Keith Richards is a portfolio manager with ValueTrend Wealth Management. His focus is on technical analysis.
Market outlook
The potential for a sharp rally beginning some time between mid July and August is high. I am targeting 1,500 for the S&P 500 into the early part of 2013. Briefly, my reasoning behind expecting a buying opportunity in that time period are:
1. Federal Reserve monetary stimulus cycles: Markets have tended to sell off prior to the ending of a Fed quantitative easing (QE) program, and then rally from August on as rumours circulate about the beginning of a new QE program. There is potential of a new Fed action later this year, in addition to the current extension of Operation Twist. The Fed has indicated its willingness to use additional measures to offset the negative repercussions of the European malaise as is necessary.
2. Presidential election cycle: The second half of year tends to be positive in election years, according to Ned Davis Research
3. Seasonal cycles: Seasonal patterns appear to be "pushed to the left" (shortened) in recent years as volatility has risen. For example, the traditional "best six months" seasonal buying point was July/August during 2009, 2010, 2011 rather than the more typical November buy point.
4: Acceptance: News out of Europe will eventually be absorbed and accepted – whatever solution comes out of the current situation. Eventually, things become oversold, and markets move up despite the news.
5. Market fundamentals: Are actually looking reasonable, albeit not screamingly cheap. Trailing PE is around 15 on the S&P, which is its long-termed average.
6. Mid-termed bull market intact: The mid-termed bull market, which began March of 2009, still has one last leg in it. The decade-long technical resistance point of 1,500 on the S&P500 will be reached in the new year. I'm expecting that level to be the peak of this cycle.
Past Picks: May 18, 2012
Brookfield Infrastructure (BIP.UN-T)
Then: $30.48
Now: $33.35
TR: +10.72 per cent
Intact Financial (IFC-T)
Then: $64.03
Now: $63.15
TR: -0.73 per cent
Horizons Betapro S&P Short term VIX ETF (HUV-T)
Then: $12.18
Now: $8.30
TR: -31.86 per cent
Total Return Average: -7.29 per cent
Top Picks:
1. SOIL (Global X Fertilizer / Potash ETF)
Seasonally speaking, this sector tends to move well between early August and the end of the year, according to Brooke Thackray's guide. In fact, our friend Don Vialoux made the SOIL ETF a top pick on BNN recently. I hate to look like an imitator, but I am intending to buy the same sector around the same time this year, so I'm making SOIL a top pick as well. The chart shows nice support at around $11.60, with a sell target at resistance of around $14.
2. ZEB (BMO Equal Weight CDN Banks ETF)
Here's one that the seasonal guys might argue with me on, (Canadian banks tend to move best after October) but the chart looks ripe for a bounce for the Canadian banks. The sector looks to be building a base after a 3 month downtrend, but wait for a breakout before buying. It may fail, and you don't want to be in if that's the case. Given the tendency for seasonal cycles to move forward a bit lately, I think this sector is a decent bet for at least few months, provided we get a breakout through $16.80 or so. The 3.7 per cent yield doesn't hurt either.. It could reach $18 or higher sooner rather than later in a market rally. By the way — I recommended BNN viewers sell the banks in the spring, as I did back then for my portfolio.
3. CGL (iShares dollar hedged Gold Bullion ETF)
I've been out of gold for a year now. Bullion has been forming a large right-angled triangle. This formation can be quite bullish, especially if the triangle breaks to the upside. Given bullion's typical seasonal strength from July to October, I'm looking for a nice move in the coming weeks. I prefer playing bullion over the gold stocks – it's more of a pure play on a technical pattern. You can pick any gold bullion ETF – I don't recommend this one over any of the others, it just has a bit more volume.