cdn Bonds) NEGATIVE NEGATIVE BELOW S&P 500 (U.S. Stocks) NEGATIVE POSITIVE ABOVE U.S. Long Bonds NEGATIVE NEGATIVE BELOW iShares Emerging Markets NEGATIVE NEGATIVE BELOW Commodities ($CRB) POSITIVE POSITIVE ABOVE Gold (U.S. dollar terms) NEGATIVE NEGATIVE BELOW Canadian $ (vs. U.S.$) POSITIVE NEGATIVE BELOW Source: Optuma * as at October 4th, 2021 ** changes from last month are noted in RED text

Lots of change. Most notably, while stocks have turned down, bonds also are negative across the board. Aside from commodities, asset prices are falling. Diversification is not what it once was.


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Relatively Speaking

8EMA/20EMA

What Does It Usually Mean?

BULL/BEAR (BULLISH/BEARISH)

Offense vs. Defensive OFFENSE BULLISH Small Caps vs. Large Caps SMALL-CAPS BULLISH Semiconductors vs. SPX S&P 500 BEARISH Discretionary vs. Staples DISCRETIONARY BULLISH Source: Optuma

* as at October 4th, 2021 ** changes from last month are noted in RED text

Despite the weakness in the stock indices, we can see from the table above that we’re still seeing signs of risk-on. Despite the short-term down trend in the S&P 500 (lower highs and lower lows), the small-cap market is NOT in a downtrend as it remains in its choppy, sideways range while even starting to outperform the weaker large-cap indices. Staples and utilities, both traditionally defensive sectors are both out of favour too, showing that we’re not seeing classic risk-off type behaviour, yet at least. Technology has been under pressure, and the semiconductors show that pressure (above). Commodities Commodities are really strong. Natural gas and oil continue to move higher and the trend must be assumed to be up with higher prices expected. While we still have consolidations in areas like copper, the CRB index is clearly rising (and clearly outperforming stocks, which it’s been doing since the 2020 COVID crash bottom).


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Source: Optuma * as at October 4th, 2021 Relative Strength Report Finally, we’re seeing significant change this month as the market changes gears. Value is back in the limelight as interest rates have risen leading to banks hitting the bullish list. (Canadian note: U.S. banks are handily outperforming the TSX banks -> we continue to prefer and invest accordingly). Perhaps more importantly this month is the new areas of weakness which include some foreign markets, genomics and social media (the first of the tech sectors to really appear weak at this juncture). Bullish/Strong: Natural Gas, Coffee, Energy, Uranium, Regional Banking/U.S. Banks Bearish/Weak: China, Genomics, Social Media, Brazil/Latin America, Steel, Hong Kong/Malaysia/Asia, Silver/Gold stocks David’s Contrarian Corner In the short-term, while fear has risen, we’re going to have to pick stocks as contrarians. While the equal-weighted S&P 500 would be my preference, the chart below is the S&P 500. A few chart notes: note the lower lows and a lower high (=downtrend) but we have bullish divergences in both the middle panel (MACD histogram) and the lower panel RSI(5) – both suggest the downside momentum is lessening and this can be very challenging for investors. When the market keeps falling, our emotions often cause fear as we extrapolate the path forward, but in reality, the selloff presents opportunity that we need to be ready to spend our portfolio cash on. We’re closer to a short-term buying opportunity right here, it’s too late to be a seller in my opinion.


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Source: Optuma * as at August 30th, 2021 My Hot List Energy of course has to be the hot list this month, as we’ve seen a lot of breakouts from a variety of stocks in production, exploration and drilling. This is also following the breakout in crude and natural gas itself, which adds legitimacy to the move. That said, I think it is late, in the short-term and instead am adopting a “let’s try to wait patiently for the next short-term pullback” to get more involved. It’s definitely time to sort out the leaders from the laggards and prepare for what has the potential to be more lasting strength in the energy stocks. As a note, let’s not forget that we


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have seen MASSIVE underperformance by the energy stocks themselves relative to the underlying commodities. If this changes as investors decide to express more conviction for the stocks themselves, energy stocks could have significant upside, but we’re going to see more proof of this – right now, understanding what I just told you suggests investors can benefit from having exposure to the commodities themselves, which also contain much less risk (volatility) than the equities.

Chart(s) of the Month I maintain a variety of bigger picture charts which can provide important context for determining the health of stock markets to help understand where they’re going. This model shows the S&P 500 along with two measures, one shorter-term (lower) and one longer-term (middle) plots of volatility. Note the vertical lines, which occur when volatility is rising (and the middle panel green line crosses up above the blue moving average), an environment which tends to be unfriendly to stock prices. As you can see in recent years, this model did a great job of flagging risk off type environments that led to price weakness. We are not in that camp just yet, although the short-term measure has seen an increase in this price volatility (rightmost green circle). We’re going to want to see this settle back down this fall as we enter the most bullish period for stock prices.

Source: Optuma * as at October 4th, 2021


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Every day, I look at a lot of charts! Some of the charts I glance at, include the plots of global stock markets vs. the world index. Why? We need to know which markets are performing better than the world itself, because we want go where the relative strength is. At this point, as you can see in in the six panelled chart below (don’t bother squinting) all of the regions of the world are underperforming with one exception (top – middle) which of course is the U.S. stock market which has been dominating for many years. The Toronto stock market (top left) is moving up in the short-term, but it’s certainly not trending upwards. Until these plots change, the U.S. stock market has to continue to command our attention (and investment dollars).

Source: Optuma * as at October 4th, 2021 Social Media Corner I continue to post charts on twitter most days as we strive to have the all-important #marketpulse and the ability to develop a set of expectations for what comes next. From the weekly #SectorWatch table of relative sector performances, to a variety of charts from our monthly #TradeReview for our portfolios, to charts that speak to what the market is doing, please follow along with me @DavidCoxWG.


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Upcoming Dates, Seminars and Announcements Believe it or not, both Don & Dawn and Conor all managed to get away (and out of the country!) for some travel which I know most of us haven’t been doing a whole lot of. I’ve been on my own at the office but they’re back later this week. Your feedback, questions and/or comments are always appreciated and welcome! Sincerely, David Cox, CFA, CMT, FCSI, FMA, BMath Portfolio Manager

CIBC Wood Gundy COX DAGGETT Advisory Group


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Monthly Market Chit Chat