Keith Richards is portfolio manager, ValueTrend Wealth Management of Worldsource Securities. His focus is technical analysis.
SPDR Consumer Discretionary ETF (XLY-NYSE)
I like to contrast the difference between consumer staples and consumer discretionary as such: You need the products the companies within the staples index do and make (Walgreen, P&G, Colgate, and CVS Health). You want the products that the discretionary sector companies make (Disney, Time Warner, Nike, Starbucks, and Home Depot). I tend to rotate back and forth between these two sectors via the SPDR ETF's – seasonally, you are best to hold the discretionary sector now, and then rotate into the staples in the spring. We bought into this ETF back in December at $70 (U.S.), having rotated out of the staples ETF (XLY) at that time.
Walt Disney (DIS-NYSE)
Disney is part of the discretionary sector noted above. We've held this stock since December, 2013 where we picked it up at $69. We view it as a longer-termed hold – the trend is fantastic, and the company exhibits everything you want in a long-termed growth stock: innovation, market leadership, and strong leadership.
BMO Equal Weight US Banks Hedged to CAD Index ETF (ZUB-TSX)
I'm going to stick with the BMO U.S. banks ETF for the reasons I outline in the past picks write-up below. Now is probably a good time to pick it up.
Past Picks: December 19, 2014
WSP Global (WSP-TSX)
After an eight-year volatile consolidation, WSP broke out in mid-2014. We liked the stock fundamentally for some time, and wanted to buy it on a pullback of that breakout. The stock co-operated, pulling back from $38 to $33. We bought at around the current price last fall. The stock looks to be on the move and is defying the market's recent negativity. We expect it to be a profitable position over the coming months. (Read more on the company).
Then: $34.90; Now: $34.37 -1.52%; Total return: -0.46%
Technology Select Sector SPDR ETF (XLK-NYSE)
XLK was affected by January's selloff similarly to the BMO U.S. banks ETF noted above. Info tech has a seasonal period of strength into mid-January, but I have noted in the past that the sector can remain strong well into the spring or early summer. In 2014, this ETF did not slow down until July. The trend remains bullish on the longer termed chart for XLK – although it is consolidating in a similar pattern to the S&P 500 (see my market commentary). Like the U.S. banks, we're giving this sector the benefit of the doubt and will hold it until the spring – unless the longer termed trendline is broken.
Then: $41.57; Now: $39.90 -4.02%; Total return: -4.02%
BMO Equal Weight US Banks Hedged to CAD Index ETF (ZUB-TSX)
Seasonal factors are usually bullish for U.S. banks at this time of the year (from December until April). We bought ZUB on a breakout of the 1-year consolidation pattern it had been stuck in since last March. We had recommended it as a BNN top pick back in the fall of 2013 and recommended a sell in March 2014 for a very profitable trade. Thus far, the trade is not working as well as it did last year. The ETF went right back into its trading range ($18.80 - $21) after we bought it. This may be due to the negativity we saw on the broad markets through January. As I note in my market commentary, January was a rough month in 2014 as well, so this negativity may not be as ominous as investors fear. We are still holding this ETF, and expect to play it out until April, unless it cracks support – in which case we would sell.
Then: $21.22; Now: $18.85 -11.17%; Total return: -10.70%
Total return average: -5.06%
At a few of my recent speaking engagements, I've been asked the following two questions:
1. Where is the loonie going to land?
The loonie has been pretty tied to the direction of oil recently. The Canadian dollar peaked in June, 2008 at around $1.10 (U.S.) – right along with the peak price in oil of around $145/barrel. As oil plunged, so did the loonie, where it found support at just under $0.77. I would expect a similar washout for the loonie this time around, followed by support at that level. A base will likely occur, comprising of a series of rallies and failures, before the Canadian dollar will be back on its feet again. This should be a similar pattern to oil, as I will describe below.
2. When is the timing going to be right to take advantage of oil's plunge?
As always, I will refer to history to offer clues to when we should buy oil. Oil has experienced 3 major crashes in the past 35 years: the mid-80's, the late-90's, and 2008.
In December, 1985, Saudi Arabia declared its intention to regain market share – oil prices began to decline, sinking to as low as $10.42 a barrel in March, 1986 from a November, 1985 peak of $31.72. Sound familiar? Oil producers by the dozen folded tent, and a complex process of bottoming occurred as oil formed a double bottom through 1987.
The years 1998-99 saw another near-$10 / barrel test of oil prices during the "Asian Contagion". WTI Oil was finding support at the prior decade's low point, near $10/barrel. I was a stockbroker with Merrill Lynch at the time, and I recall the default by Russia on its bonds, and the near collapse of its economy (again, sound like a familiar setup?). As a younger broker, I recall wondering if I should buy oil in the $10-$12 range during the 1998-99 collapse. I didn't, but I did learn an interesting lesson by observing the bottoming process. The bottom took a good 2 years to complete its process through a series of volatile moves. Like the drop in late 1980's, this was a complex bottom.
The drop in oil prices in 2008 from their peak of $140 to around $35/barrel looks fairly v-shaped. However, a look at a shorter-termed chart shows that the bottoming process took the entire winter of 2008 - well into the spring of 2009. I don't care what formation you wish to call that period of basing (head and shoulders bottom, perhaps?), but I do care to note that it was a complex bottom. Once again, the bottoming process took many months to complete – just as the last two oil collapse bottoms did. I expect the same will occur this time around. Perhaps oil will find support at $35-$40/barrel before the summer. But it will be a choppy, complex series of peaks and troughs before it regains its glory. I expect to be legging in as this process proves to be taking place. By the way, I am happy to say that I learned my lesson from missing the 1999 drop – I bought oil during the spring of 2009 in the mid-high $40's.