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Keith Richards.
Keith Richards.

BNN MARKET CALL

Three top picks from ValueTrend’s Keith Richards Add to ...

Keith Richards is portfolio manager, ValueTrend Wealth Management of Worldsource Securities. His focus is technical analysis.

Top picks

SPDR Consumer Staples ETF (XLP-US)

Look to continue holding for the summer – this sector tends to hold out well in a choppy market, should the summer go that way – seasonally favourable over the summer.

iShares JPM Emerging Markets Bond ETF (XEB)

Emerging markets space is one that has been unloved, and so the contrarian in me made me take a look. The emerging markets bond ETF chart built a nice little triangle base during the latter half of 2013 – and broke out early this year. I think it will target around $23 this summer and will pay 4% along the way. After last year’s bond market selloff, all bonds look pretty good for the summer. We’ve held this in our bond portfolio for most of the winter.

Cash

Both as an opportunistic play and for lowering portfolio volatility, cash is still in our equity portfolio to the tune of 27%. We look at cash like this: if the market climbs, we still have 73% exposure to great stocks, but if it falls, we can buy low. We can’t lose either way – and it’s part of our seasonal discipline.

Past Picks: April 15, 2014

SPDR Consumer Staples ETF (XLP NYSE)

Then: $43.20; Now: $44.40; Total return: +2.78%

Brookfield Infrastructure Partners (BIP.UN TSX)

Then: $43.33 Now: $45.57; Total return: +5.17%

+ Cash

Total return average: +2.65%

Market outlook

The market, you might say, has “bad breadth.” Not to be confused with halitosis, bad market breadth indicates that it is rising on less participation than may be ideal for continued support of a bullish trend.

Breadth can be measured in a number of ways, but for this article I’ll focus on just a few of them. One way to measure breadth is by measuring the percentage of stocks trading over their 50- and 200-day moving averages. These indicators have been declining since March, and particularly since the beginning of May. This tells us that the internal strength of both the U.S. markets (S&P 500) and the TSX 300 may be running out of steam.

I also watch the ratio of stocks on the NYSE making new highs vs. those making new lows. This shows a declining trend since April. Less stocks making a new high when the composite index is making a new high implies less stocks are participating in the fun! For example-- only 23 stocks on the S&P500 (which represents less than 5% of the total number of stocks) made new highs on Friday, while the S&P500 itself closed at a new high. This means that 477 stocks of that index didn’t make new highs. I will be posting the new high/new low chart on my blog on Wednesday.

Not surprisingly, the DJIA and even the larger NYSE composite index itself failed to make new highs last Friday. On the broader markets, I’ve noted that the market has been largely driven since early April by energy stocks on both sides of the border, along with consumer staples in the U.S. markets, and consumer discretionary stocks in the TSX. Other sectors were not moving nearly as well to suggest a broad-based movement. We technical analysts like to call this lack of participation “divergence” of breadth – it can be a leading indicator of a weaker market to come. Unfortunately, bad market breadth cannot be cured by chewing gum or mints.

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  • XLP-N
  • XEB-N
Live Discussion of XLP on StockTwits
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Live Discussion of XEB on StockTwits
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