Apr 25, 2017

Brooke Thackray's Top Picks: April 25, 2017

BNN Bloomberg

Brooke Thackray , BNN

Brooke Thackray, research analyst at Horizons ETFs (Canada) Inc.

Focus: Seasonal Investing and technical analysis
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MARKET OUTLOOK
The S&P 500 rally after the French election helped to bring the S&P 500 close to its all-time closing high of 2396 set on March 1. It seems that every time there is an election, the stock market rallies. As this current “election rally” started at high market valuations and the French election outcome was largely anticipated, investors should not necessarily expect a long, sustained upwards move. The stock market is richly valued compared to historical standards, sporting a 18.2 forward P/E for the S&P 500 and a trailing 12 month P/E of 24.4 (Wall Street Journal, April 21, 2017). The stock market is also overvalued by other measures, including a Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE) of 29 and a 131 per cent Market Capitalization (Wilshire 5000 Index) to GDP. Although market valuation metrics are not good market timing tools, high valuations tend to make the stock market more susceptible to a correction. Given that we are on the doorstep of six-month unfavourable period for stocks (Sell in May), consideration should be given to lowering investment portfolio risk.

TOP PICKS

HORIZONS US 7-10 YEAR TREASURY BOND ETF (HTB.TO)
Government bonds tend to perform well from early May until early October. As investors reduce their equity holdings in the unfavourable six-month period for stocks (May 6 to October 27), on the margin, money flows into fixed-income holdings, helping to push up the price of bonds. A lot of investors assume that when central banks raise their target rates, that bond yields will increase. Although this happens often, it does not happen all of the time. This spring, the U.S. Federal Reserve raised its target rate and at the same time the yield on U.S. 10-year treasury bonds decreased. Government bonds can provide a good seasonal opportunity for investors looking to reduce their exposure to equities in the summer months when the stock market often falters.

CONSUMER STAPLES SELECT SECTOR SPDR ETF (XLP)
Investors tend to be attracted to the consumer staples sector in the six-month unfavourable period (May 6 to October 27) when the stock market often does not perform as well as the other six months of the year. Although the sector is currently supporting a 21.4 trailing 12-month P/E, investors are attracted to the sector for the stability of its earnings, helping to support the sector.

CASH
Nobody likes to hold cash. Holding cash over the long-term can be costly as the effects of inflation reduce the value of cash. Nevertheless, there are times where holding cash can be prudent on a short-term basis. If the opportunity cost of other alternatives is negative, then cash has increased value. In addition, cash can be used as a strategic tool to purchase assets when they correct. Given that the summer months tend to be volatile, a correction in equities would provide an opportunity to buy assets cheaper or sectors of the stock market that tend to perform well in the summer months.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
HTB	N	N	N
XLP	N	N	N

PAST PICKS: FEBRUARY 23, 2017

HORIZONS S&P/TSX CAPPED ENERGY INDEX ETF (HXE.TO)
The energy sector typically performs well from February 25 to May 9. This year, the technical setup appeared to be strong as the sector had corrected previous to its seasonal period and was just starting to show strength at the beginning of its seasonal period. Oil prices are being battered around between OPEC talks of extending their production cuts and on the other side, an increase in U.S. oil production. The sector is finishing its seasonal period and is looking technically weak. Consideration should be given to exiting the sector.

Then: $21.00
Now: $20.02
Return: -1.8%
TR: -1.8%

MAGNA INTERNATIONAL (MG.TO)
Although Magna International appears to be attractive from a value standpoint, trading at a relatively low P/E, car sales have stalled with U.S. March sales coming in at 16.5 million versus an expectation of 17.3 million. Car sales have been robust for a long time and the March weak report could be signalling a downtrend. Given that car sales have slipped and Magna International finished its seasonal period on April 24, consideration should be given to exiting a position in Magna International.

Then: $59.20
Now: $56.29
Return: -4.91%
TR: -4.30%

MATERIALS SELECT SECTOR SPDR ETF (XLB) – Sold April 24, 2017 at $52.80
The U.S. materials sector generally benefits from a growing economy. More than two-thirds of the sector is made up of chemical companies. The materials sector did not really benefit from the “Trump rally.” The sector has been performing at market, but given that the seasonal period for the sector is ending on May 5, consideration should be given to exiting the sector.

Then: $53.32
Now: $53.65
Return: +2.54%
TR: +2.86%

TOTAL RETURN AVERAGE: -1.08%