Oct 3, 2019

Jon Vialoux's Top Picks: Oct. 3, 2019

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Full episode: Market Call Tonight for Thursday, October 3, 2019

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

MARKET OUTLOOK

Welcome to the fourth quarter, an important period in the seasonal timeline for the market. The summer volatility typically peaks, bond yields typically reach a low and equity prices find a floor. October marks the start of the best six months of the year for stocks. The S&P 500 has averaged a gain of 6.99 per cent between Oct. 31 and April 30 since 1950, with the median return for this timeframe coming in at 6.57 per cent. Compare this to the 1.49-per-cent average return (2.27-per-cent median return) for the other half of the year and you can see why this period is seen as favourable. In addition to the stronger comparative return, the frequency of gains is also better, equalling 78.26 per cent for the favourable period and 63.77 per cent during the unfavourable period. Consumer and business activity tends to flourish over this timeframe and positive catalysts are more frequent, thereby driving the price of stocks higher.

As for the technical view of the market going into this seasonally strong period, a rising trading range, now between 2,650 and 3,025 basis points, has generally provided the limits to the market since the start of 2018. The equity market is having difficulty drawing in the next marginal buyer around all-time highs, which has effectively kept the market range-bound for over a year and a half. The key bogey on the downside has been 2.950, which was broken in the past few sessions, confirming resistance overhead and suggesting a short-term double top pattern that could lead to another test of long-term support around the 200-day moving average. Ultimately, the market continues to wait for a catalyst to fuel a breakout, but with various geopolitical risks and never-ending headlines, the shallow rising range remains the best guide to determine the risk/reward of broad equity exposure. The way to trade it has been to limit risk around the upper limit of the span and accumulate risk around the lower limit, a pattern that could easily progress into the upcoming election year.

TOP PICKS

Jon Vialoux's Top Picks

Jon Vialoux of CastleMoore shares his top picks: Jacobs Engineering, ITB and SDY.

JACOBS ENGINEERING (JEC:UN)

Public construction spending in the U.S. has been trending well above average this year and the prospect of further infrastructure spending bodes well for heavy construction stocks into the New Year. Jacobs Engineering, the largest engineering company in the S&P 500, sees its optimal holding period between Oct. 30 and Jan. 27, resulting in a geometric average return of 5.9 per cent above the benchmark S&P 500. The stock has outperformed the market in 15 of the past 20 periods.

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

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 been outperforming the market for the past year, benefitting from the strength in home sales attributed to the low cost of borrowing and a strong consumer.

SPDR S&P DIVIDEND ETF (SDY:UN)

In modern history, it has been rare for stocks to provide higher yields than fixed income counterparts. The SDY yields 2.46 per cent, which is over three quarters of one per cent above the yield on the 10-year Treasury note. The ETF, which tracks a diversified basket of companies that have consistently increased their dividend for at least 20 consecutive years, recently started to outperform the S&P 500 Index as investors rebalance their portfolios towards some of the value areas of the market.