Jon Vialoux
Jon Vialoux is a research analyst at TimingTheMarket.ca and EquityClock.com. His focus is technical analysis and seasonal investing.
Top Picks:
Costco (COST.O)
Consumer-related stocks, including the discretionary and staples sectors, tend to perform well leading up to the holiday season at the end of the year. Costco exemplifies this tendency. Between Oct. 3 and Dec. 5, around the Thanksgiving holiday in the U.S., shares of Costco gain, on average, 10.5 per cent with positive results recorded in 21 of the past 25 periods. Consumer spending remains the bright spot within the economy, bucking the weakness that has become apparent in other areas of the economy, such as manufacturing. The year-to-date change in retail trade has held inline with historical averages and is setting up well for a profitable holiday season ahead. The stock has been outperforming the market since the start of July, and short-term resistance was recently taken out around $147, opening a path towards the all-time highs around $153. Support is apparent around the rising 200-day moving average.
Sysco (SYY.N)
Sysco, the food services company, is an ideal defensive hold during this period when the broader market seeks a footing for the period of seasonal strength ahead. The consumer staples company has gained in 84 per cent of Octobers over the past 25 years, averaging a gain of 4.1 per cent. Further out, from an average low on Oct. 10 to an average peak on Dec. 31, the stock has gained an average of 9.14 per cent with positive results recorded in 21 of the past 25 periods. The stock jumped to new all-time highs in August following news that activist investor Nelson Peltz had taken a 7-per-cent stake in the food company, calling it "undervalued." The stock has since consolidated following the initial "pop," charting what appears to be a bull flag pattern. The stock is jumping once again after testing support recently at its 50-day moving average.
Bank of Montreal (BMO.TO)
The Canadian banks are nearing the end of their fiscal year, and the stocks tend to gain ahead of the fourth quarter reports released at the end of November. Shares of Bank of Montreal have averaged a gain of 5.17 per cent between Oct. 10 and Dec. 1, with positive results recorded in 15 of the past 19 periods. While profitable trades have been typical by buying the rumour, investors will want to exit positions ahead of the release of the quarterly reports, as the stocks are prone to selling on the news into the end of the calendar year. The stock recently broke above intermediate resistance at its 50-day moving average and longer-term trend channel resistance remains the critical hurdle ahead.
Past Picks: August 14, 2015
BMO Low Volatility Canadian Equity ETF (ZLB.TO)
This is a top pick that I last provided during my appearance in the spring, and since that time the price has been flat. However, performance relative to the market has been firmly positive. The summer is characterized as a period of increasing volatility and investors will want to find ways to hedge themselves. The BMO Low Volatility ETF provides exposure to a low beta-weighted portfolio of Canadian stocks, providing less sensitivity to market movements. Reducing beta and correlation to the market in portfolios can allow investors to ride out the rocky trading period ahead, while still participating in the upside potential for stocks. Investors seeking the US alternative can look to the BMO Low Volatility US Equity ETF (TSE:ZLU).
Then: $27.29 Now: $26.60 -2.53% Total return: -1.93%
Xcel Energy (XEL.N)
Xcel Energy, a utility holding company based in the U.S., operates a very seasonal business with a large share of annual earnings generated in the third quarter. The company benefits from increased demand for electricity during the warm summer months, the impact of which becomes evident in shares of XEL. Between July 29 and the end of the year, the stock has gained an average of 12.13 per cent, with positive results recorded in 76 per cent of the seasonally strong periods over the past 25 years. The utilities sector typically acts as a proxy for the bond market, moving inversely to the direction of borrowing rates. Should treasury yields remain under pressure though the next couple of months, as is seasonally typical, utility companies should continue to benefit.
Then: $35.80 Now: $35.26 -1.51% Total return: -0.56%
Horizons Active Floating Rate Bond ETF (HFR.TO)
Horizons Active Floating Rate Bond ETF is a great alternative to cash during the summer. The ETF invests in a portfolio of Canadian debt securities and hedges the portfolio's interest rate risk to generally maintain a portfolio duration of less than two years. Bonds seasonally outperform stocks starting from the beginning of May through to October, making this fund an ideal hold to maintain a market neutral portfolio during the period of seasonal weakness for stocks.
Then: $10.07 Now: $9.96 -1.09% Total return: -0.77%
Total Return Average: -1.09%
Market outlook:
After a peak in the equity market in the month of May and the volatile summer that followed, investors will be looking for places to put their money to work with the seasonally strong period for stocks directly ahead. October is typically known as a month for bottoms with the low in the S&P 500 index occurring on Oct. 27, on average. Following this date begins the best six months of the year for stocks, a period that runs through the first quarter reporting period in April. Over the past 50 years, the S&P 500 index has averaged a gain of 7.95 per cent between the close on Oct. 27 and the close on May 5, while the off-season for stocks between May 5 and Oct. 27 has seen a decline in the large-cap index of 0.43 per cent, including the loss recorded this past summer. Sectors of the market that perform well through the fourth quarter include Canadian banks, leading up to the fourth-quarter reporting season in November, and sectors pertaining to the consumer with the upcoming holiday season, including consumer discretionary, consumer staples, and technology. Each of these areas are already showing outperformance versus the market, enticing investors away from some of the lower beta, defensive allocations that worked well over the summer months.
Looking at the technicals, while the broader market, according to the S&P 500 index, has recorded strong gains from the double bottom low charted at the end of September, equities may not be out of the woods yet. A critical retest of the breakdown point that led to the waterfall plunge in August is directly overhead, approximately around the now-declining 200-day moving average. Expect some struggle in regaining this previous level of long-term support.