Hap Sneddon, chief portfolio manager and founder at Castlemoore Inc.
FOCUS: Technical analysis and macro portfolio strategy
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MARKET OUTLOOK

The current market structure reflects a positive pro-growth and rising inflation view with financials, energy, materials, discretionary and industrials showing strong relative strength, and defensives and interest-rate sensitive sectors such as utilities, bonds and consumer discretionary showing weaker relative strength. Technology and health care are somewhere in no man’s land now: not breaking down or moving decisively higher.

Part of the underpinning for this situation is based on economic data, part on investor inflation expectations and part from determined central bankers to simply raise rates. 

GDP prints in Canada and the U.S. have been decent as of late, though the recent Canadian print was underwhelming after the lag of the two BoC rate increases finally took effect. That being said, Deputy Governor Wilkins recently, and again, talked up accelerating future economic activity seemingly mudding the waters in understanding the BoC. And just before Christmas the third look at Q3 U.S. GDP data came in at 3.2 per cent from 3.3 per cent and the U.S. passed its tax code overhaul.

The two biggest inputs to inflation — housing and wages — are showing a bit of a mixed bag, but generally supportive of growth and inflation. Housing has paused in Canada and bounced up under the 2007 highs in the U.S.  In both countries employment gains have been positive, and increasing minimum wage legislation as well as U.S. companies handing out worker bonuses are also a tailwind for inflation. 

Rising rates at the U.S. Fed (the BoC is trying its best) were quietly a watershed event eight months ago, well before the markets began pricing them in just recently. Time will tell how this second phase of central bank experiments plays out and if they are appropriately getting in front of the curve or trying to wishfully manufacture investor consensus. 

If we are yet early for rate normalization — businesses, governments and individuals really can’t handle a steady march higher in rates — there will be opportunities in the next few months in defensive and interest-rate sensitive securities.

In the meantime, mid-term market indicators, including the last holdout, the advance/decline lines, have turned positive. Though short term indicators are extended and the U.S. tax billed favours capturing gains in 2018 (versus 2017), investors will see any near term downside, including from a geopolitical event, as temporary in the pro-growth, pro-inflation theme.

TOP PICKS

ISHARES S&P/TSX GLOBAL BASE METALS INDEX ETF (XBM.TO) 
At the core of the pro-growth investment theme and global central bank rate increases, industrial or base metals offer one of the best upsides in the next six months as investors growth more bullish on the outlook for supply and demand. Increased infrastructure activity, dwindling stockpiles and low new mine builds provide tailwinds into 2018. Using an ETF reduces individual company execution risk and broadens exposure by region and commodity. Investors seeking alpha may prefer to create a basket of FM.TO, HBM.TO, S.TO, TECKa.TO and LUN.TO.

KELT EXPLORATION (KEL.TO)     
The energy sector is also showing improving relative strength against other industries and the index itself, and Kelt, a mid-tier company focused on the exploration, development and production of crude and natural gas, offers strong upside through the cycle. Kelt, led by a team that sold Celtic in 2013 to Exxon for $3B, recently showed it is focussed on the right things with robust cash flow and scalable exposure with a basket of emerging plays. Next resistance is around $7.50; passing this will see minor resistance at $8.50 on the way to the intermediate target of $10.00. Investors seeking more safety may look at Suncor, then an ETF in the sector, to capture the sector move albeit with lower volatility and performance potential.

BANK OF AMERICA (BAC.N)   
In the U.S. banking space preference should be given to the large money-centered, universal banking model, with various silos of growth and increased potential from economies of scale. From the recent quarterly earnings announcement in October investors saw improved revenue growth and operating leverage, as well as better credit cost increases.  A break out past $25.80 acts as support with first upside in the mid-30’s.

PAST PICKS: FEBRUARY 17, 2017

HEALTHCARE SELECT SECTOR SPDR FUND (XLV.US)
Health care is one of the few sectors truly in a secular bull market and for this reason have representation in all investor portfolios.

• Then: $73.66
• Now: $84.41
• Return: 14.60%
• Total return: 16.35%

UTILITIES SELECT SECTOR SPDR FUND (XLU.US)
Utilities began to weaken on a relative basis back in the summer when we sold. We will be looking for bottoming opportunities in the next couple of months as markets have a more difficult time digesting higher rates (demand destruction). 

• Then: $49.57
• Now: $51.82
• Return: 4.53%
• Total return: 7.98%

WAJAX CORP. (WJX.TO)
Wajax was sold at the time to reduce our infrastructure allocation to SNC.TO and ARE.TO. Re-entry above 25.70 is preferred.

• Then: $23.70
• Now: $24.50
• Return: 3.37%
• Total return: 8.30%

TOTAL RETURN AVERAGE: 10.87%