Keith Richards, president and chief portfolio manager at ValueTrend Wealth Management
Focus: Technical analysis

MARKET OUTLOOK

I don't think it's an exaggeration to state that the markets have been a wee bit volatile lately.

Peak to trough drawdowns from October to Dec. 24 were more than 20 per cent on the U.S. markets (S&P 500) and some 16 per cent on the Canadian markets (TSX 300). Following that little implosion, markets rallied to retrace more than half of their drawdowns over the past three weeks. It's enough to make your head spin.

Despite the rally markets are not yet out of the woods, but they’re looking better.

Evidence for remaining cautious yet flexible includes the significant December breakdown; virtually every market index fell below key support levels that had held during 2018. Yes, they’re now getting back above support, but the breakdown was widespread. In fact, even after recent rebound some 65 per cent of stocks that comprise the S&P 500 are well under their 200-day moving average. In plain language, this means that two thirds of the major U.S. stocks are still trending down. That can change as markets show strength, but we’re keeping an eye on that development.

Another thing to keep in mind is that there’s a market cycle (Elliott Wave pattern) of a five-wave bull market followed by a three-stage decline. The three-stage down pattern comes after a speculative finish to the bull market.  That may (or may not) have occurred in 2017. I’m not predicting 2017 was the final leg of the bull market, but there’s potential. Meanwhile, markets are showing early signs of a short-termed overbought condition due to the recent rally. A pullback after such a strong rally is to be expected, but a break of the 2018 lows on the SPX (mid- 2,500s) might be considered damaging. Such an occurrence may suggest that the Elliott Wave three-stage bear market pattern may indeed be in place.

Conclusion: We expected to see a short-termed pullback that might last a number of days given the overbought conditions. We should keep an eye on the longer-termed patterns of the market for a material breakdown of support.

TOP PICKS

FAIRFAX (FFH.TO)

Fairfax is coming off of its long-termed support. This is a perfect time to buy.

BMO EMERGING MARKETS ETF (ZEM.TO)

After a long decline, the emerging markets ETFs have been basing nicely. This suggests the next move is going to be a breakout. We’re looking to buy shortly.

CASH

There are going to be trading opportunities and some of the better ones will be with index ETFs in North America. We are looking to enter on a pullback, as per my short-termed market comments.

PAST PICKS: NOV. 1, 2018

ORCALE CORP (ORCL.O)

• Then: $48.59
• Now: $49.20
• Return: 1%
• Total return: 2%

MICROSOFT (MSFT.O)

• Then: $105.92
• Now: $106.20
• Return: 0.3%
• Total return: 1%

FAIRFAX FINANCIAL (FFH.TO)

• Then: $627.00
• Now: $616.04
• Return: -2%
• Total return: 0.4%

Total return average: 1%

WEBSITE: valuetrend.ca