Keith Richards, Portfolio Manager, ValueTrend Wealth Management of Worldsource Securities

FOCUS: Technical Analysis

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MARKET OUTLOOK:

I noted on my April 18 BNN appearance that our indicators currently suggest a neutral to unfavorable risk/reward trade-off. Nothing has changed. This doesn’t mean we are declaring an inevitable market decline or crash. Markets always present potential for risk and potential for reward. Will markets rise, fall or meander? Nobody knows! But at ValueTrend, we can say that we use some quantifiable rules and indicators that can give us guidance on positioning for risk and reward potential. Right now the 12 factors we watch are skewed somewhat bearishly. However, there are still some that are bullish indicators that might support further upside, and some that are “neutral.” For this reason, we’ve positioned our equity platform as “neutrally” as possible. This means that we have hedged, reduced beta and raised enough cash to make, or lose, very little to market movements for the time being. Remember, you can’t have your cake and eat it too. If you want to reduce or eliminate potential downside in equities, it’s difficult to pursue upside simultaneously. Here are eight of our factors noted when positioning our equity platform to neutral:

Bullish factors

The short termed bullish trend persists:   

Markets have been rising since February on the daily charts. The market is over its 50 and 200 day Moving Averages- key indicators we use for trend analysis.

Cumulative breadth (broad market participation by a large group of stocks or sectors) is bullish. This is a diverse rally.

Confirmation of near termed strength by transport stocks: This has changed from a bearish condition back in January. You want to see industrials and transports move together-they weren't before, now they are.

Put/Call ratio was at 1.2, although that level has declined substantially of late. That means there were lots of options traders betting on downside-contrarian thinking suggests this is a buy signal.

Bearish indicators

Intermediate termed trend is bearish:

Markets have unsuccessfully tried to break the May 20, 2015 highs of 2135 on 7 different occasions since early 2015. In fact, each attempt to take that level out has resulted in a slightly lower high. Meanwhile, it put in lower lows in August 2015 and again in January 2016. This is our prime long termed trend rule. You must have higher highs and higher lows on the weekly chart to be in an intermediate termed uptrend. The market is decidedly not in an uptrend.

Trailing Price to Earnings ratio on the S&P500 is 24. That's historically at the high end, especially in an environment of mediocre earnings. To correct this high valuation, you need rising earnings or falling stock prices.

Volatility is historically too low. A VIX (volatility index) level of 13 was seen a month ago when I was on the show. It's around 14 right now. The normal range is usually 12 (very low) to 28 (very high). This index rarely stays at one end of the range for too long – and will tend to swing back to the opposite extreme, regularly. That means that the VIX should rise off of the current low end of the range, and volatility is likely to return to the market soon.

Sell in May and go away. Now is the seasonally unfavorable time of the year to be fully invested. Markets are weaker during the next 6 months 72 percent of the time.

Top Picks:

Consumer Staples Select Sect. SPDR ETF (XLP)

We bought this sector ETF a few months ago, having rotated out of the discretionary sector ETF by SPDR. This sector tends to be more defensive – and has demonstrated outperformance over the “worst six months” according to the seasonal experts. You might also get some upside out of an oversold USD bounce on this ETF if you are buying it in Canadian dollars.

Chartwell Retirement Residences (CSH_u.TO)

We bought Smart REIT and Chartwell recently in an attempt to hold some lower beta, higher dividend stocks with good charts. We like the entire sector, but like the stability of these two in particular.

Cash

We still hold about a third of our ValueTrend Equity Platform in cash. This allocation can reduce volatility and provide capital should the market sell off over the summer as we suspect it might. 

Company Twitter: @ValueTrend

Company Website: www.valuetrend.ca

Blog: www.valuetrend.ca