Hap Sneddon, chief portfolio manager at Castlemoore
Focus: Technical analysis
On late February, I wrote: “By many metrics, current stock markets are extended to the upside in the short term. For example, insider selling is high and put/call ratio data shows complacency. The VIX is scrapping the bottom of a yearly range and many indicators are showing overbought levels. But how things work off such conditions is always a mix of both price and time. There’s no set blend, however. We always find out later how it gets composed, and what the catalysts were.”
Now we know the composition was severe, the catalyst a novel healthcare issue and the economic forecast today seemingly temporary for some sectors, longer for others and generally unknown.
Foremost in our technical analysis as we look for opportunity while being mindful of risk is the 2,300 level on the S&P 500, the highest quality and most liquid of any global securities marketplace. We did come very close to that line on Monday and will likely probe it again. This is of importance as it marks the Dec. 24 low, a spot where previous buyers came in.
What has changed from a fundamental perspective over the last several days was the liquidity injection by central banks, including the Bank of Canada, but in particular the massive moves made by the Fed. Liquidity is the mother’s milk of markets, even over earnings and economic data. This was evident last week when dislocations bubbled up in U.S. Treasuries and gold bullion and they were sold hard when the margin clerks came calling and spreads and fills were terrible.
Now that liquidity has improved, more efficient and less volatile price discovery can start. This of course is subject to further market spasms (and additional government reactions), but it appears that we are closer to a bottom in terms of both price and time than we were 20 days ago. The best judgement today on the corporate impact seems to be in terms of a quarter or two. The “snap-back” factor will be strong, though longer term damage may have happened and is unknown at present.
For intermediate-term opportunities, it’s usually best to look at what has held in best. Staples, technology, healthcare and utilities have been stalwarts and paint a risk barbell portfolio picture (growth and defence) going forward. In spite of all that’s happened interest rates are on the rise again, resuming a trend that started in September but turned back in January. The potential for inflation on the other side of this because of supply chain backlogs and government spending, to name a few inputs, is high and may surprise investors.
Defence is very expensive today and growth less so. However, these conditions may remain until things clear a bit more and some exhaustion sets in.
Though we are mindful of the “cost” of portfolio defence today, consumer staples companies offer predictable earnings, are seasonally strong now and through to the summer and still remain technically positive. We will watch this timely investment closely for a technical change that may occur from pulling demand forward from all the hoarding.
ELI LILLY & COMPANY (LLY NYSE)
All turmoil aside, healthcare remains in a secular bull market. With Joe Biden being the presumptive Democratic nominee much of the political overhang in the sector has dissipated, allowing companies to thrive based on their benefit and contribution to global health. Eli Lilly is focused on improving patient options from TNF drugs (tumor necrosis factor, drugs to stop inflammation) by launching two new drugs that improve efficacy and safety and on unmet needs on oncology and neurology. Its divestiture of its non-core animal line and recovery after its 2014 patent cliff too are both positive for the company.
OPEN TEXT (OTEX TSX)
This Canadian company has defensive and growth attributes. Being a “roll-up” story allows Open Text to dial things back if needed and control its costs, but also to take advantage of better pricing for targeted acquisitions. Open Text has a strong balance sheet and cash flow from a 73 per cent recurring revenue stream.
PAST PICKS: DEC. 23, 2019
SUN LIFE FINANCIAL (SLF TSX)
- Then: $59.64
- Now: $40.76
- Return: -32%
- Total return: -31%
PEMBINA PIPELINE (PPL TSX)
Sold on March 12.
- Then: $48.69
- Now: $23.29
- Return: -52%
- Total return: -52%
XILINX INC (XLNX NASD)
Sold on March 2.
- Then: $98.90
- Now: $75.52
- Return: -24%
- Total return: -23%
Total return average: -35%