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


MARKET OUTLOOK

Where do we go from here? After a sharp snap-back rally following the panic-driven plunge in the month of December, investors are asking themselves this critical question. Investor sentiment has improved significantly compared to the December lows for equity markets, which coincided with the highest put-call ratio on record and sentiment surveys that pointed to self-confessed bearish biases within portfolio decisions. This proved to be a wonderful contrarian buy signal leading to the gains of 16 to 20 per cent for U.S. benchmarks over the past 30 sessions. These contrarian signals will typically define the appropriate risk/reward metrics that investors should follow: when investors become overly bearish, downside risks are typically limited given that protective positioning within their portfolios have likely been implemented already. The opposite is also true, where overly bullish sentiment suggests complacency, opening the door to a downside shock. Sentiment among market participants is presently neutral as investors weigh the solid domestic fundamentals against some of the headline risks that fueled the fourth-quarter decline.

The technical status of the market shows that major indexes are at an important pivot point. The S&P 500 Index and TSX Composite have each rebounded back to their declining 200-day moving average lines, typically a critical hurdle in the long-term path of the broader market. In bull markets, this variable level tends to support the long-term rising trend, but in bear markets this hurdle has typically allowed investors to book short-term profits following snap-back rebounds such as what we’ve seen over the past month and a half. The level of major equity indexes is in a zone of significant supply where investors that were trapped in positions on the way down may look to exit closer to the breakdown point and those that have benefited from the almost 20 per cent rally from the December low will seek to book profits. Assuming the economy can maintain a stable footing in 2019, the supply could take a while to grind through before a test of levels closer to the all-time highs can be achieved.

TOP PICKS

Jon Vialoux's Top Picks

Jon Vialoux of CastleMoore shares his top picks: Suncor, the EEM and cash.

SUNCOR ENERGY (SU.TO)

Analysis of Suncor shows that a buy date of Jan. 12 and a sell date of May 24 has resulted in a geometric average return of 10.27 per cent above the benchmark rate of the S&P 500 Total Return Index over the past 20 years. This seasonal timeframe has shown positive results compared to the benchmark in 16 of those periods.

ISHARES MSCI EMERGING MARKET INDEX ETF (EEM.N)

Analysis of EEM shows that a buy date of Dec. 19 and a sell date of April 9 has resulted in a geometric average return of 4.55 per cent above the benchmark rate of the S&P 500 Total Return Index over the past 20 years. This seasonal timeframe has shown positive results compared to the benchmark in 18 of those periods.

CASH

Typically, we don’t advocate holding cash or equivalents during the average period of seasonal strength for risk-on assets between November and April, but given the hurdles overhead for stocks, managing portfolio beta may be prudent. A number of fundamental warning signals have been flagged in recent months and the reaction of major benchmarks in the U.S. to their declining 200-day moving average lines gives reason to simply step back, possibly just for a matter of days. The S&P 500 Index has just realized the best 30-day rate of change since November of 2011 when the benchmark similarly snapped back to its 200-day moving average. Back then, the benchmark corrected by around 9 per cent rather swiftly in the month that followed. Given some of the uncertainties over the month ahead, managing your risk beyond the seasonal probabilities appears wise.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
SU Y N Y
EEM N N N

 

PAST PICKS: NOV. 23, 2018

Jon Vialoux's Past Picks

Jon Vialoux of CastleMoore reviews his past picks: the IHI, the ITB and CGI Inc.

ISHARES U.S. MEDICAL DEVICES ETF (IHI.N)

  • Then: $203.85
  • Now: $215.93
  • Return: 6%
  • Total return: 6%

ISHARES U.S. HOME CONSTRUCTION ETF (ITB.N)

  • Then: $31.72
  • Now: $33.67
  • Return: 6%
  • Total return: 6%

CGI (GIBa.TO)

  • Then: $83.28
  • Now: $89.18
  • Return: 7%
  • Total return: 7%

Total return average: 6%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
IHI N N N
ITB N N N
GIBa N N N

 

FUND PROFILE

Seasonal Advantage Portfolio
Performance as of: Jan. 31/19 

  • 1 month: 6.5% fund, 5.7% index
  • 1 year: 3.0% fund, 2.7% index
  • Since inception (May 1, 2018): 6.0% fund, 2.2% index

INDEX: 33.4% S&P 500 Index, 33.3% TSX Composite, 33.3% 10-Year US Treasury Note Price.
Returns are net of fees and annualized.

WEBSITE: EquityClock.com
TWITTER: @EquityClock