The Stock:Canadian Tire Corp. Ltd.
Monday's price: $55.48, down 37¢
The Trend Although most of the credit for the second-quarter strength of the Toronto Stock Exchange goes to the strength of the resource and financial sectors, investors are keenly aware that consumer stocks are also sprouting green shoots.
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After a lengthy downward trend, the S&P/TSX consumer discretionary index is sporting a Stock Trends Bullish Crossover indicator, signalling a change in trend from bearish to bullish.
Leading stocks in the sector are Gildan Activewear Inc. , Forzani Group Ltd. and Dorel Industries Inc. , telling us that investors are encouraged that the worst is over for the beleaguered consumer.
This renewed confidence in the consumer, though far from universal, shows up in the U.S. market as well. The Stock Trends screens for stocks with trend and momentum improvement include a number of consumer and retailing stocks.
The Trade Many investors are joining the retail cue and cashing in their Canadian Tire money this spring, lifting Canadian Tire Corp. shares 28 per cent over the past 13 weeks.
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Even amid the turbulence of the broad market, the company's shares hit a 52-week high last week.
Since the stock turned Stock Trends Bullish five weeks ago, it has managed to advance every week - an impressive run. In recent weeks, the volume of trading has been growing along with a notable increase in average traded value - a sign that institutional interest in the stock is increasing.
Investors buying shares in this quintessential Canadian retail brand now have a solid intermediate trend and strong relative price performance supporting their trade. If consumer confidence grows, the stock will be a beneficiary.
The Upside
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A look at the two-year chart of Canadian Tire suggests that there is no significant overhead resistance until the $60 level, a 10-per-cent gain that could be booked in the coming weeks.
In a rosy scenario the trend takes the stock to $65 later this year before running out of steam, but those expectations should be muted.
The advantage of trading a trend is less profit potential and more risk aversion.
Like any bullish trending stock, Canadian Tire offers investors a chance to rotate market exposure to sectors that have downside price support. That is the underlying assumption of trend analysis's core axiom - "the trend is your friend."
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Sometimes our friends let us down, but investors buying into Canadian Tire's trend now are joining good company.
The Downside The 13-week moving average trend line is the key support for investors with a longer-term time horizon. Currently, the trend line support is at $50.
The fate of the Canadian consumer dictates the primary risk to this trade, so the assumption of economic recovery is implicit. Crumbling resource performance would be crippling for the sector.
A turn to Stock Trends Weak Bullish would be a signal that the retailer has dropped below trend line support. Generally, a Weak Bullish indicator directs investors to re-evaluate and possibly sell their holdings.
Skot Kortje has been analyzing stock market trends for 15-years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995. For more go to http://www.stocktrends.ca/