Jon Vialoux, research analyst and portfolio manager at CastleMoore
Focus: Technical analysis and seasonal investing

MARKET OUTLOOK

The final month of the year is often associated with the Santa Claus rally. But before investors can rejoice in this holiday glory, they must navigate the tax-loss selling period typical in the first half of December. The S&P 500 has shed an average of two-tenths of 1 per cent in the first 15 days of the month as investors look to rebalance their books ahead of year-end. The benchmark has been higher during this timeframe only 52 per cent of the time over the past 50 years. Compare this to the back half of the month, when the return on the large-cap benchmark averages 1.56 per cent and positive results have been achieved in 78 per cent of periods over the past 50 years. The better time of the month to be exposed to risk should be clear. The strategy that has proven to be effective in December is to buy sectors that have been beaten down the most by tax-loss selling pressures, presumed this year to be energy and perhaps the metals and mining industry. The mean reversion that can often follow the selling pressures can be a quick way to tack on solid gains into the new year. Energy and metals/mining remain highly susceptible to the ongoing news flow, but the vacuum of significant headlines surrounding the holidays may be sufficient to allow a bid in sector constituents. Seasonally, energy and material stocks tend to find a low around the end of the year.

Going into 2020, we can’t help but be concerned by manufacturing data continuing to weaken in the U.S. and Canada. U.S. industrial production has declined by 1.2 per cent year-to-date through the end of October, well below the 1.7-per-cent gain that’s average by this point in the year. This is one of the weakest performances of this economic cycle. While the back half of the year warrants a strong focus on the consumer given spending patterns, equities’ strength in the first half of the year derives its roots from the industrial economy. Should weakness in this segment of the economy persist, it’s questionable whether the important seasonal drivers for markets through the spring will materialize.

TOP PICKS

ISHARES RUSSELL 2000 ETF (IWM:UN)

Small caps have typically outperformed their larger-cap counterparts between the end of the year and the start of the next. Between Nov. 9 and April 3, the ETF has outperformed the S&P 500 by 2.69 per cent on average in each period and has shown positive relative performance in 15 of the past 18 years. IWM recently broke out from a prolonged trading range between $144 and $160, which projects an upside target of $176. Given the lag in sector constituents versus the broader market throughout the year, the potential for a catch-up trade into the start of the new year is enticing.

SPDR GOLD SHARES ETF (GLD:UW)

While December may be the strongest month of the year for equity markets, metals have still found a place in investor portfolios. Between an average low of Dec. 15 and an average peak of Feb. 24, the precious metal has gain 6.12 per cent on average over the past 20 years and positive results have been realized in 15 of the past 20 periods. Following the breakout from a massive basing pattern in the summer, precious metals have consolidated their gains in recent months and are well-positioned for the next leg higher. The basing pattern projects a target for gold towards $1,700.

A&W REVENUE ROYALTIES INCOME FUND (AW-U:CT)

Analysis of this stock shows that a buy date of Dec. 6 and a sell date of March 10 has resulted in a geometric average return of 7.09 per cent above the benchmark rate of the S&P 500 Total Return Index over the past 16 years. This seasonal timeframe has shown positive results compared to the benchmark in 14 of those periods. This is a very good rate of success and the return strongly outperforms the relative buy-and-hold performance of the stock over the past 16 years by an average of 2.18 per cent yearly. The fund moved in a parabolic manner in the first half of the year, but it has since consolidated those gains and is positioned well for its next run higher.

PAST PICKS: OCT. 3, 2019

JACOBS ENGINEERING GROUP (JEC:UN)

• Then: $88.01
• Now: $86.29
• Return: -2%
• Total return: -2

ISHARES U.S. HOME CONSTRUCTION ETF (ITB:UW)

• Then: $42.64
• Now: $45.11
• Return: 6%
• Total return: 6%

SPDR S&P DIVIDEND ETF (SDY:UN)

• Then: $99.70
• Now: $105.73
• Return: 6%
• Total return: 6%

Total return average: 3%

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