I had a neighbour who had a method for market timing. It was physical.
She told me that she knew it was time to sell a stock when she got a tingling in her fingers.
In the past couple of weeks, somebody out there has been letting their fingers click the sell button.
Maybe it’s the time of year. There is a seasonality to the markets. A time to buy and a time to harvest. September has often been a selling time for stock markets.
Seasonality can vary by sector. August, when the yellow summer sun is high and the living is easy, has traditionally been a strong month for gold. This year was no exception, and gold and silver made a nice upward turnaround last month. Even if it looks lousy in July, gold likes to trade up in August.
Oil and gas stocks have price seasonality, as do some tech stocks. Seasonality can be related to holiday buying. Some seasonality, in brewery stocks for instance, is related to weather.
For some reason this looks like harvest season for the dividend paying stocks.
The Harvest
High dividend paying stocks have been winners. After the shock and paralysis of late 2008/early 2009, it became obvious that savers were going to be squeezed. Central banks have pushed down rates to try and revive economies. Bond interest and interest on CD’s are a pittance. Savers can’t live on the proceeds of their savings and they have had to look to riskier bets to make their capital go to work and bring in some kind of pay cheque. This trend is being accentuated by the surge of retiring baby boomers that are looking to their portfolios, instead of their kids, to support them.
High quality dividend paying stocks have been the obvious alternative to low paying bonds and CD’s. And in the past few years, utilities, REITS and other high dividend paying stocks have been great investments as the multitudes turned to them for revenue.
As the economic crisis drags on, central banks have graduated from the occasional toke of quantitative easing, to talk of hard core “unlimited” bond buying. The story of addiction is always the same. The illusion of this particular drug is that interest rates will stay low forever. Central banks will always buy bonds and that will always keep rates down and give time for every country’s economy to heal.
That is the hallucination.
Utility stocks were a big bargain in 2008/2009 when all stocks were sold indiscriminately. The yields were great. But increasing dividends sometimes don’t go up at the same rate as stock prices. If stock prices outpace dividend increases, yields decrease. After a good run, the stocks aren’t as much of a bargain in terms of yield.
In recent months I have written about a few high dividend paying renewable energy producers. Northland Power and Innergex Renewable Energy have done well. Transalta has done badly. Iberdrola, the Spanish utility with international operations and lots of renewable power generation, has chosen recently to conserve capital by paying stock dividends instead of cash. The stock has turned higher in the past few trading sessions.
Besides Transalta, which has had a string of troubles, the other companies are doing well in a tough environment. But there may be pressure on all stocks if there is a general sell-off in the weeks to come.
There are plenty of triggers that can start the process. Europe, China, US politics, it’s the same wall of worries that the market has been climbing for months. None of these problems is resolved. What’s more, US dividend tax rates are slated to increase big time in January unless the government decides to act and change some of the legislation of the “fiscal cliff.” This looming tax increase could be the big reason that sellers of US utilities are taking profits now rather than waiting for the November election. There is no talk (yet) of dividend tax increases in Canada.
Dow Jones Utility Index 52 Week Chart: Source - Bigcharts.com
But there may be something else at play – a cyclical shift. There is some inflation already baked in the cake because of the summer drought in the US. Food prices will be rising in the next few months and CPI numbers will likely move up with them.
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But the Fed may go ahead and buy more bonds even if inflation perks up. A sputtering economy, weak employment numbers, a Republican President who wants to fire the Chairman - there are plenty of reasons for more QE. “Go on, man, have another hit.”
Maybe the Fed Open Market Committee meeting this week will not approve further easing for the moment. That alone could trigger a market sell-off. But down the road, the chances are that easing will continue even if inflation begins to revive. The debts are just too big and this is the mechanism to forgive them. The revival in gold and silver prices is pointing to that likelihood.
If there is a general stock market sell-off in the weeks to come, the key following a drop will be to see which stocks are hit the least, and which stocks lead when it comes back. Will a switch to higher inflation begin to show?
Renewable energy should do well in an inflationary cycle. Input costs to produce power from fossil fuels go up – higher fuel and transportation costs. But sunlight and the wind are free and will remain so for the forseeable future. So inflation may help renewable electricity close the gap with power produced from burning fossil fuels.
In the long run power producers have lots of infrastructure that will go up in value in an inflationary environment. And the value of electricity as a commodity will rise as it's used more and more for transportation. That's worth remembering if it's selling time in the weeks to come.
By. Dave Zgodzinski
