Here is an argument for the market being bullish:

Carrigan: Euro crisis sets up a new North American bull

Published On Mon Nov 21 2011

By Bill Carrigan Investments Columnist

Last August I attended a buddy’s annual rib fest. He wore a T-shirt with a bold statement, “I love vegetarians: more meat for me!”

My next T-shirt will read, “I love the euro crisis: more cheap stocks for me!”

Last Wednesday was a bit of a wake-up call for the bulls when the Dow Jones industrial average dived 3.2 per cent or 389 points as the Europe’s debt crisis focused on Italy’s borrowing costs. That was the Dow’s largest points and percentage drop in seven weeks, and the sixth largest points and percentage drop this year.

Even before Friday’s stock market gains, when you look at the bigger picture, the Dow was only down 8 per cent this week from its 2011 closing high of 12,810 on April 29 and had rebounded more than 10 per cent from its 2011 closing low of 10,655 on Oct. 3.

To regain my confidence as a bull, I need to confirm the nasty April through October mini-bear in the equity markets is over. Technically a bull market will post a long series of higher highs and higher lows. A bear market will post a series of lower highs and lower lows.

The turning points, such as bull market peaks and bear market troughs, are called junctures. Was the early October low in the Dow a juncture?

Our chart this week shows about five months of daily closes of the Dow Jones industrials plotted above the daily closes of the 10-year U.S. Treasury bonds. In this example, I am comparing the level of the Dow to investor fear as illustrated by the flight into U.S. Treasuries. Note the recent prices relative to their August lows. In mid-September, the 10-year bond yield broke below the 2 per cent level of the August lows and the Dow industrials held firm just at the August low. This price divergence has created a bull set-up because while investor fear was greater (lower bond yields), the Dow held firm. This is called bullish divergence.

This week, the price divergence was even greater, with the 10-year Treasuries still at the fearful 2 per cent level and the Dow well above the early October low. Internally the Dow is very healthy. All 30 Dow components are now sitting well above their relative early October lows. A very bullish scenario!

The bottom line here is that, from a technical perspective, the August through October lows are an important juncture that will likely become the origin of a major bull market.

We need to participate. We need to focus more on the earnings and guidance from companies such as Cisco Systems Inc. and less of the names of the Greek and Italian prime ministers.

First you need to know what kind of an investor you are. If you lack experience and are not being advised, keep it simple and just buy the Canadian and U.S. equity markets in two baskets.

For Canadian exposure, you can buy the iShares S&P/TSX 60 Index Fund, which trades under the symbol XIU on the Toronto Stock Exchange. The XIU gives us direct ownership of 60 Canadian large-capitalization companies.

For U.S. exposure, you can buy the SPDR S&P 500 fund, which trades as SPY on the New York Stock Exchange. If you wish to operate only in Canadian dollars, another exchange-traded fund choice is the TSX-listed BMO Dow Jones Industrial Average Hedged to CAD Index ETF, symbol ZDJ.

These products contain the shares of large domestic and multinational corporations, which allow you to participate in both the Canadian and the global economy.

If you are an experienced investor or have an adviser, you may seek to enhance the returns of the above broad and diverse products and drill down a bit into the stock sectors such as the financial, technology or industrial groups of stocks.

In Canada, the three prime price drivers are the energy, materials and financial groups of stocks. Related ETF investment products are the TSX-listed iShares S&P/TSX Capped Energy Index Fund (XEG), the iShares S&P/TSX Capped Materials Index Fund (XMA) and the iShares S&P/TSX Capped Financials Index Fund (XFN).

Another important but lesser profile stock group is the TSX industrials, rich in domestic and global corporations. Unfortunately for Canadian investors, no ETF covers just that sector.

In the U.S., the three prime price drivers are the industrial, technology and financial groups of stocks. For related investment products, try the NYSE-listed Industrial Select Sector SPDR (XLI), the Technology Select Sector SPDR (XLK) and the Financial Select Sector SPDR (XLF).

Again if you only wish to operate in Canadian dollars, BMO Financial Group has a series of ETFs that cover most of the major global asset classes.