Keith Richards, president and chief portfolio manager at ValueTrend Wealth Management

Focus: Technical analysis

MARKET OUTLOOK

The plunge in the S&P 500 post-monetary policy statement by the U.S. Federal Reserve has brought markets well below the February lows. The S&P 500 now has significant overhead resistance at just over 2540 with little technical support. It should be of comfort for people who pay attention to my BNN Bloomberg appearances and blogs to know that the technical way of looking at the markets has saved the ValueTrend Equity Platform from much of the grief that the majority of investors experienced. The ValueTrend Equity Platform has a history of typically experiencing somewhere around 30 to 40 per cent of the market’s volatility in a bear market.

How we’ve managed risk this year

We held 24 per cent cash over the summer, invested half of that cash on a signal before mid-term elections and retained the balance of the cash given the lack of new buy signals. We have been holding about 12 to 13 per cent cash in the ValueTrend Equity Platform to date. We have also maintained some U.S. dollar exposure to play that upside.

One of our buy signals is to look for three positive days on the market (within four trading days) that takes place after a major selloff. There have been several two day rallies over the recent decline since September. Our three day rule kept our cash on the sidelines. Many investors were fooled into buying off the recent “lows” that followed these short rallies!  

The battle plan

As noted above, the market broke 2540 this week. There appears to be few market catalysts for the markets to move up in the near-term. Though the market looks oversold given the relatively positive economic data that brought the Fed to hike rates, there are not many market moving events that would point to a strong reversal anytime soon. New Fed talk, corporate earnings, a potential China trade deal and most economic data from this December all won't be in the headlines until January. Thus we expect that the Santa Claus rally, which is typically in the last week of the year and the first week of the new year, is unlikely. However we do anticipate an oversold rally as catalysts appear in January.

Our three day rule applies to buying and selling. We are looking for three days of the S&P 500 below 2540 as a sell signal. If the market does not rise above 2540 by Monday of next week we anticipate selling a bit more equity to raise cash. If it continues to remain below 2540 into the following weeks we will look for further short rallies to sell.

On the other hand should the market form a base we will count three days and then re-deploy our cash. It should be noted that markets are quite oversold. We simply need a technical signal to inspire a deployment of capital. The time to buy is when markets are low and that time will arrive. While it’s true that the actual fundamental environment for many of our investments is quite constructive, the reason for owning these investments is to realize a positive return. We will continue to look at markets quantitatively for new buy and sell signals, all with an eye on limiting risk and earning positive returns over the long run.

TOP PICKS

BMO INDIA EQUITY INDEX ETF (ZID.TO)

This and other emerging markets are outperforming North America markets at this time.

UNITED PARCEL SERVICE (UPS.N)

This stock is near its major support lines of 2015. It is likely to hold above $90/share and could easily bounce into the $115 area upon a market rally.

CASH

PAST PICKS: SEPT. 26, 2018

SNC-LAVALIN (SNC.TO)

This stock has long term support at $51, which is where we bought it at earlier this year. It cracked support like so many stocks and seems to be basing of late despite the chaos. I think it’s highly likely to move up to $51 again in a market rally. We will play it by ear if I will continue to hold past that point.

• Then: $53.31     
• Now: $44.51      
• Return: -17%     
• Total return: -16%

BCE INC (BCE.TO)

We bought BCE at $58 early in the year and it’s pretty near breakeven. It seems to be holding out despite market chaos.

• Then: $52.86     
• Now: $54.30      
• Return: 3%         
• Total return: 4%

MANULIFE (MFC.TO)

This, like most stocks of late, has cracked recent support. Big support comes in at $19 and we will sell if that cracks.

• Then: $23.66     
• Now: $18.62      
• Return: -21%     
• Total return: -20%

Total return average: -10%

WEBSITE: www.valuetrend.ca

TWITTER: @ValueTrend