FOCUS: Technical Analysis & Seasonal Investing

Market Outlook:

We are reaching the time of year when investors start to contemplate the seasonal strategy of “Sell in May and Go Away.”   The strategy implies broadly that investors should own equities during the period of seasonal strength from the end of October to the end of April and avoid equities during a period of seasonal weakness from the beginning of May to the end of October.   Since 1950, the S&P 500 Index has averaged a minor gain of 0.14% between May 5th and October 27th, the off-season for stocks, and positive results were achieved in 62% of those periods.   While the returns for equity markets are certainly not as robust as the favourable season from October through April, losses in the off-season are certainly not guaranteed.  The strain on the broad market benchmark between May through to October was largely attributed to three sectors: materials, industrials, and consumer discretionary.  

Looking through history, the largest declines during the off-season for stocks have occurred during recessionary periods.  So, are we headed towards a quarterly economic contraction?  While we’ve seen below average results in reports that are sensitive to low commodity prices, employment and those reports relating to the consumer are trending above average, keeping the change in economic activity in the plus column.  But it is earnings that may be the bigger issue with companies on track to report the fourth consecutive quarter of year-over-year declines.  The S&P 500 Index is showing a trailing P/E of 18.2, according to Factset, well above the 10-year average of 15.8 and the highest level outside of a recession since the late 90’s, in what we now know was a bubble related to bloated technology valuations.  Investors will be looking for something this earnings season to justify both the trailing and forward valuations that are high compared to historical norms. 

Technically, major equity benchmarks in the US, such as the S&P 500 Index, are within a massive area of supply given the approximately 18 months trading around these highs.  Stocks are likely to require a catalyst to break this overhead resistance.


BMO U.S. High Dividend Covered Call ETF (ZWH.TO)  

This ETF provides exposure to a dividend focused portfolio with the benefit of collecting additional yield through a covered call write strategy.  Coming into the more volatile time of year for stocks, investors will want to find ways to reduce risk in equity portfolios and this defensive ETF is an ideal way to do that.  Dividend stocks, in general, are less prone to seasonal fluctuations than low or no-yielding equities and if we are to assume that upside for equities is capped until we receive further clarification regarding forward valuations in this coming earnings season, the call write overlay has proven benefits above the benchmark return in a flat to negative market.

Alphabet Inc. (GOOGL.O)

Technology stocks tend to perform well into the spring months, leading up to the developer conferences in May and June.  Alphabet is holding their event in the middle of May with Apple following soon thereafter in June.  These events have all the fanfare of a product launch, but without the buy the rumour, sell the news that is typically realized with the unveiling of a new device.  While the stock doesn’t have an extensive trading history, shares of GOOGL have gained an average of 16.95% between March 16th and July 19th, higher in 9 of the past 11 periods. Shares remain supported around the 20-day moving average with longer-term support presented around the 20-day moving average with longer-term support presented around the 200-day, which recently moved above $700.

BMO Short Federal Bond Index ETF (ZFS.TO)

During the off-season for stocks, government bonds offer a way to reduce portfolio beta while collecting a yield higher than cash equivalents.  This ETF holds short-term (1 to 5 year) bonds issued by the Government of Canada as is presently yielding 1.79%. 

Disclosure Personal Family Portfolio/Fund

Past Picks: Jan. 8, 2016

Aetna (AET.N)

Recommended at: Now at: Change Total Return
$107.07 $110.28 +3.00% +3.23%

Valero Energy (VLO.N)

Recommended at: Now at: Change Total Return
$68.26 $61.66 -9.67% -8.79%

Northrop Grumman (NOC.N)

Recommended at: Now at: Change Total Return
$186.07 $200.55 +7.78% +8.21%


Total Return Average : +0.88%

Disclosure Personal Family Portfolio/Fund