Low-volatility Flat Spots
The market moves in waves and our way of using the the EMA200 limits them
to a 4-year time horizon
and includes them in Volatility measurements.
Enter wisely, but do not trade.
Buy At the EMA Trick:
The image to the right shows four approximate straight-line segments, with arrows pointing to the
The segments are numberd #1,2 #3,4 etc.
There are four segments, five corners.
showing up after a run-up
in the Price Chart starts
The end is usually triggered by Price unrunning Earnings. Beware.
The slopes of the straight line segments alternate between about zero and about 12%
This would be the slope of a line touching corners #2 and #4.
It will be like SAP.TO above; price shoots up and then dawdles to correct P/E.
Note too that the volatility is
In other words price wanders 6% above and below the EMA200.
in the blue box, and measurements
of volatility for ZLB.TO give
Low volatility stocks tend to bounce three times the annual %/yr growth.
Measured visually between blue lines as shown above.
triple the annual growth
Thus it pays to wait until there is a pull-back of some kind.
The EMA200 (Exponential Moving Average) is delayed by 187 days,
and in the process strongly filters out volatility.
The slope of the trend is that of a line that just touches two bumps.
a trend, and if the price is rising, it will lie below the current price
(green line) most of the time.
ASIDE: most "chartists" and brokers use
avoid doing that too because the EMA gives better R.O.R. measurements.
The EMA trick only works for low volatility
Examples: ZLB.TO, HAC.TO, ZWH.TO, XUT.TO and XST.TO.
and for good equilibrium between
The yellow patches on the calculator.
of stock price, earnings and
CAUTION: The yellow patch, not the Yield.
The reason is that the EMA time horizon is about four years.
Secular Bear markets have about a 16 year time horizon, and
furthermore they exhibit savage volatility:
Secular Bears: High-volatility Elliott Wave Flat Spots
(These Also Result From Price
Above is the S&P500 index since 1944, with 16 year rectangles for the Secular Bears and ovals for Bulls.
This can be viewed as an Elliott "long wave", and
the Secular Bears are
Unlike the chart above, there will be a LOT of volatility.
The EMA200 won't follow it.
Let us turn our attention to the right hand two periods;
a Secular Bear with two
The Internet Bubble of Y2K and the Financial Crisis of 2009.
followed by the first half of a Secular Bull, interrupted by the
Government bailouts have led to inflation and rates are rising.
That suggests some defensiveness even in a Secular Bull.
Quenching Events: Failed Elliott Waves
To the right is an expanded view of the right-hand third of the S&P500 chart above.
The flat spot contains two drops from about
A drop to one half of the peak; far worse than during Secular Bulls.
Generally caused by collapse of unrealistic P/E ratios.
$148 to $70
Two such convulsions, marked by pink ovals, are typical during Secular Bears.
To the right is a third one, caused by COVID, which occurred within the current Secular Bull.
Also, it only dropped to about 3/4 of the peak, due to continued good P/E ratios.
Secular Bulls are generally like that.
These are often called Black Swans, meaning they are unexpected.
However, Secular Bears are predictable and high P/E is a warning.
can quench Elliott Waves in
stock prices if they have run up too far.
Below that chart is one for the Canadian financial sector. All three events appear
in it, but it continues to rise during the Secular Bear. That is a
Also, during Secular Bull periods one should diversify across many sectors.
when a Secular Bear market is due, one should get out of sectors that are
and into sectors that have
Also, sectors like Utilities and Groceries exhibit only normal volatilty.
For example the Dot Com
during the 1990s pulled money away from the banks etc.
"Hot" internet ventures exhibited P/E ratios
that were either very high or negative.
When the bubble burst, people turned to the strong dividends of banks and insurance companies.
Dividends have also outrun price; 8.2 vs, 6.5%/yr recently.
had grown faster than their stock price and P/E had
Be alert to this indication of a bubble at ANY time.
Investors tend to travel in herds - they follow others and then panic.
Thus the price of Canadian banks tracked earnings growth,
ignoring the Secular Bear.
There had also been a bubble in energy companies (chart below financials), and it also
Delayed by about five years.
Then energy share prices dropped for more than a decade. The COVID crisis (third oval) introduced
a very steep drop, and recently it has broken out of the
This crisis quenched the downward part of an Elliott Wave.
It was ready to happen anyway, but was triggered early.
because earning power of oil companies had recovered.
The Trend is Your Friend.
Quenching events cause a new sector to
Brokers call this sector rotation.
We should also "rotate", sell high P/E ETFS and buy ignored ones.
At the beginning of the latest
The first quenching event also causes rotation into gold.
Gold producers become lucrative every 32 years.
the low P/E ratios of Canadian banks
and insurance companies attracted brokers' attention.
However, there was more to it; the
The growth rate measurements on the calculator.
were out of equilibrium; earnings and dividends had been
In the 2009 Crisis the Financials took a beating, but
soon benefited in
two ways: the banks bought up "fire sale"
and their P/E ratios became more realistic due to generalized panic.
There was another phenomenon; strong government intervention to stimulate the economy
and avoid stagnation in the general panic. The buzzword was "quantitative
easing" and after 2019 it was "CERB" in Canada. In both cases government injections
found their way into the banks'
And dividends, to the chagrin of Fiscal conservatives.
Bottom Line: Be Ready to
Fear will drive investors to rotate into gold producers.
E.G.: Gold, ZLB.TO, HAC.TO, ZWH.TO, XUT.TO & XST.TO.
Low P/E, steady P & E growth.
Growing dividend, strong yield.
About 16 yr after the Secular Bear.
Watch for bubbles and "parabolics".
P/E will out-run inverse of interest rates.
To the right is the chart for gold, with another rectangle to show the Secular Bear.
During that time gold rose, which is typical for a 16 year Secular Bear.
What is NOT typical, though, is the "Quantitatitive Easing" that was invented after 2008.
(Middle pink oval, indicating a crisis.)
Typically gold would have continued to drop to the bottom of the formation over 16 years.
However, gold is actual money that cannot be quantitatively eased and
acts as a refuge in uncertain times.
Therefore there is a second maximum because of inflation-fear.
The COVID crisis (right hand pink oval) added dramatically to the amount of injected
liquidity while simultaneously disrupting the supply of goods.
"Too many dollars chasing
goods", as of June 2022, has forced Central Banks to
shrink the money supply by boosting interest rates.
That threatens to pull down Fixed Income valuations and Real Estate prices.
The two lines were measured after Quantitative Easing and then after CERB.
Both slopes agree with historical inflation rates.
of non-inflating gold in inflating US dollars matches
historical inflation rates. That is a trade-off, not something
Possible implication; growth rates will suffer but without the
nasty collapses of a Secular Bear.
Bottom Line: Presently, due to inflation, rotate out of
REITS borrow too much.
Bonds drop in value if rates rise.
Compare Annual Reports for debt level.