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Market Timing System Using The Commodity Heavy Toronto Stock Exchange

Jun 2, 2012 | Market Timing System, Stock Market Outlook

Market timing systems cover ever angle you can imagine. Everything from the hemline of skirts to the alignment of planets are being used as market timing systems. A simple and basic market timing system involves commodities on the Toronto Stock Exchange also referred to as the TSX. This market timing system is simply spotting the top in the Toronto Stock Exchange. While analysts have been talking a storm about commodities for over a year now, most don’t seem to be aware that on March 7 2011 the world’s biggest commodity driven stock exchange, the Toronto Stock Exchange set its high of 14329.49. Then on April  6 2011, the Toronto Stock Exchange put in the double top with a lower high of 14315.36 and from there is has been downhill all the way, for the Toronto Stock Exchange. I have used this double top formation in the TSX as a very accurate market timing system to predict market downturns for more than 30 years.

On October 4 2011 the Toronto Stock Exchange had an intraday low of 10848.19 for a loss of 3467.17 or 24.2%. On Friday June 1 the Toronto Stock Exchange closed at 11,361.20 which is still down 20.6%. The Toronto Stock Exchange is in a deep bear market.

The Toronto Stock Exchange or TSX as it is often referred to, is small when compared to the S&P 500, DOW and NASDAQ and indeed small when compared to many of the world’s exchanges but it is heavily laden with commodity related stocks which makes it an exchange that I watch as a market timing system.

While I may trade primarily American Companies, the Toronto Stock Exchange is worth watching because it often tells me what is happening with commodities in general and when commodities enter a bear market that usually tells me that the world may be entering a slow down. Does it work as a simple Market Timing System? I have found it to be quite accurate at predicting stock downturns.

Toronto Stock Exchange As A Market Timing System

While many investors may feel that such a strategy is nonsense, it actually holds a lot of validity. When economic times are booming, commodities increase in value. I keep a record of when analysts start talking about how commodities are in a bull cycle that will last 10 years. I have found that whenever the Toronto Stock Exchange starts rising quickly and volume picks up as most commodities rise in valuations, almost overnight analysts everywhere are talking up a storm about how high commodities are going to make investors rich, how investors better get in now because it will be too late shortly. Just do a google search under “commodities new bull market” and look at some of the dates of articles. Check out how many are in the spring to summer of 2011 while the commodity heavy Toronto Stock Exchange had been high and was already pulling back having made two lower highs by the early summer.

When my newspapers are filled with talk about commodity booms I look for the distinct double top in the Toronto Stock Exchange. Basically I look for the Toronto Stock Exchange to make a new high, then a higher high and then a lower high.

It is a very basic market timing system that has been surprisingly accurate.

Let’s look at three such signals.

Market Timing System Commodities Signal In 2000

In 2000, the Toronto Stock Exchange made a new high in July and another new high in August. From there the Toronto Stock Exchange began a correction as it continued to show lower highs. Amazingly the Toronto Stock Exchange, Dow, S&P 500 and NASDAQ (in particular) all collapsed losing more than 50% of their values in a long bear market that dragged into 2003.

Market Timing System Toronto Stock Exchange 2000

Market Timing System Toronto Stock Exchange Year 2000

Market Timing System Commodities Signal In 2008

In April, May and June 2008 there were three new highs and then two lower highs. By the second lower high I had bought XIU Puts, which are the iShares S&P / TSX top 60 Canadian Companies ETF.

Market Timing System - Toronto Stock Exchange 2008

Market Timing System - Toronto Stock Exchange Year 2008

Market Timing System Commodities Signal In 2011

In 2011 the same distinct pattern emerged and again in the Spring of 2011 analysts had incredible predictions of $3000 gold and $400 oil sometime in 2011. Instead commodities started to pull back and the Toronto Stock Exchange followed commodities lower.

So basically in early to mid 2011, while economists were predicting that the economies of the world were picking up steam the Toronto Stock Exchange with its commodity heavy index was already turning down,  predicting that the economies of the world would slow down. No bad for a simple market timing system. Easy to understand and to follow.

Market Timing System- Commodities in 2011

Market Timing System Using Commodity Heavy Toronto Stock Exchange in 2011

Market Timing System Using iShares CBR ETF

A new ETF introduced by iShares in late 2010 is the CBR or the iShares Broad Commodity Index which is a quantitative hedged fund based on the Auspice Broad Commodities Total Return Index. This Commodity Index fund poroduces almost the same results as the Toronto Stock Exchange and while it is too early to tell, it could end up being a simple market timing system. When commodities pick up, the CBR ETF will increase in value and should predict an upturn in the Global economies. Right now the iShares CBR ETF is predicting lower prices ahead for commodities which also means slowing Global economies. No options are presently available for the iShares CBR ETF and considering how poor options on Canadian ETFs I don’t think it would make much sense to use CBR options even if they were available. Check out this market timing system link for more on the iShares CBR ETF.

Market Timing System - iShares CBR ETF

The CBR ETF makes for an interesting market timing system

Buying XIU Puts on the Toronto Stock Exchange

In 1999, iShares Canada introduced the XIU exchange traded funds on the Toronto Stock Exchange. The XIU is an Index Fund of the top 60 Canadian companies. While many stocks within the group are not commodity related there are enough commodity related stocks for investors to consider buying puts. I have bought XIU puts on all three of the above market timing down signals when the second lower high has been made.

Problem with XIU ETF

The problem with options in Canada on many exchange traded funds is very small volumes and wide spreads, often larger than .10 cents. As well many Canadian Exchange Traded Funds have no options available at all.

To counter this on the XIU, I try to buy 6 months out and at strikes at least 10% lower. In late April 2011 for example the XIU was trading  just over $20.00. 10 percent would means the $18.00 put. This should also accomodate a 10% correction as I have no way of knowing how deep the correction would be once the Toronto Stock Exchange puts in a top. It could be just a 10% correction or it could be the start of a new bear market.

In April 2011 the December $18 put was selling for .50 cents. In October when the market fell, the December 2011 $18 put was trading for .98 cents. Not much of a return considering the length of time I had to hold it, but nonetheless it is still a return of close to 50%. The problem of course is not being able to put $50,000 or $60,000 into such an option trade. For one thing, if the correction is not very deep or drags on for too long the put premium dries up. Therefore if I buy the December $18 put and want to spend $50,000 to buy 900 contracts, I would basically make the market so to speak. On an average day the XIU is lucky to trade 600 puts in total. I have therefore found that it really doesn’t make a lot of sense to do XIU puts, but when I see the market top signal, I buy 50 puts for a bit of profit and leave it at that.

Instead I Consider Raising Cash

So instead I work toward raising cash when this Market Timing System signals a market down call because when it is right, the overall market is going to pullback and eventually so will the S&P 500. So I use this Toronto Stock Exchange market timing system signal as sort of an early warning that everything is not right in the economy and things are going to slow down the road.

It’s A Simple Market Timing System

As far as a market timing system, commodities actually make a lot of sense. When economies are booming, commodities are in big demand and prices rise. When economies slow, commodities are not in high demand and prices soften. This simple market timing system is uncannily accurate in its prediction. Sometimes it can take months for the prediction to come true, but I have yet to see this Market Timing System be wrong with its prediction of commodity related stocks.

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