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

North American stock markets are at all-time highs, or close to all-time highs. Despite the stock markets having high valuations by many metrics, they can still move higher for an extended period of time. We are currently moving into the favourable six-month period for stocks which starts on October 28th. North American stock markets are expected to move higher over the next six months, but it would not be surprising to see stock market volatility increase over this time period. So far, earnings this season have handily beaten expectations, which should help support stock markets over the next few months. Strong results in the U.S. financial and technology sectors should also help to rally higher from the current levels.

TOP PICKS

UNITED PARCEL SERVICE (UPS.N)
On average, UPS has underperformed the S&P 500 on an annual basis from 2000 to 2016. But in the time period from October 10th to December 8th, on average UPS has produced an average gain of 8 per cent and has outperformed the S&P 500 88 per cent of the time. Longer term, competition from Amazon is creeping into the delivery business. Nevertheless, UPS is still expected to perform well prior to its busiest time of the year: the Christmas holiday season.

BMO EQUAL WEIGHT BANKS INDEX ETF (ZEB.TO)
Canadian banks have performed well recently. After strong Q3 earnings in August Canadian banks stumbled, but have recently shown strength outperforming the TSX Composite Index. The valuations for Canadian banks are at the high end of the range. Although Canadian banks typically perform well at this time of the year on a seasonal basis, often after a strong run into the final quarter of their fiscal year their performance will start to weaken once they start to release their Q4 earnings in late November.

TECHNOLOGY SELECT SECTOR SPDR FUND (XLK.US)
The technology sector has performed well, outperforming the S&P 500 since 2015, with a few dips along the way. With strong earnings for technology companies, the sector will probably continue to outperform in the near future. The technology sector tends to perform well at this time of the year into mid-January, with a break for two weeks at the beginning of December. Given that U.S. investors have a possibility of lowering taxes next year, investors may hang on to stocks that have made large gains this year, before selling them in the New Year. Many technology stocks fit into this category as they have performed well this year.
 

PAST PICKS: JULY 31, 2017

PROCTER & GAMBLE (PG.N)
Investors have often sought refuge in companies in the consumer staples sector, such as Procter & Gamble, during times of uncertainty. Consumer staples companies have typically provided greater stability in earnings and higher dividends than the overall stock market. Over the last few months, Procter & Gamble has not performed well as investors have shyed away from the consumer staples sector to avoid “bond proxies.” In addition, Nelson Peltz, an activist investor, whom many investors were counting on to shake up the company, was denied a seat on the board, putting a damper on the stock. Also, investors have reacted negatively to Procter & Gamble’s recent earnings, as revenue was less than expected.

• Then: $90.82
• Now: $87.03
• Return: -4.17%
• Total return: -3.45%

FIRST TRUST ALPHADEX U.S. UTILITIES SECTOR INDEX ETF (FHU.TO)
The utilities sector typically performs well in the summer as investors are attracted to its high yield. Recently, the sector has softened as investors have been increasingly concerned about the possibility of rising interest rates. The sector typically finishes its seasonal period in early October.

• Then: $23.49
• Now: $24.12
• Return: 2.66%
• Total return: 3.14%

HORIZONS GOLD ETF (HUG.TO) – bought position on June 28th, 2017 at $11.57.
Gold bullion performed well in most of its seasonal period, which starts in late July and ends early October. Currently, gold is being battered around by changing perceptions on the possibility of the Federal Reserve raising its benchmark rate. According to CME’s FedWatch Tool, which is based upon CME Group’s 30-Day Fed Fund futures prices, there is a 97 per cent probability that the Federal Reserve will raise rates at its December 13th meeting. It is possible that gold might find some reprieve after the December meeting.

• Then: $11.71
• Now: $11.65
• Return: -0.55%
• Total return: -0.55%

TOTAL RETURN AVERAGE: -0.28%