Markets This past week we saw data that shows inflation in the Euro zone is slowing and the CPI data in the US continued its trend lower with some surprises to the downside, allowing the markets to maintain the bullish tone that we saw since the start of the year. Investors are getting more convinced that the US Fed is getting closer to a change in their interest rate policy stance and will slow or halt interest rate hikes. Nasdaq led the charge this past week jumping by 4.8% while the Dow was higher by 2.0% and the TSX rallied by 2.8%. |
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According to one popular metric, the US stock market is now in one of its most powerful rallies in months. The relative number of new 52-week highs compared to new 52-week lows is at one of its highest levels since November 2021. In each of the first 9 trading days in January, there were more new highs than new lows.
Energy Oil prices were stronger this past week, with WTI oil closing back above the $80 level at $80.06. A returning risk appetite and a lower US dollar were the likely reasons for the gain in oil prices. |
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Continued milder temperatures in Europe and North America allowed natural gas prices in both markets to decline further, as there are now abundant supplies to carry both markets through the winter heating season. US natural gas prices reached new year lows. |
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Baker Hughes drilling data showed more of a big bounce back in Canada from the Christmas holiday shutdown as 38 more rigs were active in Canada this past week brining the total back up to 227 rigs while in the US another 3 rigs were active bringing the number of active rigs up to 775. The North American land drill rig count currently sits 26.5% higher than it was a year ago. The sector ETF (XES) reached a new 52-week high this past week, demonstrating how bullish investors have become on energy service companies. |
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In Canada, we started to see a few of our energy service companies reaching new 52-week highs as well and I suspect we will see more, especially some of the smaller names that are showing better comparable valuations.
Commodities This is one of the most important charts that I follow. The US dollar index. |
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It’s been on a pretty steady trend lower since late September. I think it tells us 2 key things. Global financial stress is lowering and a belief that US interest rates are near peaking due to a softening US economy and lower inflation concerns.
Precious metals continue to perform well on the back of the weakening US dollar and prospect of less hawkish monetary policy. |
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Gold breached the $1900 an ounce level closing at $1923 a level it hasn’t seen since June 2022.
Industrial metals are also moving higher, with copper back above $4 per pound for the first time since June 2022 as well. |
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The weaker US dollar, expectations of lower interest rates and a gradual re-opening of the Chinese economy should bolster the demand for industrial metals such as copper, nickel and various other economically sensitive products.
Stocks Are we seeing more signs that we are in a new bull market for equities? Keep in mind that equity markets tend to be forward-looking mechanisms. Bigger stocks have an outsized impact on indexes. Smaller stocks have little to no impact. And as I’ve said before, the past market leaders will not be the leaders of the new bull market.
Let me be clear, no one can predict the future with 100% certainty. The economy could get much worse. Markets may go lower.
It’s rarely the bullet you see coming that kills you, it’s the one you don’t see coming. Almost all negative news that we are aware of is priced into the markets. We’ve become much more accustomed to inflation, higher interest rates, volatile energy prices, a war in Europe, even a worldwide pandemic. These things are already priced into the markets. Equities prices, for the most part, have adjusted to reflect all these things.
There are plenty of negative headlines and plenty of bears out there. Market bottoms are ALWAYS formed at maximum pessimism, when headlines are the most negative and the majority of investors are bearish. It’s quite likely that we have passed the point of maximum bearishness and a bottom has been put in place for the indexes. I’ve argued that the true bottom was actually likely been put in place back in June 2022, and we’ve been in a stealth bull market since then.
I don’t have the data, but I would bet that if you were to take the top 10 largest companies on the Nasdaq exchange and charted the index you would have a much different picture than the one, we see now. There are over, 3600 listed securities on the Nasdaq. The Nasdaq index is made up of 100 companies, mostly the largest 100 companies. The top 10 companies on Nasdaq carry a 50.67% weighting on the index. Microsoft and Apple alone carry a 30.2% weighting. Amazon and Google carry another 14.26%. The top 10 weighted stocks on Nasdaq were down an average of 29.9% in the last 12 months vs the Nasdaq itself, which was down 23.6%. Consider that 2 of the top 10 components, Tesla and Facebook, were down 64.4% and 56.9% respectively. |
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There were 66 listings on Nasdaq that reached a new 52-week high on Friday, vs 6 new lows. Only one of the 100 companies that make up the Nasdaq composite made a new high, Starbucks. The rest were mostly smaller, lesser-known companies.
The sectors that are hitting new highs, that are outperforming are no longer big tech. Many newer, smaller companies are performing very well. Companies like Tesla and Amazon are no longer the market darlings, and if you keep looking to these companies to take the markets higher, you’ll miss what’s really happening. There are plenty of companies that are strongly outperforming the general markets. You just need to look for them and of course how to recognize them early. |
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All this to say that we have what we usually do at the start of a new bull market, old bull market laggards outweighing the new bull market leaders until the smaller companies get big enough, and the big companies get small enough, to where the new market leaders have a bigger influence on the indexes.
Other Stuff The market for smaller stocks continues to have a better tone to it. More bids seem to be showing up as confidence in overall equities spills a bit into the microcaps. We continue to see a number of stocks in our watch list hitting 52-week highs. Supremex (SXP.T), Atlas Engineered Products, (AEP.V), Zedcor (ZDC.V), Geodrill (GEO.T), and Canadabis (CANB.V) are a few names that hit their 52-week highs this past week. |
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Some capital seems to be coming down market as we’ve expected. Companies like Supremex and Geodrill have big enough market caps now to allow some bigger players the liquidity to buy, both comfortably above $100 million.
Boring continues to be beautiful, but we likely have entered a market where, for a short time, it’s possible we’ll see some of the “sexier” stocks starting to get some attention. With gold moving and some of the other metals moving higher don’t be surprised to see action in the junior explorers. Bigger gold producers and mining stocks have started hitting 52-week highs indicating some of the big and/or early money moving into the space. This will get speculators excited and moving into the juniors. Just be extremely cautious as many of these small companies are dramatically under-financed. Keep your ears open for a huge sucking sound as these companies start scrambling for private placements as soon as the financing window opens up with any sign of investor demand.
I’ve been pointing towards the US home builders’ stocks for some time now and the trading action there continues to look bullish. Historically, when a company issues what, on the face of it looks like bad news, and the stock doesn’t go down or even goes up, it’s usually a sign that expectations are too bearish. Last week KB Homes (KBH) announced their quarterly results and announced what looked like bearish guidance. While the stock is down from the previous day, the stock is down only 2% from it’s recent high. |
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Other stocks within the sector continue to buck the general negative sentiment and in some cases like DR Horton are very near 52-week highs. |
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We are even seeing some of the same signals in Canada as several wood product/housing related companies are also trading at or near 52-week highs. Companies such as Stella Jones (SJ.T), Goodfellow Inc (GDL.T), Fab-Form (FBF.V) and Atlas Engineered Products (AEP.V)* are all at or near multi year highs in price. |
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Clearly some investors are looking forward and expecting a sector slowdown to be short-lived or perhaps the stocks were just oversold relative to the interest rate hiking cycle. Either way, you can imagine what could happen when we do see signs of the Fed and Bank of Canada change in interest rate policy and well documented lack of housing supply gets dealt with.
I managed to pick up some more Ceapro (CZO.V) this past week at $0.65. With a few of my other favorites having run away a bit on me this one moved to the top of my buy list. I continue to believe that the stocks offers a good risk/reward below $0.70. |
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I’m taking another look at BeWhere (BEW.V). I’ve been hesitant to add to my position over the past year due to better options. On a valuation basis this is about as cheap as it’s ever been. Certainly not the cheapest of the bunch but it’s been so ignored for so long that it might be worth a bit deeper dive. It’s been a consistent grower and its share count has been shrinking thanks to the company share buy back. |
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Bri-Chem (BRY.T) has also moved a bit up the possible buy list as the strength in the bigger names leads me to think we are getting close to another burst of interest in the smaller names. Trading volumes have dropped off, and we are now heading into a busier period for the company. It was almost a year ago to the day that we entered the stock and within months it had climbed over 350%. If seasonality comes to play again we could be in for a nice move. |
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And then that leaves me with Biorem (BRM.V) that we interviewed recently. The stock ranked very well in our Cheapies with a Chance list and the stock has been seeing some nice volume lately, which makes me think it too is ready to test new multi year highs soon. |
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Zedcor (ZDC.V) continues to frustrate me. I really like the company and have a starter position. The stock moved up so quickly that I took partial profits at $0.60 and $0.62. Insiders have been buying at current levels and the stock just won’t pull back enough for me to buy back the stock I sold so I continue to wait. We have written a report on the company and, time permitting I’ll get to adjusting the valuation metrics to the recent price. |
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Needless to say, I’m a buyer of ZDC.V on weakness and would suggest the same to others. $0.55 or lower looks like a good spot to me.
That’s all for now. I’ll leave with this quote from Warren Buffett that I thought is fitting of my current frame of mind: "Invest within your circle of competence, think like a business owner when buying equities, and buy at inexpensive prices to provide a margin of safety." To your wealth,
Paul and Trevor |
