Brooke Thackray's top picks: May 5, 2016

The economic and stock market conditions do not support a strong stock market over the next six months. The World Bank has reduced its Global 2016 GDP forecast from 2.9% to 2.5%. The U.S. has been sputtering along with anemic GDP growth (March GDP growth 0.5%) and declining industrial production (declining in the last seven months). Corporate profit margins are well above average with very little room to grow on the upside, and starting to decline. On a technical basis, the S&P 500® is close to its all-time high set last year in May. After a long period of consolidation, a strong catalyst is needed to move the S&P 500® substantially above its all-time high. To make matters worse, we have just entered the six month period when the stock market tends not to perform well. The six month period from May 5th to October 27th, has historically produced bigger losses and fewer large gains than the other six months. In addition, from 1950 to 2015, the S&P 500® in the six month unfavorable period for stocks has been positive 63% of the time, which is far less than the 82% of the time the S&P 500® has been positive in the favorable six month period. Also, in the same yearly time period, the S&P 500® has produced a geometric average loss of 0.5% in the six month unfavorable period, compared to a 7.8% gain in the favorable period. Given that the stock market is not supported by a strong economy and is technically vulnerable, and more importantly has entered its six month unfavorable period, it makes sense for seasonal investors to be conservative and reduce risk in their portfolios.

TOP PICKS:

Horizons US 7-10 Year Treasury Bond ETF (HTB.TO)     

U.S. Government bonds have a seasonal strong period from the beginning of May to the beginning of October. Investors tend to favour government bonds in the summer months as stock market returns often becomes more tenuous and volatility increases. Government bonds tend to perform particularly well on a seasonal basis in August and September.

*SHORT* SPDR S&P Homebuilders ETF (XHB.N)  

The homebuilders sector tends to perform poorly from April 27th to June 13th. In this time period, from 1990 to 2015, the homebuilders sector has lost an average 3.6% and has only been positive 32% of the time. Recently, the homebuilders sector has been performing well as the broad stock market has been rising. If the S&P 500® starts to weaken, it would be expected that the higher beta homebuilders sector would underperform in its seasonal period of weakness, making it an ideal short sell candidate.

Horizons U.S. Dollar Currency ETF (DLR.TO)    

The Canadian dollar, compared to the U.S. dollar, tends to perform well in late March and April. This year the Canadian dollar followed its seasonal trend with a bit of help from rising oil prices.  The trend reverses and the U.S. dollar tends to outperform in May and June as energy stocks tend to fall from being one of the top ranking sectors and the broad stocks markets enter their six month unfavourable seasonal period.

Past Picks: Feb. 29, 2016

SPDR S&P Retail ETF (XRT.N)

Sold March 24th @ $45.19

First Trust NASDAQ Global Auto Index Fund (CARZ.O)

Crescent Point Energy (CPG.TO)      

Total Return Average : +8.8%