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But what kind of rally is it?

By David West

The jury is still out on whether the ongoing worldwide surge in equities is the first phase of a sustained recovery on its way to the next bull market, or just a bear rally. In fact, the investment industry (or at least the people I’ve been talking to) is more preoccupied with debating whether the market will soon retest the low it hit in the first week of March 2009, or whether it will fall, but not enough to retest those lows.

That there has been a global rally in equities is without question. Five weeks ago, in the week ended March 13, it all started. During that week, 21 of the world’s 22 most major markets gained ground, with China’s Shanghai Stock Exchange Index being the lone exception.

Four weeks ago, all 22 of said markets gained on the week. Ditto for three weeks ago, and two weeks ago. Last week, 16 of those markets rose, while six fell (we have yet to see about this week). And the six that fell were mostly the lighter-heavyweights, such as Belgium, Denmark and Australia. I don’t have a single Euro, krone or dollar invested there, and probably neither do you. So I’d still call that a continuation of the rally.

As I explained in my most recent column, this could still turn out to be a real bull market rather than just a bear market rally. The problem I’m having so far with declaring it to be so is that it hasn’t proven itself yet. As they say, the devil is in the details.

Take, for example, our own Toronto Stock Exchange. In the past five weeks, its Composite Index has gained 9.38%, 2.44%, 3.70%, 2.77% and 1.34%, for a total gain of 21.02%, good enough for 11th place, or smack in the middle of the 22 most major markets. But what has underpinned that gain?

It certainly hasn’t been the utilities stocks. The TSX’s utility sector has declined every week for the last 10 weeks. Consumer staple stocks haven’t had a weekly gain in eight weeks. Those are two sectors you’d expect to hold up better than the rest near a market bottom, and they’re just not doing it.

What we do know is that two bull markets ago in the late 1990s, the bull pulling the market up was tech stocks, and that the last bull market early in this millennium was led by energy stocks. My thanks to CIBC World Markets for the following data: 73% of the market’s trough-to-peak gain in the former was fuelled by tech stocks, and 43% of the gain in the latter was driven by energy stocks.

And therefore what we probably also know is that the next bull market, be it this rally or a future one, probably won’t be driven by tech stocks or energy stocks, simply because sectors don’t tend to repeat leading consecutive bull markets. Incidentally, the TSX tech sector has posted gains in each of the past three weeks, after dropping for five straight weeks before that. TSX energy stocks are on a four-week winning streak, after dropping for six straight weeks before that.

Metals and mining stocks have been performing the best recently, with a seven-week winning streak. But closer inspection reveals that it’s more the non-household name small caps that have been doing that heavy lifting.

Next up are financial and energy stocks, with four consecutive winning weeks each. Consumer discretionary, real estate and tech stocks have risen for the past three weeks.

As I said, this could be the real thing, but it’s way too early to tell. And there’s a huge risk of another big drop before it materializes. So on balance, you probably want to be very selective right now about your buying. In the meantime, I’ll keep watch for you.

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Fairmont makes headway in China as it prepares to open up a posh new hotel.