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BNN MARKET CALL

Three top picks from Horizons’ Brooke Thackray Add to ...

Brooke Thackray is Research Analyst at Horizons ETFs (Canada) Inc. His focus is seasonal investing and technical analysis.

Top Picks:

Consumer Staples Select Sector SPDR® Fund (XLP NYSE)

The consumer staples sector is considered a defensive sector as it is not as vulnerable to changes in the economic climate, compared to other sectors of the market. Currently, the Consumer Staples Select Sector SPDR® Fund (XLP) is trading at a high forward P/E multiple of 18.50, but in times of uncertainty, investors are willing to pay for the greater stability of earnings. The consumer staples sector typically outperforms the S&P 500 until October 27.

BNN Video May. 15 2014, 6:10 AM EDT

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iShares 7-10 Year Treasury Bond ETF (IEF NYSE)

Despite the U.S. Federal Reserve continuing with their tapering program of reducing their bond purchases, government bonds have been increasing since the beginning of the year. This is partly the result of investors taking a defensive stance with their investment portfolios and moving from stocks into bonds. Bonds typically perform well over the summer months as investors look for a safe place to hide in the volatile time period for stocks. Last year, this was not the case as the Federal Reserve “spooked” the market with its discussion on tapering its asset purchase program and investors rotated from bonds to stocks. As the tapering program is well under way, the same phenomenon is not expected this year.

*SHORT* The Walt Disney Company (DIS NYSE)

Disney is currently performing well, but do not expect the trend to continue. Due to the seasonality of revenue flows, Disney tends to perform poorly up until its yearend at the end of September. Historically, Disney has performed poorly from June 5th to September 30th and in this time period, from 1990 to 2012, Disney has lost an average of 9.0% and has only been positive 26% of the time.

Past Picks: FEBRUARY 20, 2014

Financial Select Sector SPDR® Fund (XLF NYSE)

The U.S financial sector typically performs well from January 19 to April 13. Heading into the earnings season (U.S. banks are some of the earliest to report), the U.S financial sector started to underperform the S&P 500 in late March. The financial sector failed to impress with its earnings and underperformed for the month of April.

Then: $21.44; Now: $21.97 +2.47%; Total return: +2.85%

Energy Select Sector SPDR (XLE NYSE)

The energy sector typically outperforms from February 25 to May 9. This year the Canadian energy sector started to outperform, early in January. The U.S. energy sector started to outperform in February. Overall, the energy sector performed extremely well, but the benefit from the seasonal trend is over and the sector is not expected to outperform until later in July, during its next seasonal period.

Then: $87.10; Now: $94.72 +8.75%; Total return: +9.28%

E.I. du Pont de Nemours & Co. (DD NYSE)

Once again, DuPont performed well in its seasonal period. Analysts like the company results as the CEO Ellen Kullman has been restructuring the company over the last few years. The seasonal trade worked well, but investors should consider exiting the position. It should be noted that DuPont has a poor performance track record from May 6 to the end of the year. In this time period, from 1990 to 2012, DuPont produced an average loss of 3 per cent and has only been positive 39 per cent of the time.

Then: $65.35; Now: $67.72 +3.63%; Total return: +4.32%

Total return average: +5.48%

Market outlook:

The S&P 500 has just reached an all-time high. Earnings are coming in better than expected with 90 per cent of the companies reporting by May 9, 2014. So far 69 per cent of companies have surprised on upside earnings and overall earnings growth is expected to be 5.4 per cent. The economy seems to be improving, albeit at a slow pace and corporate merger activity has ramped up. Investors generally have a “rosy” outlook for the stock markets. The problem is that there are some troubling signs with relative sector performance, investors have become complacent and we have just entered the six month unfavourable period for stocks. While the overall stock market has been increasing, the performance of small cap sector (Russell 2000) has raised some concerns as it has corrected substantially since March. It is difficult for the S&P 500 to continue to move higher for an extended period of time while the small cap sector moves lower. One way or the other, this divergence has to be solved. Investors should be cautious as very often it is the small cap sector that leads. Investors have become complacent with the CBOE Volitility Index (VIX) at very low levels, below 13. If there were to be a correction, it could be quite steep as investors are not expecting a correction and would be caught off guard. Lastly, investors need to be cautious as we have just entered the six month unfavourable period for stocks from May until October. The fact that we are in the unfavourable period, does not mean that the stock market will go down, but this is the period when corrections most frequently happen and the largest corrections tend to occur.

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