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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 at ValueTrend Wealth Management of Worldsource Securities. His focus is on technical analysis.

Top picks:

Unilever NV (UL NYSE)

We bought today after it proved it could hold over the breakout point.

Unilever is an international consumer staples company that is changing its focus from its food products to its consumer goods products, which is a higher margin sector of their business. The company is also looking to the emerging markets for future growth. The stock broke out to a new high recently, then retraced to test the breakout point at around $43 (U.S.).

BNN Video Aug. 20 2014, 6:28 AM EDT

Video: Market Call Tonight: Top picks from ValueTrend’s Keith Richards

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Enerplus Energy (ERF TSX)

ERF has been affected a bit by the recent pullback in oil, but the near-termed trend line is very much intact. Again, seasonality can be positive for this sector for the next few months – from late July to October. The theme and the underlying success of Enerplus has been their ability to deliver production from their assets. We expect this to continue, and we especially look forward to progress updates on the Williston Basin and Bakken/ Three Forks projects. The stock trades at a discount to peers; we expect this will continue to shrink as further successes are realized.

Cash

As mentioned in my July 16th BNN Market Call appearance, seasonally, July can often start off strong and finish its rally into about the mid-point of the month for the broad S&P 500 index. From that point, late July and August can be a bit more “iffy”, at least from a seasonal perspective. According to Thackray’s Investors Guide, August on the whole has produced a 0-per-cent average gain since 1950. September too can be weak, with a net average loss of about 0.4 per cent over the past 60+ years. So far, I’d say the seasonal tendency for choppy markets seems to be holding true this year. Cash isn’t a bad thing to hold right now.

Past Picks: July 16, 2014

CGI Group (GIB.A TSX)

Current Commentary: To the disappointment of the nay-sayers, the company’s recent quarterly report results were positive. The quarter saw continued high quality deal signings and growth from the various business segments. Operating margins have increased significantly and improvement in cash flow is expected to continue. We look for continued positive results to translate into further price appreciation in the stock.

Then: $38.31; Now: $36.92 -3.64%; Total return: -3.64%

Encana (ECA TSX)

I recommended this one on my last show (July 16,2014), and still like it. Oil pulled back a bit since the show, which might make sense to seasonal investors as energy stocks tend to have a second period of seasonal strength (after their initial February-May run) from late July to October. Seasonal speaking, therefore, it’s not a bad time to buy into the sector. ECA has shown pretty good relative strength to the group despite its rather sideways performance since my top-pick placement a month ago. It continues to test and bounce off of technical support at around $23. Fundamentally, the second quarter release of earnings on July 24 was strong, with results meeting or exceeding company targets that were set when announcing the new strategy in the later part of 2013. 2014 is going to continue being a transformational year with a focus on higher margin production and value creation. The company is generating a lot of free cash flow right now. We expect that the effective deployment of capital will support projects that grow the company and its stock price.

Then: $23.61; Now: $23.77 +0.68%; Total return: +0.68%

Cash (third pick)

Total return average: -0.99%

Market outlook:

I mentioned on the last show (July 16) that the S&P500 hadn’t seen a correction of 5 per cent or more since the January correction. We’re normally due for some type of corrective action that exceeds 5 per cent after about 5-6 months, according to my study I presented on the last show, and we were due for one. We got one in early August – right on schedule. Seasonally, August and September can be choppy, volatile months. My suggestion is to utilize cash that you may have been hoarding over the summer to pick up new positions. I have been holding about 20 per cent on average through much of the summer, although that figure varies as I buy or sell positions over the summer months. Right now, due to a few stocks we recently sold, we’re almost 30 per cent cash, but that will likely be reduced back to 20 per cent in the coming 1-2 weeks. We are awaiting a few buy signals on some select stocks to trigger a few purchases at this time.

One factor that might suggest another short-termed selloff may be approaching is the low level of the VIX right now.

The VIX is best used as a relative measurement tool. In other words, you want to see how it moves relative to its recent history to try to determine if the market is not expecting too much volatility (a contrarian sell signal) or if its pricing in a lot of future volatility (a buy signal). We’ve gone through two volatility ranges since the bull market began in 2009.

The first range (2010 – 2013) saw investor “complacency” at a VIX level of about 15, and investor “fear” at a VIX level of around 27. So a trader would look at movement in or around either of those areas as one more piece of evidence of a buying or selling opportunity. Keep in mind that the VIX must never be the sole indicator that triggers a buy or sell. Always defer to the market chart patterns and indicators as your main trading tool.

The next range began in early 2013 – signalling the start of the recent non-stop uptrend. The VIX range seems to have changed from 12 (complacency) to 18 (fear). Interestingly, the VIX got to a new low level of complacent at 10.3, before the recent correction. Presently, we’re approaching 12 again. Complacency has set in. To me, this signals that traders should keep an eye open for another corrective blip in the coming weeks. However, if the VIX repeats its July performance, that may not happen until a level of 10 or lower, is approached.

I remain a long-termed bull, but short-termed cautious investor due to factors such as the current low level of the VIX indicator.

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