Full episode: Market Call for Monday, October 16, 2017
Keith Richards, portfolio manager at ValueTrend Wealth Management of Worldsource Securities
FOCUS: Technical analysis
The stock market has a seasonal tendency to be stronger from November to April and then, on average, weaker from May through October. Markets underperform about 70 per cent of the time over the "weak" six months from May to October. The problem with the "worst six months" is both the frequency of pullbacks during that period and the size of those pullbacks.
This history of poor performance during the May to October period inspires a strategy to sell some stocks and raise cash during the spring and summer. We have diligently followed this strategy for two decades in our Equity Platform, and this has resulted in long-term outperformance along with lower portfolio risk. Despite the seasonal odds being high for a market correction this summer, markets went up. Having said that, the U.S. dollar fell hard, causing Canadian investors holding U.S. dollar-denominated stocks a loss, despite the rise on the S&P500. The seasonal strategies are not guaranteed to work each and every year for either the broad markets or sectors, but the odds make it prudent to follow the discipline each and every year despite those non-compliance years.
The setup is in place for a correction of some sort in the short term. Take a look at the chart below, which illustrates my “short-termed timing system." Details on how this system works are available on this blog: http://www.valuetrend.ca/short-long-termed-timing-models-offer-trading-guidance/
By noting its past signals, you might see that this short-termed timing system has been pretty accurate in picking interim tops and bottoms. The magnitude of the move after a buy (green lines) or sell signal (red lines) can be significant, or quite minor. So you don’t bet the farm on its signals. Having held some cash as part of a seasonal strategy this summer, we will want to take advantage of any correction that this system implies may be coming.
Interestingly, work by seasonal guru Brooke Thackray shows that the final two weeks of October are the most vulnerable of the month. If Brooke’s research holds true, this adds ammunition to the short-termed timing systems signal. Further, over 40 per cent of market participant attitude indicators by Sentimentrader show excess optimism. Too much optimism is not a positive for the markets. So a correction – however minor – might be in the cards over the next two weeks or so. Whether that happens or not, we will be forced through our seasonal discipline to buy back into the market by or before the first week of November. Over time, the seasonal discipline has proven to outperform the markets, and offers less volatility along the way.
You can expect us to leg back into stocks with the 40 per cent cash held in our ValueTrend Equity Platform in the coming two to three weeks.
E*TRADE FINANCIAL (ETFC.O)
This stock has tons of upside based on the chart. No major resistance for a while. Still own.
The underperforming bank. Small base breakout. Stock looks like it will play catchup with the group. Cheapest (fundamentally) of the big Canadian banks – planning to buy this week, not owned yet.
VANGUARD FTSE DEVELOPED ALL-CAP EX-NORTH AMERICAN HEDGED-TO-CAD INDEX ETF (VI.TO)
A currency-hedged play on the world markets adding diversification outside of North America – planning to buy this week, not owned yet.
PAST PICKS: MAY 3, 2017
E*TRADE FINANCIAL (ETFC.O)
- Then: $36.03
- Now: $44.42
- Return: 23.28%
- Total return: 23.28%
ISHARES MSCI BRAZIL ETF (EWZ.US)
- Then: $37.88
- Now: $42.95
- Return: 13.39%
- Total return: 14.35%
POWER FINANCIAL (PWF.TO)
- Then: $34.93
- Now: $35.57
- Return: 1.83%
- Total return: 4.32%
TOTAL RETURN AVERAGE: 13.98%