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bnn market call

Keith Richards is portfolio manager at ValueTrend Wealth Management of Worldsource Securities. His focus is technical analysis.

Top Picks:

iShares S&P/ TSX SmallCAp Index Fund

S&P TSX Small Cap ETF is a repeat from my last month's top picks. Many of our ValueTrend unique value plays are listed on this index, including Chemtrade and Parkland Fuel. Technical signs show early movement of capital into these stocks, as some of the big blue-chips show overvalued prices. We feel that this is where some of the best opportunities lie, and we're playing both individual names within the index, and this broad-basket approach. Further, tax loss selling may have suppressed some of the names in the index – there is a tendency for value managers to buy into those depressed names in the New Year if they have sold off too much – plus, the higher beta names in the index can often enjoy outperformance during the first quarter of the year as the market reaches its seasonal highs in the spring. We bought this about a month ago – around the time of my last show – at $14.90.

Brookfield Infrastructure Partners

Brookfield Infrastructure "BIP" continues to invest in projects that add to the opportunity for growth in their portfolio. During the recent quarter, further investment has been made in toll roads, transmission systems, and the energy segment. The strong growth in funds from operations (FFO), and the conservative payout of 59 per cent has led several to speculate about a potential dividend increase. A few brokerages recently upgraded the stock target, the stock has no technical resistance ahead of it, and pays a 4-per-cent dividend. Its currently touching a 3-year trendline – a great entry point. We've held this one for the past 2 years quite profitably ($26), and happily buy more on dips to the trendline.

Qualcomm Inc.

We added Qualcomm in November, having bought it on a small pullback to its technical breakout point. Qualcomm is another story within the quickly-growing smart-phone parts supplier sector. The stock had a spot of technical resistance at $70 (U.S.), which it broke in November – we bought on that breakout. Seasonals are usually strong for tech stocks until late January – we're in this until that point or later, depending how the trend maintains.

Past Picks: NOVEMBER 5, 2013 * past picks are from his last appearance to reflect his investing style*

American International Group
Then: $14.87 (U.S.)
Now: $15.07
Total return: +1.35 per cent

BMO Equal Wt. US banks
Then: $48.28 (CAD)
Now: $50.12
Total return: +4.00 per cent

iShares S&P TSX Small cap index
Then: $18.04 (CAD)
Now: $19.18
Total return: +6.32 per cent

Total return average: +3.89 per cent

Market outlook:

It is my opinion that the major U.S. markets have entered into a new mega-year bull market, having recently broken through a 14-year technical ceiling that began in 1999. Some may argue that instead of a bull market, stocks should be getting ready for a bear market correction. This might make sense, given how far the market has moved lately. True enough, market valuations are relatively high. Moreover, investors currently hold a rather irrational level of enthusiasm for stocks (often signs of a market top) – as evidenced by various investor sentiment surveys. So let me address the potential for a pending market correction in the near-term. Yes, we are due for a normal (i.e. not of the 2001 or 2008 magnitude) bear market correction sooner or later. There has been a bull – bear market cycle on the S&P 500 during the past 15 years on the S&P 500 lasting about 5-6 years. Past troughs include the 1998 Asian Contagion trough, the 2002/2003 Tech bubble double-bottom, and the 2009 Great Recession trough. If you have heard me speak at a conference before, you will know that I do not get too tied up in picking the exact dates where a cycle is due to bottom. Instead, I note a rhythm to the markets, and the current rhythm appears to be a tendency for troughs to occur about every 5-6 years. If we measure from the last trough in 2009, a 5-6 year period would suggest the correction would bottom in late 2014 or some time in 2015. This suggests a market peak later in 2014. Seasonal tendencies suggest market strength until the spring, so I expect corrective action, if any, won't happen until Q2 2014 or later. Adding evidence to that is the Presidential cycle. In the second year of a U.S. presidential term, the S&P 500 experienced positive returns through the first six months 47 per cent of the time. Its median return was -2.9 per cent. So, while not something I get too tied up in as an accurate indicator, the tendency is for weakness in the second year of a U.S. presidential term – adding further downside potential.

As we continue to enjoy the remaining upside that this leg of the bull market delivers, I am focusing on three main investment themes:

  1. Buy dividend growth stocks with great charts for a high percentage of your stocks. My top pick Brookfield Infrastructure fits that bill.
  2. Look for rotation out of old leadership. The iShares TSX Small Capped ETF fits that bill.
  3. Avoid rotation out of old leadership. Tesla motors and IBM look like they are rounding over, with money leaving their stocks.