Jon Vialoux is research analyst at Horizons ETFs Management Canada Inc. His focus is technical analysis and seasonal investing.
Martinrea International (MRE-TSX)
The automobiles and components industry enters a period of seasonal strength during the spring months, benefiting from the increased sales of cars and trucks with the onset of warmer weather. Martinrea is no different, gaining, on average, between the beginning of January and the beginning of May. The stock has returned an average of 19.1 per cent per year over the past 16 periods with positive results recorded in 12 of those seasonally strong time-frames. The stock recently moved above a base building pattern that was charted following its period of seasonal weakness that concluded in December.
Aecon Group (ARE-TSX)
In Ontario, we are accustomed to two seasons: Winter and Construction season. Construction spending seasonally rises each year between March and August and Aecon is the beneficiary of some of these projects. Between the start of February and the start of June, the stock has gained an average of 10.27 per cent with positive results recorded in 67 per cent of the past 18 periods. Since last May, the stock has lost almost half of its value, impacted by its exposure to the energy sector, but recently has carved out a bottoming pattern as the price of oil attempts to find a floor. With the period of seasonal strength for the energy sector currently upon us, Aecon should see at least a temporary reprieve from the energy related selling through to the spring months. Although the stock has recorded gains, on average, through to June, recent years have suggested an April peak, which may provide an opportunity to book profits if energy sector volatility returns.
iShares MSCI EAFE Index ETF (EFA-NYSE)
While equity markets in Canada and the U.S. continue to show seasonal strength, benchmarks outside of North America have started to outperform following the announcement of the asset purchase program in Europe. Between January 30 and May 2, the MSCI EAFE Index has gained in 90 per cent of the periods over the past 20 years, averaging a return of 4.60 per cent. The ETF is composed of investible markets outside of North America, including Japan, United Kingdom, France, Switzerland, and Germany. Assuming the markets can get past the overhanging concerns pertaining to Greece, stocks outside of the U.S. look set to start a trend of outperformance following a prolonged period of lagging returns versus U.S. equity benchmarks.
Past Picks: December 3, 2014
iShares Russell 2000 Index (IWM-NYSE)
UPDATE: The Russell 2000 Small Cap Index benefits from a period of seasonal strength that runs from December 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 benchmarks, 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 provides ideal buying opportunities during the month of December, an event that was realized again this past year. Despite a breakout in the last half of December, the Small Cap ETF has continued to consolidate around resistance around $119.
Then: $117.37; Now: $121.53 +3.54%; Total return: +3.93%
CGI Group (GIB.A-TSX)
UPDATE: The technology sector seasonally gains between the start of October and the middle of January; CGI Group is no different. Between December 2 and February 8, the stock has historically shown some impressive stats. 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. Although the period of seasonal strength for the stock may have come to an end, price continues to trend positive following the break above resistance around $41.
Then: $41.91; Now: $52.52 +24.58%; Total return: +24.58%
iShares U.S. Home Construction ETF (ITB-NYSE)
UPDATE: The home-building industry is seasonally strong through to the beginning of February. Through the period of seasonal strength, which began in mid-October, the Home Construction ETF (ITB) is higher by around 22 per cent, double the return of the S&P 500 index over the same period. Seasonal strength concludes at the beginning of February, suggesting now may be an opportune time to take some profits. 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. As well, the reduction in the FHA mortgage insurance premium should be a net positive for the industry this year.
Then: $25.70; Now: $27.51 +7.04%; Total return: +7.16%
Total return average: +11.89%
Stocks have had a lacklustre start to 2015, consolidating following fairly healthy gains accumulated last year. The S&P 500 index has traded within an 80-point range that topped out around 2,064 as investors remained cautious given the overhanging macroeconomic issues. Defensive assets, such as bonds and high yielding equities, were the beneficiaries of the market uncertainty through the month of January, but the risk-off trend is showing signs of changing. Following another strong employment report for the month of January, treasury yields in the U.S. traded firmly higher, forcing investors out of some of those higher yielding equities in the utilities and REIT sectors. Consumer staples and health care, two defensive sectors, have also started to show performance that is lagging that of the broad market as investors rotate towards materials, financials, and consumer discretionary. This cyclical rotation is typically a positive for the broad equity market as investors venture out on the risk spectrum.
Seasonally, cyclical sectors, including industrials, materials, energy, financials and consumer discretionary tend to perform well into the spring, benefiting from the uptick in economic activity following the winter months. This risk-on sentiment amongst equity investors tends to result in gains for the S&P 500 index, particularly during the months of March and April. Between March 1 and May 5, the large-cap benchmark has recorded gains 75 per cent of the time over the past 20 years, resulting in an average gain of 4.23 per cent. Assuming markets can get past some of the overhanging macroeconomic concerns, there is a strong probability for further gains in stock prices during the months ahead.