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bnn market call

Jon Vialoux

Jon Vialoux is research analyst at Horizons ETFs Management Canada Inc. His focus is technical analysis and seasonal investing.

Top Picks:

iShares Russell 2000 Index (IWM NYSEARCA)

The Russell 2000 Small Cap Index is approaching its period of seasonal strength, which runs from Dec. 15 to March 7. Gains over the period, based on data from the past 25 years, average 5.65 per cent, outperforming the S&P 500 Large Cap Index by 3.14 per cent. Money managers tend to take on additional risk at the start of the year to get a jump on equity benchmark, which benefits the higher beta small cap benchmark. The month of December tends to be particularly strong with gains realized in 88 per cent of the periods over the past 25 years. Weakness related to tax-loss selling over the next couple of weeks may provide ideal buying opportunities for the period of seasonal strength ahead. Investors that prefer a Canadian dollar denominated ETF tracking the U.S. benchmark can look to the iShares U.S. Small Cap Index ETF (CAD-Hedged), which trades under the ticker XSU.

CGI Group (GIB.A TSX)

The technology sector seasonally gains between the start of October and the middle of January; CGI Group is no different. Over the remainder of the seasonally strong period, the stock has shown some impressive stats. Between Dec. 2 and Feb. 8, shares of CGI Group have gained 76 per cent of the time, averaging a return of 14.43 per cent over the past 17 years. The sector peaks around the time of the Consumer Electronics show in January.

iShares U.S. Home Construction ETF (ITB NYSEARCA)

The home building industry remains in a period of seasonal strength through to the beginning of February. From Dec. 1 to Feb. 3, the S&P 500 Homebuilding Index has recorded gains 85 per cent of the time over the past 20 years, averaging a return of 11.56 per cent. Performance of the benchmark outpaces the return of the S&P 500 index by 9.17 per cent over the two month time span. Trends for the industry remain positive with new home sales and housing starts continuing to climb. Low mortgage rates and an improving labour market continue to bode well for the industry into the New Year, ahead of the spring home buying season.

Past Picks: September 15, 2014

Technology Sector SPDR ETF (XLK NYSEARCA)

The technology sector enters a period of seasonal strength at the beginning of October, running through to the start of January, around the time of the Consumer Electronics Show in Las Vegas. Between Oct. 9 and Jan. 19 the sector has averaged a gain of 10.89 per cent with positive results recorded in 70 per cent of the periods over the past 20 years. A word of caution over the near-term: Technology tends to be the weakest performing sector in the month of December as investors book profits during the holiday season. Strength resumes into the beginning of January. This pick was offered as an opportunity to buy on weakness into mid-October and depending on your entry point you would be up by 5 per cent to 14 per cent.

Then: $39.98; Now: $42.17 +5.48%; Total return: +5.93%

Archer-Daniels-Midland Company (ADM NYSE)

The agricultural products industry enters a period of seasonal strength in August, running through the end of the year during what is generally known as the harvest season. Archer-Daniels-Midland Company is no different, gaining, on average, between Aug. 5 and Dec. 31. The stock averages a gain of 15.64 per cent with positive results recorded in 90 per cent of the past 20 periods. This pick was offered as an opportunity to buy on weakness into mid-October and depending on your entry point you would be up by 6 per cent to 25 per cent.

Then: $50.56; Now: $53.71 +6.23%; Total return: +6.72%

iShares Dow Jones Transportation Average ETF (IYT NYSEARCA)

The transportation industry tends to benefit ahead of the end of year holidays. Between Oct. 2 and Dec. 5 the industry has averaged a gain of 7.85 per cent with positive results recorded in 85 per cent of the past 20 periods. Aside from an increase in travel and transportation of products for the end of year holiday season, the industry also benefits from a seasonal decline in oil prices over the same period, helping to alleviate a significant input cost. This pick was offered as an opportunity to buy on weakness into mid-October and depending on your entry point you would be up by 8 per cent to 20 per cent.

Then: $152.97; Now: $164.06 +7.25%; Total return: +7.44%

Total return average: +7.46%

Market outlook:

** All positions mentioned on BNN Market Call Tonight and held in the fund (Horizons Seasonal Rotation ETF) are bought and sold within the year due to the seasonal nature of the trades. Average holding period is approximately three months.

"It's the most wonderful time of the year" for stocks. December tends to be the strongest month of the year for equity markets around the globe. The S&P 500 index has closed higher 76 per cent of the time in this last month of the year, averaging a return of 1.7 per cent. Returns for the Canadian equity market tend to be even better. The TSX composite has gained in 86 per cent of Decembers over the past 37 years, averaging a return of 2.2 per cent. Most of the gains, however, have historically been realized in the last half of the month, resulting in what has become known as the Santa Claus Rally. This bullish short-term tendency spans the last two weeks of the year from Dec. 15 through to Jan. 3, on average. S&P 500 index returns over this period have averaged a gain of 2.31 per cent. Frequency of success over the past 25 years has been 80 per cent.

In the interim, until Santa Claus comes to town, tax loss selling tends to dominate. Between Dec. 5 and Dec. 15, the S&P 500 index has averaged a decline of 0.91 per cent as investors reallocate portfolios ahead of the end of the year. Areas of the market that are most vulnerable to tax-loss selling pressures are those that have returned 5 per cent or less by the end of November, including small-cap stocks and the energy sector. Weakness over the next two to three weeks should provide ideal entry points for the year-end rally ahead.