Keith Richards' Top Picks: Aug. 24, 2018

Keith Richards, portfolio manager at ValueTrend Wealth Management of Worldsource Securities
Focus: Technical analysis

MARKET OUTLOOK

Seasonal trends for the market don't work every year. In "irrational exuberance" years, where markets rise at grossly distorted angles (like in 1999, 2007 and 2017), seasonal patterns go out the window. Markets also ignore fundamental value, technical overbought signals, and sentiment fear/greed signals when markets are irrational.

But seasonal patterns are a statistical play, meaning that markets tend to follow their calendar patterns more often than not despite the occasional periods of exuberant crowd behavior. While the traditional "sell in May and go away" six-month pattern is an easy one to remember, the real danger if there’s going to be any will usually occur between August and September on the markets. While not always the case, the low of the summer can often occur in the first week of October. Through practical experience, we at ValueTrend know that a market low often occurs anywhere between August and September.

Right now, we’re entering into seasonal period of weakness for stock markets. Our Equity Platform continues to make all-time highs; this in the face of a market that hasn’t seen a new high in five months. In an effort to lower our managed portfolio's volatility and to increase our buying power during a potential period of market weakness, we’ve raised some cash in the Equity Platform. By selling a few stocks, we’ve achieved over 20 per cent cash level as of this time of writing. We’ve also created a watch list for potential new stocks as/if/when the market provides an interesting entry point. Technology, infrastructure and other equities are on our watch list for potential entry points.

TOP PICKS

MANULIFE (MFC.TO)

We just bought this stock in early August at $23.50 for the Equity Platform. We’re looking for about $27 as a sell target. The stock is also held in our Income Platform, where we tend to retain it for its dividend. This illustrates the differing philosophies of these two models. The Equity Platform is largely focused on capital gains and is price sensitive. The Income model is focused on sustained income and is less sensitive to price swings on its individual holdings. Hence why we would sell Manulife at our target price from the Equity Platform, while maintain the position in our Income Platform.

SCOTIABANK (BNS.TO)

This is the underdog of the Canadian banking sector, perhaps because of their exposure to underperforming markets like the emerging markets. They’ve made strategic acquisitions like MD Management and the stock hasn’t reflected this. Technically, it’s starting to firm up. We feel it may do some catching up to the sector, which might help it outperform during the seasonally strong period for Canadian banks from October into the New Year.

CASH

Given that we’re 20 per cent cash due to seasonal influences, I felt it prudent to add cash to my top picks. The market is bullish, but deserving a pullback. Any such pullback suggests a buying opportunity. While I hate to provide a pullback target with any level of confidence—it may be possible to see 2,700 or so on the S&P 500 and 15,500 or so on the TSX.

PAST PICKS: JUNE 6, 2018

FAIRFAX FINANCIAL (FFH.TO)

Looking for a $770-$780 sell target.

• Then: $722.38
• Now: $713.31
• Return: -1%
• Total return: -1%

BECTON, DICKINSON & CO. (BDX.N)

• Then: $231.61
• Now: $255.29
• Return: 10%
• Total return: 10%

CASH

Total return average: 3%

WEBSITE: www.valuetrend.ca