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Keith Richards.
Keith Richards.

BNN MARKET CALL

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

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

Top Picks:

CASH

We are a little over 27-per-cent cash in the ValueTrend Managed Equity Platform, and have been for about two weeks. The stock market put in corrective summer lows between June and September over the past four years. Specifically, we saw summer low points in July 2010, September 2011, June 2012 and a minor one in July 2013. Thus, we will be watching to re-deploy our cash holdings upon a technical buy signal any time over those months.

BNN Video Apr. 16 2014, 5:32 AM EDT

Video: ValueTrend's Keith Richards names his top picks

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Consumer Staples Select Sector SPDR Fund

The consumer staples sector normally does well over the summer as investors move out of risk and into less aggressive equities during that seasonally weaker time of the year. Most years, we’ve bought this ETF in April and sold it in November successfully. However, last year was an unusual summer, where defensive stocks like staples and utilities fell while high-beta stocks like technology rose. So we stayed out of staples for the summer. We moved into this ETF at the precise moment we normally would be exiting the position, having bought last November at $42 (U.S.). The ETF didn’t do much over the winter beyond give us U.S. dollar exposure (a good thing!) – but we held it because we were overweight technology all winter, and felt we should have something a bit safer in the mix. Now, however, it’s time for this sector to move, and we will continue to hold it for the summer. It’s now breaking out of a holding pattern it’s been in over the winter – looks like it will be a strong mover this summer.

Brookfield Infrastructure Partners

Due to the steady trend, low beta (around 0.6) and high dividend of 5 per cent+, I will keep this stock on my top picks at this time. I’ve held it since 2011, when I bought at $26. Great position for the long-termed investor.

Past Picks: March 11, 2014

CGI Group

Then: $35.03; Now: $36.00 +2.77%; Total return: +2.77%

Brookfield Infrastructure Partners

Then: $41.06; Now: $43.33 +5.53%; Total return: +5.53%

Keyera

Then: $66.30; Now: $69.82 +5.31%; Total return: +5.62%

Total return average: +4.64%

"Now" figures are intraday from the date of the analyst’s appearance on BNN Market Call.

Market outlook:

Too many happy faces!

I’ve been pounding the table lately about the increased level of investor complacency as the bull market has charged ahead. You can pull up any of my recent blogs (http://www.smartbounce.ca/), or my last month’s Globe and Mail commentary or review my last BNN appearance to hear me speak about various signs of “too many happy faces” (as one of my astute clients once said) amongst retail investors. Just to name a few of my past-cited sentiment indicators of concern:

  • The Investment Company Institute shows $3.91 in equity for every $1 in money market funds – a level that is ahead of those seen in pre-crash 2000 and 2007
  • The level of margin loans on the NYSE is at record highs, ahead of its July 2007 levels
  • The high volume rotation out of market leaders (Nasdaq, Biotech, U.S. small caps) into bonds, utilities and consumer staples is a sign of money becoming defensive
  • There has been increasing activity in low quality IPO’s (medicinal marijuana, anyone?) – sometimes a sign of caution.

Another sign of investor complacency has been the low levels of the VIX. Take a look at the 20-year chart of the VIX (volatility index). Notice how it’s been hovering near its 20-year support lows of the mid-teens for the better part of a year. That’s because the deviation of returns during the recent leg of the bull market has been a little too “comfortable”. The longer such lack of volatility lasts, the more likely a spike in volatility will return. I might quote David Wilcox’s (blues guitarist) song Bad Apple here in a message to stock investors – “You need to eat a slice of humble pie. And the longer it takes, the worse it’s going to taste!”.

Perhaps this year will end up looking a little like 2011. That year, the market peaked in mid-April, then fell some 20 per cent by September. As with our recent markets, the 12 months preceding the 2011 market selloff were pretty low in volatility (VIX levels). It was a choppy rise back to the top over Q2 and Q3 of 2011. For the record, we began selling more than 2 weeks ago. The cash levels of our ValueTrend Equity Platform hit about 27 per cent by early last week. We didn’t feel that the markets would remain strong until May – the typical end of the ‘best six months” period – as mentioned on my last BNN appearance. We’ve been following our own advice and selling early this year. Having said that, we expect to re-deploy our cash in the months to come, as our longer termed view remains quite bullish.

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