Three top stock picks from Jon Vialoux

Jon Vialoux is a research analyst with TimingTheMarket.ca and EquityClock.com. His focus is technical analysis and seasonal investing

Top Picks:

Aetna (AET.N)

Aetna, the health care benefits company, began to pull out of a five-month decline in December following news that there was an extremely high volume of Affordable Care Act signups around December's deadline. The stock has been consolidating since the summer following news of its acquisition of Humana, which is expected to be complete in the second half of 2016. Price of the stock has now rejoined the long-term rising trendline that has supported it since 2012. Seasonally, Aetna enters 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. With three months left in the period of strength, the trade has appeal as long as long-term trendline support, presently around $106, is maintained.

Valero Energy (VLO.N)

One of the few energy stocks that is showing a positive trend, this refiner has benefited from the excess supply of oil that continues to dominate the sector. As of the end of 2015 there was 29.1 days of supply of oil in inventory, well above the 22.9 days that is average for the end of the year. The presents a tremendous backlog in the commodity that requires processing into gasoline and other refined products. The rise in oil inventories is set to continue, with an average seasonal increase in the supply of 3 per cent over the next four months; in 2015 the rise in inventories during the first four months of the year was closer to 10 per cent. This could strain storage capacity of the commodity, potentially escalating pressures to push the input to refiners at a faster pace. Seasonally, Valero tends to gain 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. The trade remains valid as long as long-term trendline support, now at $60, is maintained.

Northrop Grumman (NOC.N)

After the events over the past week, defence companies continue to have a certain appeal (unfortunately). 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. However, recently economic reports pertaining to industrial production have deteriorated significantly versus the average trend. One of the few areas staying afloat, showing above average seasonal growth, is the value of new orders for defence goods. This fundamental support for stocks like Northrop could mitigate some of the negative conditions prevailing within the broader industrial sector. 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. As with the other top picks, a move below long-term support presented by its 200-day moving average, presently around $170, would be an appropriate stop level.

Past Picks: October 9, 2015

Costco Wholesale (COST.O)

NEW COMMENTS: 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 has remained a 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 throughout 2015, but warrants monitoring going into the new year. The stock has been outperforming the market since the start of July and resistance was taken out around $153, shortly after profiling it as a Top Pick. The stock gained 14.8 per cent between the average buy and sell date.

Then: $153.97 Now: $152.11 -1.20% Total return: -0.96%

Sysco (SYY.N)

NEW COMMENTS: Sysco, the food services company, is an ideal defensive hold during the period when the broader market seeks a footing for the period of seasonal strength that starts in October. 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 after hitting resistance around $41.50. Over the period of seasonal strength, the stock was up a very marginal 0.12 per cent, unable to overcome that overhead level of resistance.

Then: $40.93 Now: $39.80 -2.76% Total return: -2.01%

Bank of Montreal (BMO.TO)

NEW COMMENTS: The Canadian banks 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 trades have been profitable by buying the rumour, selling pressures can often emerge following the release of the results. The stock gained just over 6.6 per cent between the time of the pick and the release of earnings, trading flat to negative thereafter.

Then: $75.51 Now: $73.52 -2.64% Total return: -1.60%

Total Return Average: -1.52%

Market outlook:

With the volatility that has started the new year, investors may start looking to the "January Barometer" to gauge the expected performance of the equity market throughout 2016. The theory suggests that the direction of the equity market during the first month of the year tends to predict the full year performance. Therefore, investors may expect a full year loss should broad equity benchmarks, such as the S&P 500 Index, end lower in the month of January.

While there may be merit to the forecasting ability of the barometer during positive Januarys for the S&P 500 index, negative Januarys do not tend to produce statistically significant results correlating with negative full-year returns. Over the past 65 years, negative Januarys have coincided with negative full-year returns only 54 per cent of the time. Meanwhile, 90 per cent of positive Januarys have preceded full-year gains. Together, the success rate of both positive and negative Januarys translating to either full-year gains or losses comes out to 75 per cent, which many media outlets have reported over recent days. However, none of these figures are really acting as a predictor of how the market performs after a positive or negative January, given that the statistics include the January performance itself.

A significantly negative January could weigh on the full-year performance, but it may act as a buying opportunity for strength through the remainder of the year. Looking at the same 65-year history, of the 26 losing Januarys, only 11 years (or 42 per cent of periods) have seen losses continue through the remaining 11 months of the year. On the flip-side, 34 of the 39 positive Januarys have preceded gains through the rest of the year. Clearly, the barometer is heavily weighted by the results for positive Januarys, masking the rather poor forecasting ability during negative starts to the year. Therefore, should the present weakness in equity markets continue through the remainder of the month, you're probably better off guessing the market direction for the remainder of the year by flipping a coin.