Don Vialoux is research analyst at Horizons ETF Management Canada. His focus is technical analysis and seasonal investing.
Horizons Active Floating Rate Bond ETF (HFR.TO)
Now is the time to avoid the inevitable correction in equity prices that happens between the beginning of June and the end of October. Investing in an Exchange Traded Fund that holds short term corporate and government bonds will provide an opportunity to realize a small return, but with limited volatility. If a summer rally starts after a stock market correction this summer, the ETF easily can be liquidated and funds can be re-employed into seasonally attractive equity sectors.
Two month Canadian Treasury Bill
Selected seasonal sector opportunities frequently become available during the June to October period including gold, energy and fertilizer. Owning two month treasury bills offers an opportunity to move quickly into these sectors when technical requirements confirm their favourable seasonality.
Five month Canadian Treasury Bill
Several non-recurring events could trigger greater than average volatility in North American equity markets this summer including first increase in the Fed Fund rate in the U.S. and Greece's foreclosure. Typically the period of volatility in summer by North American equity markets is over by the end of October. A five month Treasury bill will allow the investor to protect capital and to prepare for a return to equity markets near the end of October.
Past Picks: April 14, 2015
SPDR S&P 500 ETF Trust (SPY NYSEARCA)
Then: $209.49 Now: $211.14 +0.79%; Total return: +0.79%
Horizons S&P/TSX 60 Index ETF (HXT.TO)
Then: $28.91; Now: $28.23 -2.35%; Total return: -2.35%
PowerShares QQQ Trust Series 1 (QQQ.O)
Then: $107.17; Now: $110.08 +2.68%; Total return: +2.69%
Total Return Average: +0.38%
When will the summer rally occur? As June is entered, the media love to ask the question. Not so fast! Granted, the S&P 500 Index and TSX Composite has recorded a period of significant strength from the beginning of June to the end of October in every year during the past 10 periods, except 2008, when the U.S. equity market was in a free fall. However, the timing of the rally is any time during the five month period. Trying to determine precise timing during the next five months is like trying to nail Jell-O to the wall. Of greater importance, every summer rally occurred after a spike in volatility (i.e. VIX) and a correction ranging from 6 percent to 13 percent. Triggers to the spike in volatility have been non-recurring events. Possible triggers this year include the first increase in the Fed fund rate and bankruptcy by Greece. Currently, the VIX Index is dragging near a five year low and has yet to show momentum signs of moving higher. The S&P 500 Index and TSX Composite can drift higher under current conditions. However, be aware that when VIX begins to spike, the correction happens quickly. Last year the S&P 500 Index dropped 9.8 percent and the TSX Composite plunged 13.0 percent from mid-September to mid-October. Investors need to be vigilant as summer approaches. The good news: after the correction is over, the summer rally occurs and gains frequently continue until the end of the year.