Hap Sneddon, founder and chief portfolio manager at Castlemoore

Focus: Technical analysis

MARKET OUTLOOK

Typically, the transition from Q2 to Q3 is a fairly muted time for markets, producing little in the way of historical stock price upside as the economic focus shifts from manufacturing, housing and retail activity to consumer and business spending. This year, we have the added attention being paid to global trade, and the U.S. Fed rate cut that’s ensued, as the U.S. and China try to reset their relationship. The economic backdrop has been fairly supportive of prices as employment, retail sales and corporate earnings have been quite decent with only manufacturing showing up as noticeably weak.

Markets are soft and susceptible to outsized spasms from economic or, more likely, geopolitical events at this time of year due to thinly-staffed trading desks of junior traders. This August we are working through a technical trading bottom, with the June low on the S&P as the demarcation point between normal volatility and having our answer on whether the trade outlook deteriorates further from current expectations. Current put/call readings and near-term strength in the U.S. dollar suggest one more lurch to the downside before a resumption of the march to new highs.

TOP PICKS

iShares S&P/TSX Capped Energy Index ETF (XEG.TO) – Last purchased on June 25, 2019 at $9.03

Canadian energy stocks have suffered the double whammy of volatile crude benchmark pricing and lack of access to global markets (the pipeline debate). However, from a comparative fundamental and “value” technical basis, the risk to reward over the next year is quite favourable. Cash flows, particularly in senior/integrated (+35 per cent) and conventional producers (+9 per cent), are a tailwind, while industry stocks are in general at support levels last seen in late 2015 and from 2002-04.  Though sentiment is terrible, investors are getting their money in good today.

iShares China Index ETF (XCH.TO) – Last purchased on November 18, 2018 at $26.95

Similar to our energy top pick, an investment in this unit, which covers the top 50 largest Chinese stocks, represents a call on a market that is at an attractive entry point both fundamentally and technically amidst terrible investor sentiment. Chinese markets have fallen for close to two years now, and have come to rest three times at current levels. Sure, global markets, including trade competitors like the U.S., have been impacted by the growing negative trade cloud (more so recently), but no stocks will benefit from a thawing or even a piecemeal agreement as much as China will. A break below current levels on a monthly or weekly basis implies larger global concerns and would be cause for stepping aside.

iShares S&P/TSX Capped Consumer Staples Index ETF (XST.TO) – Last purchased on August 1, 2019 at $64.08

The consumer staples sector offers investors broad exposure to moderate growth stories with fairly predictable income and dividend growth. Due to this, units that are domestically focused will also offer a buffer against further global trade friction. Most importantly, this ETF has recently broken out of a several-month consolidation, accompanied by many indicators also turning up.
 

PAST PICKS: FEB. 4, 2019

CP Rail (CP.TO)

• Then: $267.82
• Now: $309.57
• Return: 16%
• Total return: 16%

Progressive (PGR.N)

• Then: $66.03
• Now: $80.15
• Return: 21%
• Total return: 22%

iShares Core MSCI Emerging Markets ETF (XEC.TO)

• Then: $26.11
• Now: $24.32
• Return: -7%
• Total return: -6%

Total return average: 11%
 

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