There's no way we can describe our current outlook other than to say "bearish." We've held a defensive stance through the first quarter of this year. Yes, we underperformed as markets rallied in February and March. However, there is reason behind our madness. The indicators we watch don’t always catch short termed market gyrations, but are typically not wrong for too long. Allow us to point out just a sample of the indicators that encourage a defensive position. Some are technical indicators (crowd and price behaviour), some are fundamental (valuation and economic):

- Non-confirmation between industrial and transportation stocks: Charles Dow pointed out 100 years ago that when the companies that make stuff (industrials and technology stocks like Microsoft) aren't shipping that stuff (rail, trucking, air) then you have a problem. Right now, as with March 2014 (when we got a similar reading - and sold), the industrials are not being supported by transport stock movements.
- Smart money selling, dumb money buying: Retail investors such as small stock investors and mutual fund buyers are known to make decisions emotionally. They buy high and sell low. That's why we call that group "dumb money." Meanwhile, sophisticated traders, large institutions, pension managers and commercial hedgers are selling. They notoriously call the markets correctly, which is why we call them "smart money." We track these groups independently. Take a guess how the smart and dumb money investors are positioning themselves (hint: it's not looking good for the dummies).
- Déjà vu all over again: Been there, done that. That is, we've seen the S&P 500 hit 2130-ish over and over since early 2015. And it's found support at 1820-1860 several times (October 2014, last summer twice, and once this January). This week the S&P 500 hit just under 2080. The implied upside from there is about 3 percent if the S&P gets back to its 2135 highs established last May. Do you know of a catalyst that could drive it through that level? We don't. We think that's the lid for now. The implied downside is about 12 percent if the S&P hits 1820 again. That's a 4:1 risk to reward ratio. Would you take a $100 bet if all you could win was $3 and you could lose $12? Didn't think so.
- The Fed: Fed Chairperson Janice Yellen recently implied that the Fed will not raise rates for a while, given poor job numbers and world events. However, she is stuck between a rock and a hard place as far as stimulating growth again: she can't go back on her words made back in late 2015 to become fiscally tighter. So, don't expect more stimuli in the near term. The market is cut off from its favorite drug.
- Seasonals: Sell in May and go away. Soon it will be the end of the best 6 months strategy.
- Volatility: Volatility is increasing. The VIX has traded from as low as 12-to-14 to as high as 28, three times since last summer. Right now it’s near the bottom of that trading range—a sign of complacency, and trouble to come.
- Election:  The historic pattern for markets during an election year is for volatility leading into the summer, and then bullishness as the election draws closer. Don Vialoux provided an enlightening description of why this happens on his recent BNN appearance.
- World events: More déjà vu from last year. Greece, China, Brazil, Europe, Japan are all in trouble (still). Or how about- ISIS, oil pricing, currencies, bond yields and immigrant challenges? Lots of issues for the markets to get worried about.
- Earnings and Valuation:  Trailing PE ratio for the S&P 500 is at the high end of its historic range at about 22.6 times earnings. With the exception of the bubble 2001 and 2008 levels, trailing PE doesn't like venturing much past the low 20's before reversing.  Strength in the markets has been driven to a large degree by these expanding multiples and not earnings growth.  Meanwhile, we enter into the current earnings season with the risk that earnings do not support current, let alone further multiple expansions.
- Global Debt: Since the financial crisis many of the advanced economies have prudently reduced private debt, only to significantly increase public debt. Emerging economies and those economies less impacted by the financial crisis, the Bank for International Settlements points out, are now increasing private debt to record levels.  As the world struggles with this excessive use of leverage, we believe this represents an additional risk to markets.

TOP PICKS:

Cash

We are 40 percent cash at this point – which is prudent given our prognosis for market malaise.

SmartREIT (SRU_U.TO)

This is a closed ended trust that owns and manages shopping centres across Canada. A main tenant is Walmart Canada. This trust has highly predictable income stability, and recently broke out of a consolidation pattern. We view it as a defensive pick for the summer, given our rather bearish short termed prognosis. Our strategy has been to move out of beta and into defensive positions lately, and this is one example of a stock holding that we recently moved into.

Horizons BetaPro S&P 500 VIX Short Term Futures Index ETF (HUV.TO)

This ETF rolls the VIX (CBOE Volatility Index) near termed futures contract—it’s a reasonable play on the VIX itself. Any time the VIX gets near 12-to-14, it’s a buy. It’s at 14 as I write this. A low VIX reading represents what the hero in the 1939 movie “Drums Amongst the Mohawk” said, “It’s quiet, too quiet!” The lowest VIX level seen in the past 15 years was just below 10.  I’ll look to sell if /when the VIX rises to anywhere from 19-28. Worst case risk on buying the VIX now is -40 percent (to 10), best case gain is a double (100 percent to 28) based on this history. While these are big numbers, the facts lean towards a favorable risk: reward ratio and the odds favorable for those willing to take the trade. As an aside, we hold 5 percent VIX and 5 percent inverse/short positions to help neutralize risk on our stock holdings at this time.

Past Picks: Apr. 20, 2015

SPDR Consumer Staples (XLP.N)

Chemtrade Logistics Income fund (CHE_u.TO)

Cash

Total Return Average : -0.27%