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

Focus: Seasonal investing and technical analysis
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MARKET OUTLOOK
The Trump rally has been stronger than expected. From the U.S. election day to December 9, the S&P 500 has gained 5.6 per cent. The stock market is positive partly because of investor expectations of pro-business policies under President-elect Trump, and partly because investors are rushing into the market fearing that they may miss out on the stock market rally. The big question is: how long can the rally last? From a seasonal standpoint, the stock market is in its favorable six-month period when it typically has larger gains and few large losses. Although the stock market can correct at any time, the stock market is expected to be higher in April/early May. There seems to be a consensus building that the stock market will start to correct around the presidential inauguration day. The generally-accepted rationale for this is that the president typically gets into power and then blames the last president for leaving the country in a mess. The markets do not like to hear bad news and often responds negatively. It is difficult to predict what President-elect Trump will do after he is inaugurated, but if he is fast out of the gate introducing policies that are favourable for business and provide a stimulus for the economy, the stock market rally could carry on for a 100-day honeymoon period that is often bestowed on U.S. presidents before they are harshly judged.

TOP PICKS

FINANCIAL SELECT SECTOR SPDR FUND (XLF)
The financial sector has been one of the main beneficiaries of Trump’s proposed policies. Not only have bond yields increased dramatically, increasing the net interest margins for banks and therefore increasing profits, but Trump has also promised to partially deregulate the financial industry. As a result, the financial industry has led the market higher. Although the financial industry may pause in its performance, it is still expected to outperform the S&P 500 over the next few months. From December 15 to April 13, in the years from 1989 to 2016, the financial sector has produced an average gain of 5.7 per cent and has been positive 67 per cent of the time.

ISHARES RUSSELL 2000 ETF (IWM)
Small-cap stocks have been strongly outperforming the stock market since the U.S. election. They have benefitted from the potential corporate tax cut that Trump has promised. In general, small companies benefit more than large companies from corporate tax reductions because they generate much more of their revenue from domestic operations. In addition, if the economy does increase substantially, small companies would receive the greatest benefit because of their domestic focus. The seasonal period for the small-cap sector is from December 19 to March 7. In this period, from 1979 to 2016, the Russell 2000 has produced an average gain of 5.5 per cent and has been positive 76 per cent of the time.

HORIZONS NASDAQ-100 INDEX ETF (HXQ.TO) – Purchased at the close of the market on December 13
The technology sector, the largest sector in the Nasdaq-100 Index, and the health care sector, also a component of the Nasdaq-100, have not been beneficiaries of the Trump’s proposed policies and have lagged behind the S&P 500. As some of the overbought sectors of the stock market that have benefited from the prospect of a Trump presidency pause in their climb, the money will probably flow into the laggards of the stock market that are typically strong at this time of the year. The Nasdaq Composite Index has underperformed the S&P 500 since late October. It typically starts to perform well in the second half of December and should be a beneficiary of fund flows from some overbought sectors at this time. From December 15 to January 23, in the years from 1971 to 2016, the Nasdaq Composite Index has been positive 71 per cent of the time and produced an average gain of four per cent.
 

PAST PICKS: OCTOBER 27, 2016

INDUSTRIALS SELECT SECTOR SPDR FUND (XLI)
The industrial sector has performed well with the “Trump Bump” as it has benefited from the expectation of increased infrastructure spending. This is a longer-term macro trend and the sector is expected to perform well over the next few months in its seasonal period. The industrial sector’s performance could start to wane if investors start to doubt the ability of Trump to implement infrastructure spending in a timely fashion. Currently, investors are taking Trump’s claims at face value, but that could change in a few months once Trump’s inauguration honeymoon is over. Nevertheless, the sector still stands in good stead and is expected to perform well over the next few months.

• Then: $56.76
• Now: $63.66
• Return: +12.15%
• TR: +12.15%

UNITED PARCEL SERVICE (UPS.N)
UPS started to outperform the S&P 500 just after its seasonal period started in October, and has continued its outperformance in December. UPS benefits from investors buying into the stock ahead of the Christmas holiday season. Investors view the busy holiday season as a catalyst to drive the stock higher. The seasonal period for UPS starts on October 10 and ends on December 8. In this period, from 2000 to 2015, UPS has produced an average gain of 7.8 per cent, has been positive 88 per cent of the time and outperformed the S&P 500 88 per cent of the time. As the seasonal period for UPS has just finished, seasonal investors should be looking to exit the stock upon weakness relative to the S&P 500.

• Then: $108.08
• Now: $120.16
• Return: +11.17%
• TR: +11.94%

BMO S&P/TSX EQUAL WEIGHT BANKS INDEX ETF (ZEB.TO)
The Canadian banking sector reported strong Q3 earnings in August and outperformed the TSX Composite Index heading into Q4 earnings. Overall, the banking sector reported stronger-than-expected Q4 earnings in the last week of November and beginning of December. Often, if Canadian banks have outperformed the TSX Composite Index over the summer months and into autumn, their relative performance will fade with the release of their Q4 earnings. Currently, the Canadian banking sector is still performing well as they are benefitting from a steepening yield curve.

• Then: $24.59
• Now: $27.05
• Return: +10.00%
• TR: +10.31%

TOTAL RETURN AVERAGE: +11.46%