Benjamin Borden's "Best Canadian Stocks"

Hard to believe, but it’s almost the middle of the year! Where did 2010 go? It only seems like yesterday that I was nursing a cheap champagne hangover on a cold Canadian January 1st. Now here I am nursing a coffee on a cold Canadian June 10th morning! Anyway, I always like to do a market check up from time to time so I’ll take you through a few things I am looking at…

I’ll start south of the border with the HUI and Dow Jones Industrial Average. The HUI is called the “gold bugs index” – basically a compilation of select gold producing companies. I like to look at how the HUI is performing relative to the Dow Jones. When the HUI is rising relative to INDU it generally indicates that credit is flowing well throughout the system. When the HUI is dropping relative to INDU, it generally means that credit is tightening. Of course gold stocks and all mining companies in particular are the first to have problems finding credit in a “credit crunch” due to their inherent riskier nature. You can see below that this ratio telegraphed a tightening credit market approximately 1-2 months before the entire market took a dump.

However now, a range-bound ratio indicates to me that the credit system is working again, for now. Check #1 passed.

The next thing I look at is the Advance / Decline line of the NYSE. The graph below basically shows a 200 day moving average trend of daily advancing issues less declining issues. A rising trend generally indicates that money is moving into the stock market where a negative trend generally indicates money is moving out of the stock market. You can see in the graph below that there has been a recent troubling decrease in NYAD. However, we are still in positive territory.

This one bears close watching – like a strange new mole that wasn’t there before. Check #2 deferred.

Next I check how the TSX is doing relative to the Dow Jones Industrial Average. Being a Canuck investing in the Canadian markets I like to see how the home team will likely perform relative to our southern cousins. A rising trend here indicates that Canadian stocks are generally outperforming US stocks.

You can see that the trend here since early May has been up. And from what I see around me daily (granted this is anecdotal) the Canadian economy is recovering nicely. Check #3 passed. Oh baby, let the bounce come.

Finally I check the health of the Canadian smaller caps by comparing the ratio of the Canadian venture exchange to the TSX composite index, the latter being mostly composed of larger cap companies. I like to see a rising trend here again as it indicates that smaller companies are participating fully in the economy – smaller companies being key to future economic growth (large companies being virtually incapable of innovating in any meaningful way). If this trend is dropping then this is a bad sign, as it means that large cap companies are struggling to carry the economy by themselves.

Again this ratio has had a troubling drop as of late. However, you can see that even with the drop we are still in a rising trend. If this trend resumes we are off to the races again. Check #4 OK.

So three out of four ain’t bad. The May drop seems to have found a floor here for now, and I expect we’ll see a nice juicy bounce from here, starting…………..now!

Of course I’ll keep my stops in place just in case I happen to be wrong.

That never happens, right?