Three top picks from ValueTrend’s Keith Richards

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

Top Picks:

BMO India Equity ETF (ZID-TSX)

I put this ETF on my Top Picks list on BNN Market Call last fall (November). It has been in an uptrend, and every once in a while the price consolidates. This is one of those times, making it an ideal entry point. Traded in Canadian dollars, this India ETF presents an opportunity to participate in Global Depository Receipts of Indian stocks. Similar to American Depository Receipts, GDRs trade as domestic shares, but are offered for sale globally. We like this ETF basket of the largest, most respected companies trading on the India Bombay Stock Exchange. Technically, the Indian market looks attractive – and fundamentally, the Indian government has been supportive of its growing business environment.

SPDR Consumer Discretionary ETF (XLY-NYSE)

This ETF had a nice breakout through the $73 (U.S.) resistance point on the chart since I put it on my top picks January 30. It recently hit $77, but has pulled back with the general markets of late. This creates another great buying opportunity for this ETF. Seasonally, it should do well until May.

Cash

Awaiting a potential energy trade: We're about 16-per-cent cash in our equity model. That's not an outright bearish stance, but we are looking for a better entry point on a couple of picks we are watching. One of those "watch list" trades is oil. We are looking for a potential retest of WTI's $45-ish recent bottom. We may buy on a confirmation rally off of that level, should it happen. Seasonal tendencies are coming into play for energy right now, so we wanted to have some cash ready should the technical signal an entry point.

Past Picks: January 30, 2015

Walt Disney (DIS-NYSE)

Then: $90.96; Now: $102.89 +13.12%; Total return: +13.12%

BMO Equal Weight US Banks Hedged to CAD Index ETF (ZUB-TSX)

Then: $18.85; Now: $20.43 +8.38%; Total return: +8.38%

SPDR Consumer Discretionary ETF (XLY-NYSE)

Then: $69.99; Now: $74.25 +6.09%; Total return: +6.09%

Total return average: +9.20%

Market outlook:

While we should watch market trends (peak & trough movements) as our ultimate market timing tool, there are a few leading indicators that we at ValueTrend are watching for clues to the future. One such tool is sentiment. A chart that http://www.sentimentrader.com/ posts illustrates the ratio of Smart money vs. Dumb money.

For those who have not followed my work, this indicator represents 2 distinct trading groups. "Smart money" includes institutions, pensions, insiders, sophisticated traders – they tend to win the market timing game. "Dumb Money" are those investors who are usually bad market timers. Retail investors, small speculators, mutual fund investors – these are unsophisticated investors who buy and sell on emotion – usually at the wrong time.

The current spread between these groups is becoming bearish. Currently, 70 per cent of Dumb money is bullish – up from about 55 per cent just a couple of months ago. Meanwhile, Smart money is getting out of the market. That group has gone from 65 per cent bullish to 30 per cent bullish as of Monday. So there are about twice as many "dumb" investors who like the market at these levels as there are "smart investors". This spread – about 2:1 Dumb/Smart money, is right at the traditional danger level. Keep in mind, though, that sentiment studies such as this one are usually leading indicators. That is: they usually precede market movements by a month or two rather than immediately coincide with market tops or bottoms. Seasonality studies would agree with that thought process – markets are usually strong into April or May according to most seasonal experts. Given the predictive accuracy of this indicator, we have become a little more cautious of late, and expect that markets may sell off aggressively into the spring or summer – if that process hasn't already begun. We're about 16-per-cent cash in our equity model at this time. We'll have no problem in raising that cash level further if the trend deteriorates. By the way, you can see the spread chart I am referring to on my blog.