Nov 23, 2018

Jon Vialoux's Top Picks: Nov. 23, 2018

BNN Bloomberg

Jon Vialoux , BNN Bloomberg

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

MARKET OUTLOOK

Storm clouds are moving in. Following a volatile month of October, it’s becoming increasingly apparent that the market is reacting to the threats building in the economy. Of course the tariff war, the impact of rising interest rates and a strong U.S. dollar are well telegraphed, but the market was resilient to these headlines through the summer when key benchmarks in the U.S. achieved their best summer return in years. Now the economic data is reflecting the headwinds and deteriorating as future growth prospects become doubtful without some resolution to these headline risks.

Weakening home sales was an area of concern highlighted during my last appearance and for good reason: the weakness in this area of the economy has preceded every major equity and economic downturn since the 1950s. The inventory of existing homes in the U.S. is higher by 29 per cent year-to-date, more than two times the growth that’s average by this point in the year. The inventory overhang threatens to weigh on the value of the largest asset of most Americans, which would thereby weigh on consumer sentiment.

This inventory overhang is not isolated to housing. Manufacturing activity has been booming in both Canada and the U.S. for the past couple of years, but inventory levels that are growing well above average threaten to weigh on future activity. Total inventories of manufactured goods in Canada have climbed 10.8 per cent through the end of September, well ahead of the 3.4 per cent average increase by this point in the year. In the U.S. it is far less pronounced, but still elevated, with a year-to-date increase of 5.9 per cent versus a 4.3 per cent average rise through the end of September. Should demand fail to catch up to supply, future manufacturing activity is at risk.

Other factors that are presenting a warning pertaining to the health of the global economy include the over 30 per cent plunge in the Baltic Dry Index in November, the bear market decline in the price of oil, a rare October decline in small truck sales in the U.S. and evidence of below-average employee confidence in the U.S. Altogether, caution in equity markets would be expected.

Between now and the end of the year, tendencies for stocks are overwhelmingly positive; a tradeable low to retrace some of the October’s loss remains a good possibility. Over the past 50 years, the S&P 500 Index has gained an average of 1.5 per cent in the month of December, with 72 per cent of periods showing a positive result. This is the best return and frequency of success out of any month on the calendar. But beyond this near-term reprieve in selling pressures, the strength of the broader market is questionable.

TOP PICKS

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

Health care has been a phenomenal performer in 2018, significantly outperforming the market and realizing gains on the year. As a result, it’s one of the few areas of the market that’s still showing a long-term uptrend that’s intact following the volatility over the past month and a half. Seasonal analysis of the Dow Jones U.S. Health Care Equipment Index shows that a buy date of Nov. 24 and a sell date of Feb. 14 has resulted in a geometric average return of 3.17 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. The fundamental backdrop for the sector remains positive given the aging demographic, but the seasonal push is the many health care conferences that dominate the first few months of the year. The ETF, which holds stocks like Medtronic, Abbott Labs and Thermo Fisher, just pulled back to its rising 200-day moving average, a level that it has maintained support around for much of the past five years.

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

Home building stocks have been beaten up in 2018 as slowing sales amidst rising mortgage rates has investors betting on the peak in the cycle. While the concerns are warranted, the significant decline in the industry creates an appealing risk/reward for the seasonal period that stretches into February. Seasonal analysis of the Dow Jones U.S. Select Home Construction Index shows that a buy date of Oct. 28 and a sell date of Feb. 5 has resulted in a geometric average return of 7.84 per cent above the benchmark rate of the S&P 500 Total Return Index over the past 18 years. This seasonal timeframe has shown positive results compared to the benchmark in 15 of those periods. Stocks in this space tend to trend higher into the start of the home-buying season in the spring. The ETF has charted a short-term double-bottom pattern around previous long-term resistance just below $30 as the fund recovers from one of the most oversold levels since 2011. The ETF could rebound back to its declining 200-day moving average, now around $37, at which point profit taking may be appropriate.

CGI GROUP CLASS A (GIBa.TO)

Despite the selloff in technology stocks in recent weeks, the fundamental backdrop continues to look strong. Wednesday’s report on durable goods orders indicated that the change in orders for computers and related products is running 19.7 per cent above average year-to-date, representing the best performance on record. Technology remains the area of growth in the economy. Seasonal analysis of the CGI Group shows that a buy date of Dec. 22 and a sell date of March 13 has resulted in a geometric average return of 5.57 per cent above the benchmark rate of the S&P 500 Total Return Index over the past 17 years. This seasonal timeframe has shown positive results compared to the benchmark in 14 of those periods.