FOCUS: Technical Analysis & Seasonal Investing



Markets on both sides of the border are entering the weakest and most volatile time of the year, from a seasonal perspective. Lack of fundamental catalysts and lackluster trading volumes contribute to the volatile price action. Through the end of the third quarter, both the S&P 500 Index and TSX Composite have historically been more likely to post losses than gains. Looking at September in particular, the S&P 500 Index has realized gains in only 44 per cent of the periods over the past 50 years, averaging a decline of 0.6 per cent, the weakest single month of the year. The TSX Composite shows much of the same with a positive frequency for September of only 40 per cent over the past 35 years, averaging a decline of 1.9 per cent. With the Volatility Index (VIX) at exceptionally low levels, the risks of a volatility spike into this period ahead are higher than average as investors become complacent in portfolio holdings.

Technically, nothing terribly alarming is apparent in the price action of major equity benchmarks. The S&P 500 Index continues to push towards new highs having broken above significant resistance at 2100 during the seasonal summer rally period in July. Friday’s better than expected employment report is just starting to cement a level of short term support at the 20-day moving average, a characteristic that is being shared by the TSX. While short-term overbought, both benchmarks have yet to trigger any significant sell signals that would suggest a correction is imminent. However, present complacency shifts the risk-reward spectrum such that a volatility shock could have detrimental impacts on portfolio performance.

Fundamentally, the economic situation is cloudy, at best, with recent reports showing signs of deteriorating momentum. This includes the latest employment report where the seasonal adjustment factor may work against the report in the month of August.  This leaves the Fed with a real predicament as it seeks to normalize rates.  But it is not the prospect of higher rates that investors should fear. Strength in the U.S. Dollar threatens to continue to pressure manufacturing and export activity as commodity prices languish. An emerging trend of higher-highs and higher-lows is apparent on the chart of the U.S. Dollar Index, which warrants careful monitoring as investors speculate upon the Fed’s next move.


Top Picks:

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

This has been a top pick of mine ever since April and while the thesis for holding it has changed somewhat, it continues to deliver generous returns and outperformance.  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. The covered call strategy is particularly effective in flat/range-bound markets, which had become quite prominent between April and July.

SPDR S&P Pharmaceutical ETF (XPH.N)

The Pharmaceuticals industry benefits from a period of seasonal strength between mid-August and the end of November. Between August 13th and November 21st, the S&P 500 Pharmaceuticals Index has gained in 80 per cent of the seasonally strong periods over the past 25 years, averaging a return of 5.50 per cent. During this period, shipments of pharmaceuticals and medicines tend to increase into the start of the cold and flu season that gets underway in October. The result is that pharmaceutical companies tend to realize their best earnings for the year during the third quarter. The Pharmaceutical ETF declined just over 40 per cent from its peak in July 2015 to its low in March amidst the scrutiny over drug prices, but after a 6-month consolidation period, price has broken to the upside, above resistance at $45. This previous level of resistance would now be expected to act as support. The breakout implies a calculated move higher towards $52, or over 10 per cent higher from present levels.

Purpose High Interest Savings ETF (PSA.TO)

With the period of seasonal volatility for equity markets upon us, investors may be tempted to sell to cash to wait out the potential market storm. This ETF allows investors to park their unused funds while earning a stable return. The current yield is 1 per cent with distributions occurring monthly. The fund invests in high interest deposit accounts with one or more Canadian chartered banks, providing investors with greater yield than traditional money market funds.

Disclosure Personal Family Portfolio/Fund


Past Picks: June 3, 2016

Metro Inc. (MRU.TO)

  • Then: $45.11
  • Now: $47.47
  • Return: +5.23%
  • TR: +5.23%

BMO Aggregate Bond Index ETF (ZAG.TO)

  • Then: $16.15
  • Now: $16.37
  • Return: +1.36%
  • TR: +1.86%

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

  • Then: $19.28
  • Now: $19.84
  • Return: +2.90%
  • TR: +3.90%

Total Return Average: +3.66%

Disclosure Personal Family Portfolio/Fund


Twitter: @EquityClock