Hap Sneddon, portfolio manager at CastleMoore Inc.

Focus: Technical analysis and macro portfolio strategy
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MARKET OUTLOOK
Many global indices — U.S., Canada, Europe, emerging markets — have broken out of ranges or are showing strong tendencies to do so. Underneath the asset and sector levels, there has been a slow (weekly) relative rotation towards defensive themes in spite of the push seen since the U.S. presidential election, and towards pro-cyclical areas more recently over the last few weeks.

At the close of last week, bonds, utilities, staples and health care have had improving relative profiles while financials, energy and industrials have had weakening ones. This change in market structure comes at a time when seasonality for pro-cyclical should be strong, and yet it also puts us on the look-out that this is another head-fake in what has been a series of them, starting with Brexit. There is the potential for another leg up, though the fuel to do so is low.

This said, hedging opportunities are inexpensive on a cost and risk basis, market sentiment is bullish, and this week Wednesday saw an up day on the S&P (0.50 per cent) and the VIX (11 per cent) — a rare occurrence. This week’s close will confirm how active we become in reducing risk and hedging portfolios for a soft spot, whether in time or price, that may be ahead.

TOP PICKS

HEALTHCARE SELECT SECTOR SPDR FUND (XLV)
Health care is one of the few sectors in a secular bull market. The first leg up began in 2012 and lasted through mid-2015. At present, valuations are decent and improving, demographics a tailwind, and the politics of the industry waning. Large-cap names, such as Merk and Pfizer, are showing leading attributes and can be good substitutes if sectorial outperformance is preferred. The ETF has a first target of $85.00.

UTILITIES SELECT SECTOR SPDR FUND (XLU)
The utility sector has recently turned up in the face of rising rates. While increasing inflation is a topical issue in the investment community, the relative strength improvement is supported in the interim by lack of wage growth follow through, a significant component, along with housing, or inflation, and the upside resistance on the U.S. 10-year TSY bond. The risk to reward is favourable at current levels with stop losses three to four per cent below. A rise to the technical target of the mid-60s would declare the rise in inflation transitory.

WAJAX CORP. (WJX.TO)
Wajax specializes in equipment, power systems, and industrial components, areas supported by a fiscal policy focus on infrastructure. This mid-cap company has seen its earnings rise the last three quarters. The stock has fallen from a high in the mid 50s in 2012, but this stock offers good risk to reward at present values, with risk protection (sell) close to current prices and a target in the high 30s. Expect volatility in this sector as some stocks, like Wajax, have run with the expectation of governmental spending while the final numbers and commitment has not been well defined.
 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
XLV  Y Y Y
XLU Y Y Y
WJX N N Y


PAST PICKS: FEBRUARY 5, 2016

PROCTOR & GAMBLE (PG.N) 
We hold the XLP. Better upside and safety. The sector on the whole has turned upside, offering significant return potential.

  • Then: $81.20
  • Now: $91.34
  • Return: 12.49%
  • TR: 16.09%

TRANSCANADA (TRP.TO)
We no longer hold TRP. We have energy infrastructure allocation in ALA.TO and SLB and have a few others on watch.

  • Then: $49.40
  • Now: $62.20
  • Return: 25.91%
  • TR: 30.97%

WAL-MART (WMT.N)
We continue to hold WMT as it drives comps and its on-line business in a tough retail landscape. Technically, it must hold the recent lows at $65.28 or there’s more the price understands than is known fundamentally. Decent present valuation and dividend (2.9 per cent).

  • Then: $67.00
  • Now: $68.91
  • Return: 2.85%
  • TR: 5.84%

TOTAL RETURN AVERAGE: +17.63%
 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
PG N N N
TRP N N N
WMT Y Y Y


FUND PROFILE: CANADIAN EQUITY PORTFOLIO

PERFORMANCE AS OF JANUARY 31, 2017:

  • 1 month: Fund 3.70%, Index* 0.64%
  • 1 year: Fund 12.04%, Index* 20.00%
  • 3 years: Fund 6.37%, Index* 4.12%
  • Mean drawdown recovery: Fund -4.12%, Index* -8.27%
  • Mean drawdown recovery (months): Fund 5.2 months, Index* 12.0 months

* Index: TSX Composite
* Returns are net of fees and dividends are reinvested


TOP HOLDINGS AND WEIGHTINGS

  1. Canadian Apartment Properties REIT: 6.2%
  2. Open Text Corp.: 5.9%
  3. Agnico Eagle Mines Ltd.: 5.7%
  4. Methanex Corp.: 5.2%
  5. Saputo Inc.: 4.2%


COMPANY TWITTER: @CastleMoore
PERSONAL TWITTER: @Hap_Sneddon
WEBSITE: castlemoore.com