TSX TrendWatch Visitor Guide

This document contains all you need to know to make optimal use of the TSX TrendWatch website. You may find it worthwhile to print this document and use it as a handy reference until you're comfortable with the analysis and format being used in the weekly updates.

NOTE: TSX TrendWatch is not affiliated in any way with the Toronto Stock Exchange or Standard & Poors, although the web sites of both organizations are a primary source for the constituent companies for the S&P/TSX Composite Index and its subgroups. (See also the Detailed Disclaimer at the bottom of this page.)

Introduction

We assume that you're visiting this web site because you're an investor in stocks or mutual funds, or at least someone who wishes to gain another perspective on what's happening in the Canadian equities markets.

To introduce our approach, consider the following three pieces of (hypothetical) information, and ask yourself which one would be the best guide to making an investment decision right now, or in the near future?

1. The TELECOMMUNICATION SERVICES stocks are up 42% on average over the past 9 months, while FINANCIAL SERVICES stocks have declined 26% during that same period.
2. The INFORMATION TECHNOLOGY sector climbed 6% last week, while the UTILITIES group dropped 13%.
3. The ENERGY sector has been climbing at an average rate of over 5% per week. Furthermore, (on average) over 75% of the price movement recently has been to the upside. On the other hand, HEALTH CARE stocks are declining at over 1% per week, with over 65% consistency.

Choice #1 has you totally looking backward. In this example, TELECOMMUNICATION SERVICES look great compared to FINANCIAL SERVICES. But, is that enough information for you to buy some telecom stocks?

We don’t think so, but these are the kinds of statistics that mutual fund companies like to report in their newspaper ads. Of course, if the results are not impressive, there is no ad. No mutual fun company would advertise their failures.

But in any case, what does that information actually tell us about what's happening now and what is likely to happen in the near future? Not much.

Choice #2, on the other hand, is very current, but how much can we trust a single week's activity as an indicator of what might happen next week, next month or next year?

Nonetheless, this is the approach taken by many financial reporters. Their mission is to report the latest action in stock prices. If it's not new, it's not news. The daily papers will focus on yesterday's big price gains and losses. The weeklies will do the same for the previous week.

But are either of these really of much use to serious equity investors? We hope that you're more inclined to choose #3 above, as we would.

In TSX TrendWatch we track recent trends on a level playing field that let's us compare...

• sector vs. overall index (e.g., S&P/TSX Composite Index)
• sector vs. sector
• stock vs. sector
• stock vs. stock

That's why we call it relative trend analysis™ (RTA). And, what's more, we offer an approach that still includes elements of choices #1 and #2 as well.

We don't simply look back (as in #1) to see what happened at some arbitrary point in the past and compare it with the present, but we recognize that a trend can't be identified without some history. That's why we use exponential moving averages in our analyses. We take those weekly moves depicted in #2 above and average them over a 10 week period, weighting the most recent changes, because recent history is more important than ancient history.

We take a top-down approach, starting with what has happened with the S&P/TSX Composite Index -- Canada's best indicator of what's happening with Canadian equities. We look at the influence of company size by dissecting the TSX into LargeCap, MidCap and SmallCap categories. The assignment of stocks to these groups is carried out by the Standard & Poors (S&P) organization, which has been enlisted by the Toronto Stock Exchange to handle the evolution of its various indexes.

S&P also prepares capitalization-weighted indexes for these three groups, and we track them with a weekly chart.

Standard & Poors has also prepared an industry-related classification system for the S&P/TSX Composite Index companies. There are 10 sectors: MATERIALS, UTILITIES, CONSUMER STAPLES, ENERGY, INDUSTRIALS, FINANCIAL SERVICES, CONSUMER DISCRETIONARY, HEALTH CARE, TELECOMMUNICATION SERVICES, and INFORMATION TECHNOLOGY.

This is, in fact, the Global Classification System developed jointly by Standard & Poors and Morgan Stanley Capital International (MSCI). It will ultimately make it easier to compare Canadian industry groups with those of other countries.

While we do not offer investment advice with respect to any of the companies discussed here (see detailed Disclaimer below), we track the trends of all of the companies comprising the S&P/TSX Composite Index. You can easily observe how individual companies are performing within their sectors and how the sectors compare with one another.

You can then blend this information with your own investment strategy, level of risk tolerance and investment objectives.

Relative Trend Analysis™ (RTA)

To fully appreciate the methodology used here, we strongly encourage you to read this section carefully, because it’s the most important section of this guide. It explains the mathematics used in our relative trend analysis™, and explains how our approach differs from what you'll find elsewhere on the web.

Without having at least a rudimentary understanding of RTA, you may find much of what you find here difficult to interpret, if not downright confusing.

So, what is relative trend analysis™? Well, we had to call it something, didn't we? Here is the general idea...

To put all stocks and indexes on a level-playing field, all weekly price changes are converted to %-changes. That way a $1 move on a $4 stock is every bit as significant as a $5 move on a $20 stock. That's the relative component. Comparisons among stocks, or between stocks and indexes mean something when they're on the same scale!

A 10-week, exponential moving average is computed on these changes for all stocks and indexes. That's the trend part of the term. We want to know how fast prices are moving relative to one another, but over a consistent period of time.

The net result is that each stock or index has a weekly trend value that says, on average, stock (or index) ABC is moving up or down X% per week. Once computed and illustrated in the charts and data tables here, the current winners and losers are then easy to pick out.

There is also another component to the methodology... and that is consistency. A ratio is computed where the trend (already described) is divided by the volatility of the prices.

Consistency is what distinguishes a stock that thrashes around on the path from $10 per share to $15 per share... e.g., $10, $8, $6, $12, $10, $15 (causing nail-biting and ulcers among shareholders)... from one that moves up in an orderly fashion... $10, $11, $12, $13, $14, $15. The more that the weekly price movements are in one direction, the higher the consistency rating.

The bottom line is that each stock, average, or index is represented by two numbers: trend ... expressed as % price move per week, and consistency ... expressed as a percentage between 0% (random up and down price movement) and 100% (all price movement in one direction, as determined by the plus or minus sign of trend).

A couple of examples might clarify things. Suppose Company A has a trend/consistency reading of +3%/75%. That means that, on average, at this point in time, the stock is rising at +3% per week, and that, on average, 75% of the weekly price movement has been to the upside... quite a promising scenario (especially if it persists). Now consider Company B, with a +3%/10% reading. The +3% trend factor is every bit as positive as that for Company A, but the 10% consistency factor suggests that the trend value may be due to a sudden and recent spike up in price (perhaps due to an unforeseen event), or a series of broad up and down price moves over time en route to the final price. That's not to say that Company B doesn’t deserve a look; it’s just that we would be less likely to expect the trend to continue for Company B, unless the consistency factor improved over ensuing weeks.

We've all heard expressions like "Don't fight the tape" or "The trend is your friend". These are common expressions among the investment community that refer to the fact that stocks that are trending (up or down) tend to persist in doing so until some contrary news or events suggest that the current trend is ending.

To these expressions, we'll add our own saying, "A consistent trend is less likely to bend" .

With no promises of a sure thing, we've observed that stocks trending upward (or downward) with high consistency values, tend to continue to do so longer than those with poor consistency.

There are lots of other investment-oriented web sites that offer some sort of momentum or trend data, but we believe that this is the only one that both puts all trend values on a common scales and provides a metric for the consistency of trends (which is also standardized).

We hope you find our data useful.

How to Use the RTA Data

There are many ways to take advantage of the weekly data in our Data & Charts woorkbook. One that we generally recommend is to look at the sectors that are leading the pack (trendwise) and by how much. Then, have a look at the company data within those groups to find the strongest candidates.

We don't expect you to base your stock picks solely on trends, but the information you'll find here may well become a useful part to your overall investment strategy. How much you weight trends versus other fundamental and technical factors is entirely up to you.

It's probably worth mentioning that trend-following is quite different from picking tops and bottoms in market (or stock) cycles. The latter approach is best expressed by the well-known "Buy low, sell high" slogan. With trend-following, the appropriate phrase is "Buy high, sell higher".

While our own preferred tactic is to follow trends (sometimes also called "momentum investing"), a market timer could still find our data useful. We think that market timing is a tricky proposition, but if you're good at it, you should be able to map patterns in our weekly data onto some sort of trading scheme. After all, tops (or bottoms) should be flagged first by weakening consistency, then by softening or reversing trend values.

However, since this is not our preferred approach to investing, we'll leave working out the details to you.

Navigation

The navigation controls at this web site are pretty straightforward. All buttons in the left margin pull up pages that appear in the main window frame which you're looking at now.

There’s also a search box that lets you enter a stock symbol, and obtain detailed information about the company in question from the comprehensive GlobeInvestor.com web site hosted by the Globe & Mail newspaper. Since our updates are weekly, we offer this as a means for you to get up-to-the-minute quotes, charts, news and fundamentals from all Canadian and US companies that are publicly-traded. If a ticker symbol represents a different company in the US from the one it represents in Canada, both are shown and you can choose. The same applies with interlisted companies that may have the same symbol (e.g. NT is Nortel Networks Corp. both on the NYSE and the TSX).

The VISITOR GUIDE is the document you're reading now. The DISCLAIMER tells you what you can and cannot expect in terms of what we're trying to offer here. There’s also a shorter version at the bottom of this document.

WEEKLY REPORT is probably the page you should bookmark for entering this site, once you are comfortable with the content of this document. There’s no point in revisting the welcoming HOME page, unless that doesn’t bother you.

WEEKLY REPORT includes commentary on the overall market, charts that may be of interest (but not in the standard set in DATA & CHARTS), and some discussion of current sectors to watch.

We’re currently using a web log (blog) approach for WEEKLY REPORT, so you’ll be able to look back at earlier reports if you wish.

The DATA & CHARTS page actually leads you to a workbook of graphs and data tables. Each table and chart is accessed by the tabs on the bottom of the workbook. There are data tables for each of the ten sectors represented in the overall group of companies that comprise the S&P/TSX Composite Index. Each table includes an alphabetic listing of the companies and ticker symbols, the weekly closing price, weekly %-change, 10 week trend value, and consistency value. We highlight those stocks which have a trend value exceeding +1% and a consistency value of at least 70%, as "ones to watch". There isn’t anything magical about these thresholds, but it’s one simple means of identifying outperformers.

To round things out, if you’re not particularly interested in a sector-by-sector approach, you can use the Ranked tab to look at all the stocks in the S&P/TSX Composite Index ranked highest-to-lowest (by trend value).

And, finally, if you're visiting the site between weekly updates, you might click on CANADIAN NEWS to get a list of headlines of the very latest stories about Canadian companies and current events. You can click on the headlines to see the full story from the source.

TSX TrendWatch Updates

We generally run our trend analyses on weekends using price data as of the market close on Friday (or a day earlier if Friday's a holiday). We aim to publish on the weekend as well, since we know that many investors and traders like to do their homework while the markets are closed. If you’re on our MAILING LIST, you’ll receive an email just after each weekly update is published on our web site. We’ll also use that mailing list for any special announcements about changes to the site or technical difficulties; but rest assured that no one will gain access to the list for spamming purposes, and you should never receive more than one email per week. Naturally, you can opt-out at any time. Instructions will appear at the bottom of each email.

Questions & Feedback

User feedback is a cornerstone to the success with any product (even if it's a free access web site!). All suggestions and comments are welcome.

As questions come in that aren’t addressed in this tutorial, we’ll add them to our QUESTIONS? page and provide the answers you need. When that page gets excessively long, we’ll simply re-write this guide.

Our objective, as mentioned earlier, is to keep the site simple and uncluttered, but that doesn't mean that it can’t be improved. At any time you are encouraged to take a few minutes and send an email if you think something’s missing or inadequately covered.

Detailed Disclaimer

Commentary and opinions expressed by Charles P. Whaley in any of the weekly updates to this site reflect only his views and may be in conflict with the views or official releases of any company mentioned. While every attempt is always made to use reliable sources and ensure proper and consistent data gathering and analysis methods, we cannot guarantee completeness, adequacy, accuracy or reliability in any section of this online publication. Furthermore, the performance of the companies discussed here are based on historical data. As such, there is no assurance that identified trends discussed here will persist. TSX TrendWatch is not an investment advisory service. The information contained in this publication is not intended to be, nor should be construed to be a recommendation for purchase or sale of shares in any of the companies listed or discussed. At any point in time, Charles P. Whaley may or may not hold shares or options on shares of any company discussed herein. The opinions expressed are based on interpretation of available information, and are subject to change. No material contained in this publication may be reproduced in whole or in part without the written permission of the publisher.

© Charles P. Whaley & ProfiTrend Enterprises, 1997-2009. ALL RIGHTS RESERVED.

Latest revision: 2009.05.31