Jon Vialoux, research analyst at EquityClock.com

Focus: Technical analysis and seasonal investing
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MARKET OUTLOOK
The best six months of the year for equity markets started off with a shock with the U.S presidential election fueling the start of this seasonally strong period for stocks. The S&P 500 Index triggered a technical buy signal on November 7 with a gap higher from its 200-day moving average, confirming this important variable level as a point of long-term support. This follows a rather prolonged period between mid-2015 and early 2016 when stocks struggled to overcome this significant moving average, resulting in some rather notable swings over that timeframe. With this massive period of consolidation now behind us, cash is starting to come off of the sidelines and defensive positioning is being shed in favour of a more cyclical allocation, a bet on improving economic and corporate fundamentals under a Republican-dominated government in the U.S. The earnings recession in the U.S. looks to have concluded with the third quarter showing the first year-over-year earnings gain for S&P 500 companies since Q1 of 2015. Economic activity, according to a number of metrics, continues to show average growth, although ongoing monitoring of manufacturing and export segments is prudent, particularly with the breakout gains in the U.S. Dollar Index charted this quarter. The risk is that the rapid rise of the domestic currency leans on economic data again, such as what we saw in 2015, threatening the growth prospects in the early stages of the Trump presidency. Fourth-quarter earnings season, which begins in January, should provide further clarity on how corporations are faring in the rising dollar environment.

Looking at the seasonal playbook between now and the time when the next earnings season begins, positive tendencies for equity markets persist through the month of December. Beyond the tax-loss selling period, which typically falls within the second week of the month, the Santa Claus rally period between December 15 and January 3 typically lifts stocks through the end of the year. S&P 500 Index returns over this positive year-end period average 1.91 per cent and gains have been realized in 40 of the past 50 periods.

With this positive backdrop in mind, investors may want to reallocate some holdings to best position for the tendencies ahead. Following a significant gain in the retail industry during its period of seasonal strength, stocks in this space tend to fade following Black Friday, typically a sell-on-news event. Investors have historically been best positioned by rotating from retail and into the broader consumer discretionary sector, which remains seasonally strong through to April. As well, the Canadian banks have had a phenomenal run since their period of seasonal strength that began in August, some charting double-digit per cent returns in just the past three months. The release of fourth-quarter results, which begins next week, tends to fuel a round of profit taking amongst the constituents of this industry. Investors looking to maintain their bank industry exposure can reposition towards the U.S. banks, which typically gain between November and April.

TOP PICKS

ISHARES GLOBAL TIMBER AND FORESTRY ETF (WOOD.O)
The best time of year to invest in forestry stocks is from November through February, leading to the start of the spring home-building season in the U.S. Both the stocks and the commodity tend to move higher over this period in anticipation of this uptick in demand. Between October 19 and March 1, West Fraser Timber (WFT.TO), the largest constituent in this ETF, has realized gains averaging 16.71 per cent over the past 29 years. Gains were realized in 24 of the past 29 periods, a success rate of 83 per cent. Since the low hit on October 20, the shares of WFT are already higher by over 27 per cent and technically there may be reason for further gains ahead. A reverse head-and-shoulders bottoming pattern suggests upside potential to around $56 now that price has cleared the neckline to this bullish setup at $46. The price of lumber has shown above-average gains this year and the recent report on housing starts showed the largest increase for October in the history of the report, both conducive to further gains in this industry that has been under pressure for the past year and a half.

WALT DISNEY CO. (DIS.N)
The consumer discretionary sector, in general, benefits from seasonal strength between mid-October and mid-April, and what better way to play the sector tendency than to invest in one of the largest constituents, Disney. Between October 19 and April 22, the stock has charted gains averaging 23.52 per cent with positive results recorded in 40 of the past 50 periods. The stock is already higher by around seven per cent since the period of strength began, and the technical setup is conducive to higher prices ahead. The stock tested support around $90 a number of times this year, underperforming the market in the process as investors express their concern over the strength of ESPN. Recently, the stock charted a sustained breakout above its 200-day moving average and performance relative to the S&P 500 Index has improved, suggesting investors are setting aside their concerns relating to the cable sports network. Consumer sentiment, in general, remains high going into the end of the year, which is supportive of strength in the discretionary sector.

CGI GROUP INC (GIBa.TO)
The technology sector seasonally gains between the start of October and the middle of January; CGI Group is no different. Over the remainder of the seasonally strong period, the stock has shown some impressive stats. Between November 27 and February 8, shares of CGI Group have gained 70 per cent of the time, averaging a return of 20.25 per cent over the past 20 years. The stock recently bounced from support around its 50-day moving average, which is now curling higher, providing positive momentum to the remaining months of this seasonally strong period. The sector peaks around the release of fourth quarter earnings in January/February.
 

PAST PICKS: AUGUST 10, 2016

BMO US HIGH DIVIDEND COVERED CALL ETF (ZWH.TO)
This has been a top pick of mine ever since April and 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. In the more volatile time of year for stocks, investors should seek 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 have become quite prominent this past summer.

• Then: $19.87
• Now: $20.31
• Return: +2.21%
• TR: +4.18%

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 13 and November 21, 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. After a period of consolidation, the ETF broke above resistance in July at $45, suggesting reason to expect further gains ahead. But with the scrutiny that surrounded drug prices following the Mylan controversy and speculation of a democratic sweep during the election, investors panicked, violating the breakout that provided so much optimism. Now that the scrutiny is fading following the Republican sweep, the ETF has since gapped higher, clawing back a portion of the losses. This gap support around $39 may provide the basis for a rally back to the summer highs, despite the conclusion to the period of seasonal strength.

• Then: $46.75
• Now: $40.68
• Return: -12.98%
• TR: -12.87%

PURPOSE HIGH INTEREST SAVINGS ETF (PSA.TO)
In the period of seasonal volatility for equity markets, which concludes in October, 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 one per cent with distributions occurring monthly. The fund invests in high interest deposit accounts with one or more Canadian chartered banks, providing investors with a greater yield than traditional money market funds.

• Then: $50.01
• Now: $50.04
• Return: +0.06%
• TR: +0.31%

TOTAL RETURN AVERAGE: -2.79%