Brooke Thackray, research analyst at Horizons ETF Management Canada

Focus: Seasonal investing and technical analysis
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MARKET OUTLOOK

After U.S. wage growth increased at the fastest rate since 2009 (according to the nonfarm payroll report released on February 2), investors started to become increasingly concerned about the possibility of rising inflation. Looking through the inflation lens, investors have recently reacted to rising interest rates by pushing stock markets down. Many pundits have put forward the notion that rising rates do not matter. At some point rising rates do matter — it is just a matter of at what level. The late Martin Zweig coined the phrase “three steps and a stumble” to represent the market’s tendency to correct after three Federal Reserve funds rate increases. So far, the market has endured five increases with more in the pipeline. With the yield on the U.S. 10-year Treasury note coming close to three per cent, investors have a right to be concerned. Higher interest rates do not necessarily mean that stock markets are going to fall off a cliff, but it is unreasonable to expect the stock market to advance at January’s rapid pace. Although the stock market is expected to become more volatile than it has been in the past year, on a seasonal basis the stock market typically performs well into the beginning of May and is expected to be positive over the next few months.

TOP PICKS

FINANCIAL SELECT SECTOR SPDR FUND (XLF) – Bought Feb. 12 at $28.07
Not only is the financial sector in the U.S. currently in its seasonal period, which lasts until mid-April, but it also has a strong technical profile relative to the S&P 500 and is supported by solid fundamentals. Technically, the sector has formed a series of rising bottoms relative to the S&P 500 and is in an uptrend. Fundamentally, the sector is supported by rising interest rates and a steepening yield curve which allows banks to book more profits.

ENERGY SELECT SECTOR SPDR FUND (XLE)
The energy sector has a seasonal period that runs between Feb. 25 to May 9. The energy sector had performed well from the summer of 2017 into the beginning of 2018, but started to pull back in late in January. When the EIA announced a large 6.8-million-barrel build for the week ending Jan. 26, energy stocks corrected sharply. Analysts had expected a draw of 1.6 million barrels. A correction in a sector before the start of its seasonal period often leads to a good entry point.

CANADIAN TIRE (CTCa.TO)
Canadian Tire on average has a strong seasonal period from Feb. 11 to April 12, which is similar to the retail seasonal period. Recently, Canadian Tire came out with strong earnings that beat analyst expectations and with increased same store sales growth across its platforms. Despite its recent strong move, there still appears to be upside in Canadian Tire’s seasonal period.
 

PAST PICKS: DECEMBER 19, 2017

ISHARES RUSSELL 2000 ETF (IWM) – Sold Jan. 18 at $156.54
Typically, small caps tend to outperform large caps from mid-December until early March, but investor interest has been in large companies. The result has been that large-cap indexes such as the Dow Jones Industrial Index have outperformed smaller-cap indexes. A weaker U.S. dollar has also favoured large-caps stocks. Although small caps may perform well at this point relative to large caps if the U.S. dollar strengthens and investors return to a risk-on mode, investors should note that the strong seasonal period for the sector finishes soon.

• Then: $153.08
• Now: $153.10
• Return: 0.01%
• Total return: 0.39%

POWERSHARES QQQ (QQQ.OQ)
The Nasdaq-100 has been a strong performer, outperforming the S&P 500 in recent months. The seasonal period for the Nasdaq-100 ended mid-January, but it has continued to march higher. Technology stocks continue to help drive the sector higher. Investors should look for weakening momentum as an indication to considering exiting.

• Then: $157.70
• Now: $166.02
• Return: 5.27%
• Total return: 5.27%

HORIZONS SILVER ETF (HUZ.TO) – Sold Feb. 21 at $9.18
Silver bullion has a seasonal period that lasts from January 1 to March 31, but the sweet spot of the trade is January. Recently, silver has been showing signs of weakness. It typically benefits at the beginning of the year from being a precious metal and an industrial metal. The lustre has worn off the precious metal attribute recently and it has not participated in the industrial metals rally. The trade looks to be finishing early this year.

• Then: $8.97
• Now: $9.10
• Return: 1.44%
• Total return: 1.44%

TOTAL RETURN AVERAGE: +2.36%