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Bear on the prowl after year-long hibernation

Skot Kortje has been analyzing stock market trends for 15 years using trend analysis. For more go to Stocktrends.ca

The Stock

iShares S&P/TSX 60 Index ETF (XIU-T)

Recent price: $17.16

The Trend

Canadian equity investors awaiting another market rally might be encouraged by last week's impressive surge in mining stocks, but should heed the bearish trend scorecard signalling tougher times ahead.

With the majority of TSX stocks now in a Stock Trends Bearish category - the number of stocks with falling price trends exceeds those with rising trends for the first time since May of 2009 - bets on a positive turn for stocks look decidedly risky.

Although the bullish market trend of last year was largely led by small-capitalization stocks, blue-chip TSX stocks - sometimes an important pocket of relative price performance in a slipping market - are now hardly pillars of market strength.

Half of the components of the S&P/TSX 60 index are currently either in bearish trends or have been underperforming the broader market in the last three months. Adding to the bearish outlook is the underperforming financial sector, another important group that is changing to a Stock Trends Bearish category.

The stocks of Manulife Financial Corp. and Royal Bank of Canada are leading a downward drift in the sector and are the most notable big-cap stocks adding to investors' summer angst.

Trend followers taking note of the blue-chip TSX 60 stocks that are leading in performance over recent months will find the likes of Biovail Corp. and Magna International Inc. , as well as the consumer stocks of Saputo Inc. , Loblaw Cos. Ltd. , and Gilden Activewear Inc. .

These stocks lack significant weighting in the S&P/TSX 60 index to compensate for the weak trends of component stocks in resource and financial sectors. The summer sun may be shining, but overcast market weather ahead seems to be pointing many equity investors toward the exit.

The Trade

The most actively-traded unleveraged exchange traded fund on the Toronto Stock Exchange is the iShares S&P/TSX 60 Index Fund.Without a robustly traded alternative fund representing the broader TSX market, this blue-chip ETF is the most practical way for investors to trade the TSX.

The fund is a current Stock Trends Bearish Crossover, meaning the fund's 13-week moving average trend line has dropped below its 40-week moving average trend line. Its trading volume during the summer sessions has been relatively thin - with last week's volume less than half the fund's weekly average in the past quarter - and places technical concern over recent positive price movement.

The fund's price trend has retreated since early May when it failed to scale a long-term price resistance level just above $18. Its drop to the $16.50 area spells a probable trading range scenario over the near-term.

However a significant slide below $16.50 points out to a bearish stint in the coming months. The trend makeup of the index components makes this downside risk to the fund a big concern, so fundholders should consider various trade setups with derivative instruments, if not outright releasing this holding.

The Upside

This section of the weekly Stock Trends column declares an "upside" of the proposed trade, as opposed to the positive move of the stock or fund. Generally, we are moving into a bearish trend environment and the upside of selling or insuring against downside risk (using covered options trades to minimize loss) is protection of capital and a more relaxing summer vacation for investors.

The Downside

Market timers always inspire the scorn of the buy-and-hold crowd, never mind those that currently hold a bullish market analysis. However, the technical picture seems to provide the best scenario for a short-term rally and a trading range.

© 2007 The Globe and Mail. All rights reserved.

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