Brooke Thackray's Top Picks: October 27, 2016

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

Focus: Seasonal investing and technical analysis
_______________________________________________________________

MARKET OUTLOOK
Since late spring, the S&P 500 has advanced a nominal amount other than the Brexit rally. Since July the S&P 500 has been consolidating and is looking for direction. So far in this earnings season, 75 per cent of companies have beaten expectations (Thomson Reuters, October 25, 2016). Despite this favourable outcome, the stock market has failed to rally. The U.S. election takes place on November 8 and investors are starting to get anxious about the possible outcome. The stock market does not like uncertainty. Although at this point, Hillary Clinton is expected to win the bid for presidency, the Brexit polls and unexpected outcome are still fresh in investors’ memories. Even if Clinton wins, the stock market may not like the outcome if the Democrats control the Senate and the House of Representatives. Historically, the best six months of the year for the stock market have been from October 28 to May 5. Although gains are still expected in this period, they are expected to be modest over the next few months as investors get comfortable with the possibility of the Federal Reserve raising its interest rate in December and also a new U.S. president taking power in January.

TOP PICKS

INDUSTRIAL SELECT SECTOR SPDR FUND (XLI.US) – Bought Oct. 25 at $56.95
The industrial sector tends to perform well from October 28 until December 31. This year, the sector has been performing at market since February. Within its market-range performance since earlier this year, generally the industrial sector outperformed the S&P 500 when the stock market was rising and underperformed it when it was declining. As the stock market is expected to increase over the next few months, the industrial sector is expected to outperform the S&P 500. Historically, the industrial sector has outperformed the S&P 500 78 per cent of time in the period from October 28 to December 31 during the years 1989 to 2015. The industrial sector is expected to continue its record of outperformance in its seasonal period. The American Chemistry Council released its Chemical Activity Barometer on October 25 that showed strongly-improving numbers. An increase in the Chemical Activity Barometer is often a harbinger of increasing industrial production, which should support the industrial sector.

UNITED PARCEL SERVICE (UPS.N)
United Parcel Service tends to perform well from October 10 to December 8. In this period, from 2000 to 2015, UPS has produced an average gain of 7.8 per cent and has been positive 88 per cent of the time. It has also outperformed the S&P 500 88 per cent of the time in this period. Investors are attracted to UPS in its seasonal time leading up to the holiday shopping period before Christmas. From a seasonal standpoint, it is typically best to exit UPS in early December before the shopping season finishes. After its initial rise at the beginning of the year, UPS has been performing at market, setting up well for its seasonal period. UPS is expected to release earnings on October 27 before the bell.

BMO S&P/TSX EQUAL WEIGHT BANKS INDEX ETF (ZEB.TO)
The Canadian banks have been performing well over the last few months, particularly since they released their last earnings in August. At the time, the Canadian banks released earnings that beat expectations. Investors have reacted favourably and have pushed up the price of bank stocks. The outperformance of this sector is expected to continue. Historically, banks have outperformed the TSX Composite Index from October 10 to December 31. Nevertheless, investors should be aware that when Canadian banks have released strong Q3 earnings in August and the sector continues to outperform into Q4 earnings, banks stocks have a tendency of underperforming once they start to release earnings in late November and early December.
 

PAST PICKS: MAY 5, 2016

HORIZONS US 7-10 YEAR TREASURY BOND ETF (HTB.TO) – Sold Sept. 12 at $54.71
Investors were attracted to U.S. government bonds earlier in the year as the economy was showing signs of slowing, and as a consequence the expectation was that Federal Reserve would delay raising interest rates. Once equity markets started to rally after Brexit, U.S. government bonds started to retreat as investors once again raised their expectation level that the Federal Reserve would raise rates in the not-so-distant future. Currently, the Federal Reserve is expected to raise interest rates in December. Although the rate rise is largely anticipated, bonds are still not expected to perform well over the next few months.

• Then: $53.32
• Now: $55.82
• Return: 4.68%
• TR: +4.68%

SHORT SELL: SPDR S&P Homebuilders ETF (XHB.US) – Bought to cover May 25 at $34.14
Shortly after the Brexit rally that occurred at the end of June into July, the homebuilders sector started to underperform the S&P 500. Investors were concerned that the Federal Reserve was going to raise interest rates as the economy was starting to show signs of improvement and the stock-market strength was acting as a buffer for Federal Reserve action. Recently, the homebuilders sector has performed poorly as home starts in the U.S. have been below expectations. Home starts for September came in at 1 million (U.S. Census Bureau). The sector could continue to underperform until the end of the year as investors anticipate the Federal Reserve raising interest rates in December, which in turn would affect mortgage rates and, ultimately, home starts.

• Then: $33.30
• Now: $31.33
• Return: +5.91%
• TR: +5.63%

HORIZONS US DOLLAR CURRENCY ETF (DLR.TO) – Sold June 8 at $12.64
The U.S. dollar started to improve in strength relative to the Canadian dollar in May as investors became concerned over stock-market valuations and the possibility of the Federal Reserve raising interest rates. The U.S. dollar has outperformed the Canadian dollar from May until October as the Canadian economy has shown a weak economic growth profile. The U.S. dollar tends to perform well against the Canadian dollar from October until mid-December. Although a rapid rise in oil prices is not expected at this time, such a development would help to support the Canadian dollar.

• Then: $12.80
• Now: $13.31
• Return: +4.02%
• TR: +4.02%

TOTAL RETURN AVERAGE: +4.77%
 

FUND PROFILE: HORIZONS SEASONAL ROTATION ETF (HAC.TO)

PERFORMANCE AS OF SEPTEMBER 30, 2016:

• 1 month: Fund -0.7%, Index* 1.2%
• 1 year: Fund 7.0%, Index* 13.0%
• 3 year: Fund 8.5%, Index* 8.4%

* Index: S&P/TSX 60 Composite Index Total Return

TOP HOLDINGS AND WEIGHTINGS

1. Cash: 47%
2. Horizons S&P 500 Index ETF (HXS): 20.0%
3. Horizons S&P/TSX Capped Financials Index ETF (HXF): 15.0%
4. iShares Global Agriculture Index ETF (COW): 5.0%
5. Industrial Select Sector SPDR Fund (XLI): 10.0%

TWITTER: @BrookeThackray
WEBSITE: www.horizonsetfs.com/HAC