Oct 25, 2018

Brooke Thackray's Top Picks: Oct. 25, 2018

BNN Bloomberg

Brooke Thackray , BNN Bloomberg

Brooke Thackray, research analyst at Horizons ETF Management Canada
Focus: Seasonal investing and technical analysis

MARKET OUTLOOK

The world has changed. It was not long ago that investors were repeating the mantra that rising interest rates are good for the stock market, with them being indicative of a strong economy. Although this phenomenon is generally correct at the beginning of a business cycle, it doesn’t play out in its late stages. The economy is in the late stages now and investors are starting to anticipate that rising interest rates will reduce borrowing from consumers and businesses, starting to hurt the economy. Rising interest rates aren’t good for the economy and the stock market at this time. Up until recently, investors have been comfortable looking forward to clear economic growth and earnings. According to Thomson Reuters, Q3 earnings growth is expected to come at 23.2 per cent growth on a year-over-year basis. Earnings growth is expected to come in at a reduced 10.2 per cent growth in 2019, largely because of the recent tax reforms boosting 2018 earnings. With expected reduced earnings next year and rising interest rates, investors don’t have the same clarity for the future. It is as if an optometrist just slid the next test lenses in front of the eyes of investors and the world has become a lot fuzzier.

In the late stages of a business cycle, when interest rates have a rapid increase over a period of one and half months, the stock market tends to pause or correct. This phenomenon has played out according to the past trend as the yield in the 10-year U.S. Treasury note started to increase in mid-August and then a month and half later, the stock market started to correct. Although investors may pause or digest the recent interest rate increases at this time, seasonal tendencies are supportive of the stock market moving higher over the next six-months. The favourable six-month period for stocks starts on Oct. 28 and lasts until May 5. The current slump in stock prices is probably a good opportunity to increase holdings and investors should look for the stock market to move higher into the end of the year.

TOP PICKS

FIRST TRUST CONSUMER DISCRETIONARY ALPHADEX FUND (FHD.TO)

Consumer staples have been performing well recently as investors have been looking to hide in defensive positions. As the stock market moves into its seasonally strong period from late October until early May, investors typically shift to their preference to the consumer discretionary sector. The consumer discretionary sector has recently been undperforming and looks to be a good time to enter the sector as its strong seasonal period starts.

SPDR S&P RETAIL ETF (XRT.N)

The retail sector has a strong seasonal period from Oct. 28 to Nov. 29. Generally, investors look to enter into the retail sector to take advantage of the possible boost in retail stocks coming into the busiest day of the year for the retail sector: Black Friday. From a seasonal point of view, it’s best to enter before the average investor and exit when there’s maximum interest in the sector. This year, Black Friday comes early on Nov. 22. Investors should consider exiting the position the day before Black Friday.

UNITED PARCEL SERVICES (UPS.N)

UPS typically performs well from Oct. 10 to Dec. 8. The average investor is much more interested investing in UPS around the holiday season. To take advantage of this trend, it’s often best to enter into UPS in October and exit in early December, before the Christmas season deliveries get into full swing. UPS recently released its earnings, largely in line with forecasts, but the stock still suffered from selling pressure. Its recent pullback could be a good entry position.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
FHD	N	N	N
XRT	N	N	N
UPS	N	N	N

PAST PICKS: JULY 23, 2018

ISHARES GOLD TRUST (IAU.N)

Then: $11.75
Now: $11.80
Return: 0%
Total return: 0%

FORTIS (FTS.TO)

Then: $42.40
Now: $43.91
Return: 4%
Total return: 5%

ISHARES 7-10 YEAR TREASURY BOND ETF (IEF.O)

Then: $101.72
Now: $100.71
Return: -1%
Total return: 0%

Total return average: 1.7%

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
IAU	N	N	N
FTS	N	N	N
HTB	N	N	Y

FUND PROFILE

Horizons Seasonal Rotation ETF (HAC.TO)
Performance as of Sep. 30, 2018

1 month: -0.3% fund, -1.1% index
1 year: 9.6% fund, 6.5% index
3 year: 7.7% fund, 9.9% index

Index: S&P/TSX 60 Index.
Funds performance includes reinvested dividends and is net of fees. Annualized performance for periods of one year or greater.

TOP 5 HOLDINGS AND WEIGHTINGS