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bnn market call

Jon Vialoux

Jon Vialoux is research analyst at His focus is technical analysis & seasonal investing.

Top Picks:

BMO U.S. High Dividend Covered Call ETF (ZWH.TO)

This ETF provides exposure to a dividend-focused portfolio with the benefit of collecting additional yield through a covered call write strategy. Coming into a more volatile time of year for stocks, investors will want to find ways to reduce risk in equity portfolios, and this defensive ETF is an ideal way to do that. Dividend stocks, in general, are less prone to seasonal fluctuations than low or no-yielding equities, and if we are to assume that upside for equities is capped until we receive further clarification regarding forward valuations in this coming earnings season, the call write overlay has proven benefits above the benchmark return in a flat to negative market.

Alphabet Inc. (GOOGL.O)

Technology stocks tend to perform well into the spring months, leading up to the developer conferences in May and June. Alphabet is holding their event in the middle of May with Apple following soon thereafter in June. These events have all the fanfare of a product launch, but without the "buy the rumour, sell the news" that is typically realized with the unveiling of a new device. While the stock doesn't have an extensive trading history, shares of GOOGL have gained an average of 16.95 per cent between March 16 and July 19, higher in 9 of the past 11 periods. Shares remain supported around the 20-day moving average with longer-term support presented around the 200-day, which recently moved above $700.

BMO Short Federal Bond Index ETF (ZFS.TO)

During the off-season for stocks, government bonds offer a way to reduce portfolio beta while collecting a yield higher than cash equivalents. This ETF holds short-term (1-to 5-year) bonds issued by the Government of Canada and is presently yielding 1.79 per cent.

Past Picks: January 8, 2016

Aetna (AET.N)

Aetna briefly broke long-term trendline support in the middle of the first quarter following the weakness in the broader market but quickly regained those levels with the rebound in equity markets over the past month and a half. The stock recently broke above resistance around $110, trading above its 200-day moving average for the first time since late October. Seasonally, Aetna benefits from a period of strength between the start of November and beginning of April, gaining an average of 22.3-per-cent per period over the past 25 years. The stock has gained in 88-per-cent of the seasonally strong periods.

Then: $107.07 Now: $110.28 +3.00% Total return: +3.23%

Valero Energy (VLO.N)

As with many stocks in the first quarter, Valero broke long-term trendline support, but quickly regained those levels as the quarter came to an end. Much of the hit it took can be attributed to larger-than-average gains in gasoline inventories in the first couple of months of the year, which compressed the favourable crack spread, but this has since come back as refiners enter maintenance season. The days of supply of the commodity are back in line with historical norms. Seasonally, Valero benefits from strength between the start of the year and the end of April, running up to the summer driving season. Over the past 25 years, the stock has gained an average of 20.1 per cent over this seasonally strong period, with positive results realized in 22 of the past 25 periods.

Then: $68.26 Now: $61.66 -9.67% Total return: -8.79%

Northrop Grumman (NOC.N)

Defence companies continue to have a certain appeal (unfortunately) given the turmoil around the globe. The industrial sector, in general, tends to perform well between the end of January and the beginning of May, given the pickup in industrial production over this period. Between the start of the year and the beginning of May, shares of NOC have gained an average of 9.34 per cent and have shown positive results in 20 of the past 25 years.

Then: $186.07 Now: $200.55 +7.78% Total return: +8.21%

Total Return Average: 0.88%

Market outlook:

We are reaching the time of year when investors start to contemplate the seasonal strategy of "Sell in May and Go Away." The strategy implies broadly that investors should own equities during the period of seasonal strength from the end of October to the end of April and avoid equities during a period of seasonal weakness from the beginning of May to the end of October. Since 1950, the S&P 500 index has averaged a minor gain of 0.14 per cent between May 5 and October 27, the off-season for stocks, and positive results were achieved in 62 per cent of those periods. While the returns for equity markets are certainly not as robust as the favourable season from October through April, losses in the off-season are certainly not guaranteed. The strain on the broad market benchmark between May through to October was largely attributed to three sectors: materials, industrials, and consumer discretionary.

Looking through history, the largest declines during the off-season for stocks have occurred during recessionary periods. So, are we headed towards a quarterly economic contraction? While we've seen below average results in reports that are sensitive to low commodity prices, employment and those reports relating to the consumer are trending above average, keeping the change in economic activity in the plus column. But it is earnings that may be the bigger issue, with companies on track to report the fourth consecutive quarter of year-over-year declines. The S&P 500 index is showing a trailing P/E of 18.2, according to Factset, well above the 10-year average of 15.8 and the highest level outside of a recession since the late 90's, in what we now know was a bubble related to bloated technology valuations. Investors will be looking for something this earnings season to justify both the trailing and forward valuations, which are high compared to historical norms.

Technically, major equity benchmarks in the U.S., such as the S&P 500 index, are within a massive area of supply, given the approximately 18 months trading around these highs. Stocks are likely to require a catalyst to break this overhead resistance.