The Consumer discretionary sector makes up about 3% of the TSX Composite index. The consumer discretionary index market cap is about 116 billion vs. the TSX composite, which is about 3.8 trillion as of August 22, 2008. Some of the Canadian companies you may be familiar with in the consumer discretionary index are Canadian Tire Corporation, CanWest Global Communications Corp., Cineplex Galaxy Income Fund, Cogeco Cable Inc., The Forzani Group Ltd., Magna International Inc., Rona Inc., Shaw Communications Inc. and Sears Canada Inc..

The consumer discretionary index closed at $91.61 on Friday August 22, 2008. The 52-week high was 128.04 on October 31, 2007 and the 52-week low was 79.88 on July 15, 2008. From the peak to trough the consumer discretionary index has dropped –36.5% vs. the TSX, which has –8.7% during this period. There has been a short-term rally of about 12% since the bottom on July 15, 2008. On August 5, 2008 the current price broke through the 50 day moving average at about $90 giving us an initial buy signal and broke through resistance on the upper end of the longer-term channel on August 8th. Since then, the price has come back to the upper end of the longer-term channel. We would want to see the price hold above this resistance level to feel confident there is enough support in a sustained rally.

Valuations are certainly attractive with the average P/E ratio at 11.89. In addition, the dividend yields are at 3.39% so it is attractive for value investors looking for above average yields. Especially when you compare it to bond yields. With lower valuations many of these stocks are looking attractive. Recently a combination of things has led to their recent rally. The lower Canadian dollar has helped companies like Magna improve its bottom line. In other cases, the drop in oil and materials has led to an expectation of lower costs and a shift to other sectors like consumer discretionary. Companies have been restructuring in anticipation of weathering the storm ahead. Consumer discretionary tends to suffer in tough times, however with lower valuations and higher dividend yields, there are some gems within the sector that can help you diversify your portfolio to reduce risk.

The technicals are currently pointing to buy. The fundamentals look good with select companies. With all the uncertainty in the news today about housing prices, the credit crisis, currency, commodities and energy swings, consider using this sector to diversify your portfolio. Companies with good valuations and higher dividend yield exist within this sector and can serve to reduce risk and fluctuations in your portfolio. Be selective and understand that it may be a while before macroeconomic conditions change enough to warrant an overweight position in this sector.

The Industrials index makes up about 272 billion in market capitalization. This represents almost 5% of the TSX market capitalization. Some Canadian companies you may recognize are BFI Canada Income Fund, Bombardier Inc., CAE Inc., Canadian National Railway Company, Canadian Pacific Railway Limited, Finning International Inc., SNC-Lavalin Group inc. and Westjet Airlines Ltd..

The Industrials sector closed at $114.24 on Monday August 11, 2008. In the last year, the 52-week high was $121.33 on June 5, 2008 and the low occurred on January 22, 2008 at $91.22. Until the double top on May 16, 2008 and June 6, 2008, the increase in price from the low to high was 26.5%. This represents about an 8% out performance relative to the TSX and a 19.4% out performance relative to the S&P 500. After June 6, 2008 the price declined –14%, bottoming on June 15, 2008. Subsequently we saw a rise of 9.2% from the last bottom in June to present. In the month of July they contributed to 1.9% of the points on the TSX, even though the TSX was down 5%. On August 5, 2008 the current price rose above the 50 day moving average giving us a buy signal. The next point of resistance is at $114 and if it doesn’t break through this point, we would become bearish.

From a fundamental standpoint, valuations are attractive with an average price-to-earnings ratio of 12.12. Although there are many growth stocks within the industrials sector, the average dividend yield is 2.21 so there are also some high dividends paying stocks within this sector. The most recent upward move in the sector has more to do with falling commodity prices, more specifically falling oil prices. This appears to be negatively correlated to oil so could be added as a diversifier in your portfolio. Be cautious though because the driver behind falling commodity prices could be due to short-term forces. One trend is an unwinding carry trade (borrowing in low-yield currencies such as the Yen and buying into high-yielding commodity currencies such as Canada or Brazil). As a side note, this has led to a rising US dollar. The second issue is an unwarranted shift to financials, which looks to me like a 6 year old gunfighter that can’t get his gun out of his holster fast enough.

Both technical and fundamental forces suggest industrials are moving in the right direction. Watch the technicals because the upward trend has not been well established yet. If we have a reversal in commodities, things will become bearish for industrials pretty quick.

The Financials index closed on Friday August 1, 2008 at $180.92. The Financials index has a market capitalization of almost $1 trillion, which represents about 18% of the S&P/TSX Composite index. Some Canadian companies you may recognize in the Financials Index are AGF Management Limited, Bank of Montreal, Bank of Nova Scotia, Canadian Western Bank, CI Financial Income Fund, Manulife Financial Corporation, Sun Life Financial and Great west Lifeco Ltd.

The rolling 52-week high for the Financials index over the last year was $223.89 on Oct 31, 2007 and the 52-week low was $156.72 reached on July 15, 2008. From the peak (high) to the trough (low) that represents an decrease of –28.8% for the Financials index vs. the S&P 500, which was down –21.6% over that same time frame and the S&P/TSX, which was down -8.7%. Year-to-date the Financials index is down –12.2%. The S&P/TSX is down –2.4% over the same period and the S&P 500 is down –14.2%. Since it’s low on July 15, 2008 the Financials index has increased 15.4% while the TSX was flat.

Technically, the chart is telling us that investors are bullish toward the Financials index in the short term. The longer-term trend from last year has been bearish represented by the downward price movement in the chart. It is testing resistance at the 50 day moving average at about $184. The next resistance level to break is at about $190, which is representative of the longer-term upper band it has not been able to break through over the past year.

The Financials index price-to-earnings ratio is trading at 12.95 times vs. the S&P/TSX, which is 17.22 times. The dividend yield is 4.06% vs. the TSX, which is at 3.02%. More specifically, the banks are trading at 10.3 times forward earnings on average and about 2 times their book value. This suggests good valuation and attractive dividend yields.

The recent rally has been fuelled by optimism due to several reasons. This includes easing energy prices, rescue plans for Fannie Mae and Freddie Mac and some positive earnings results for a few US financials along with short covering by traders and oversold signals. Although Canadian financials are viewed favourable to US financials, earnings will be reported in short order in Canada and concerns are still there about more write downs, slowing retail and commercial loan growth and slower growth in wealth management.

In the Saturday edition of the Financial Post it was reported that “things look tough in terms of earnings power for the next 24 months since revenue pulled in from securitization and debt markets has dried up”. RBC Capital Markets analyst Andre-Phillippe Hardy said in a research report that he expects CIBC to have write-downs of $1.5 billion.

Don’t let the message of short-term bullish technical indications and attractive valuations fool you. This looks to me like a “value trap”. I don’t think we are there yet.

The Materials index closed on Friday July 25, 2008 at $367.60. The materials index has a market capitalization of about $1.5 trillion, which represents about 22% of the S&P/TSX Composite index. Some Canadian companies you may recognize in the Materials Index are Agnico-Eagle Mines Ltd., Agrium Inc., Barrick Gold Corporation, Canfor Corporation, Eldorado Gold Corporation, Fording Canadian Coal Trust, Goldcorp Inc. and Nova Chemicals Corporation.

The rolling 52-week high for the Materials index over the last year was $426.52 on June 30, 2008 and the 52-week low was $362.49 reached on August 16, 2007. From the trough (low) to the peak (high) that represents an increase of 55% for the Materials index vs. the S&P 500, which was down -9% over that same time frame and the S&P/TSX, which was up 12.6%. Year-to-date the Materials index is up 8.7%. The S&P/TSX is down –3.3% over the same period and the S&P 500 is down –14.3%. Despite it’s recent drop of more than –9%, the materials index is one of only a few positive performers in the S&P/TSX year-to-date.

Technically, the chart is telling us that investors are bearish toward the Materials index. The trend from last year until June 30, 2008 was bullish represented by the upward price momentum in the chart. Recently, a double top pattern occurred on June 27, 2008 and July 15, 2008 followed by a downward channel from July 15, 2008 to date. On July 16, 2008 the current price dropped below the 50 day moving average at about $400. The next support level broken was the 200-day moving average, which occurred on July 24, 2008 at about $365.

The Materials index price-to-earnings ratio is trading at 24.53 times vs. the S&P/TSX, which is 17.22 times. Like the energy sector, the drop in materials prices has been due to a number of factors including periods where the US dollar has rallied and a general market sell-off due to increased concerns about the impact of higher costs on company profits and consumer spending. In a recent Financial Times article, written by Lina Saigol in London and Julie McIntosh in New York, entitled, “Hostile bids at their highest since 1999”, they point out that cash rich companies are making bids for weaker counterparts. A consequence of this increased merger & acquisition drives up share price of the companies being taken over. In both energy and materials, this should continue with the need to develop reserves to meet demand. Like energy, demand and supply issues have led to the rising price of materials. Longer term this should remain the pattern with continued rising demand from places like China.

Since the high last month the materials index is down –9% so like energy, in the short term, technicals are bearish but longer term, the fundamentals favour the bulls.