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Will we see more of the same?

Richard Croft
December 19, 2011
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Year-to-date, the traditional non-cyclical sectors have performed on cue and in textbook fashion, outperforming cyclical stocks by a wide margin. The S&P/TSX Capped Healthcare (+12.8%), Capped Telecom (+13%), Income Trust (+15.4%) and Capped REIT (+13.8%) Indexes have posted year-to-date double-digit gains compared with year-to-date double-digit losses for most every other sector in the TSX.

The most beaten-down subindexes year-to-date are Capped Metals & Mining (-31.2%), Global Mining (-26.4%), Capped Materials (-23%), and Capped Energy (-21.9%).

How much longer can this go on? If you believe the eurozone crisis will continue to influence global economic activity for the next two quarters – and there’s no reason to believe it won’t – then commodity prices may continue to drift downwards for awhile yet. China, one of the world’s largest gobblers of raw materials. But it is contending with a slowdown in growth as its main European export market shrinks. And coming full circle, because a large chunk of Canada’s raw material ends up in China, reduced demand for raw materials implies a direct hit on Canada’s vast resources sector.

China is desperately trying to avoid a “hard landing” for its economy (which most analysts define as growth below the 7% threshold). If that happens in the next quarter or two, Canada’s already beaten-down resources companies are likely to get beaten down even more.

If you believe that things might get worse before they get better, look at bearish sector bets on iShares Capped Energy Index Fund (TSX: XEG, Friday’s close $16.26) and iShares Capped Materials Index Fund (TSX: XMA, $19.25). Specifically buy the XEG March 16 puts at 90 cents or the XMA Mach 19 puts at $1.20.

Conversely, traders looking to protect gains in non-cyclical sectors might consider selling covered calls to hedge against sudden downdrafts in iShares REIT Index Fund (TSX: XRE, $15.23). Specifically sell the XRE March 16 calls at 30 cents or better.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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