Keith Richards is portfolio manager at ValueTrend Wealth Management of Worldsource Securities. His focus is on technical analysis.
Technology Select Sector SPDR ETF (XLK NYSEARCA)
This has been in an uptrend since the bull market began in late 2009. The technology sector is overweight in our portfolio – we are almost at our mandated maximum allocation of a sector (we are at 25 per cent; the maximum we allow ourselves is 30 per cent in any sector). Money flow is positive to the sector, and relative strength studies show this sector is outperforming the broader markets. Seasonality for technology is positive from now into usually around late January – although we will hold this ETF until a technical breakdown occurs rather than just the seasonal period ending. Within the sector, we see many tech stocks breaking out – and this reflects on the ETF's technical breakout through its summer highs.
BMO China Equity Index ETF (ZCH TSX)
This ETF is a bit of a contrarian play, given China's recent economic slowdown. However, the Chinese government recently launched a fresh round of mini-stimulus initiatives to counter growth headwinds. The measures aim to support the agricultural sector, boost investment in public facilities and improve environmental protection. The BMO ETF is one of the better ways of investing in China, given that its holdings are made up entirely of ADRs traded on the U.S. markets. ADRs are subject to international accounting standards, making these positions a better way of playing that market. The ETF appears to be breaking out from a long base and consolidation phase. We view this as a trade with good potential over the winter. The Shanghai composite index has also broken a downtrend that has been in place since 2009 – anther positive for this ETF.
Tata Motors (TTM NYSE)
This is our single favourite stock idea within our equity platform – great stock, wonderful breakout a year ago, and a nice uptrend that has been in place since. Tata feeds off of the favourable business environment in India and its strong growth within the automotive industry. Tata is a leading Indian manufacturer of automobiles, trucks, and buses. We expect the commercial and passenger vehicle business in India to improve, contributing to better margins and more successful product launches. We have already seen increased sales in the Jaguar and Land Rover brands which are important drivers for continued growth in Tata's revenue.
Past Picks: September 30, 2014
Yum Brands Inc. (YUM NYSE)
We still hold this stock. It's still hanging around our buy price – at the trend line support level around $71. We're up thanks to the U.S. dollar, but we expect better stock performance as the company gains traction in the emerging markets
Then: $71.98; Now: $72.86 +1.22%; Total return: +1.84%
Encana Corp. (ECA TSX)
Our only exposure to the energy sector, this stock was defying the sector's bearish movement – until recently. Our buy price was $23, so we are under water on the stock. We remain cautious on energy, but feel this stock is likely to bounce from an oversold level in the sector in the near term, along with the sector. We'll be selling it soon.
Then: $23.67; Now: $21.46 -9.34%; Total return: -9.34%
Tata Motors (TTM NYSE)
Then: $43.71; Now: $46.54 +6.47%; Total return: +6.47%
Total return average: -0.34%
On my last two appearances on BNN (Aug. 19 and Sep. 30) I noted that our equity model held 25-per-cent cash in anticipation of a probable market pullback. I noted that sentiment readings were displaying excessive optimism (a contrarian indicator), and the seasonal tendencies for September and the first three weeks of October are often weak. Right on schedule, the market began selling off in September, and into October. On Wednesday October 15, we saw the capitulation point of our anticipated market correction. Capitulation means, in plain English, that investors had reached a precipice of panic – case in point, that Wednesday saw a massive selloff followed by a close that was much nearer to the high of the day. Candlestick chartists call this a "hammer" formation. At capitulation bottoms, hammer formations occur as the "smart money" (sophisticated investors) begin buying stocks off of panicking weaker hands (retail investors) that day.
Typically after such a capitulation point, the market will gyrate up and down for a while. Occasionally, like we got this time, markets form "V" bottoms that rally strongly from that bottom point. The big dip intra-week and late reversal of mid-October triggered a large number of selling climaxes in S&P500 components. These occur when a stock drops to a 52-week low, and then reverses enough to close the week higher than its previous week's close. This kind of pattern has, on average, resulted in strong markets going forward. Statistics compiled by http://www.sentimentrader.com/ show an average 1-year gain on the S&P500 of over 17 per cent after such a bottom reversal pattern.
We followed our discipline by investing most of our cash during the third week of October, after confirming support of the S&P 500 at 1,820 for a few days after. We are now down to 7-per-cent cash, and expect to have that cash invested shortly. Our focus has been on technology and select industrial/international positions that retreated and bounced off of support zones during the October blow-off. We have been avoiding commodity exposure for some time. Due to our cash holdings during the market selloff, our minimum exposure to commodity-related stocks, and subsequent buying near the October low point, our equity platform generated positive returns over the autumn selloff. Readers are welcome to review our performance – updated monthly on our website: http://www.valuetrend.ca/.