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Advisor Stocks Lazy days of summer could mask investment risks, opportunities

Hap Sneddon of CastleMoore notes that the Chicago Board Options Exchange’s volatility index (a.k.a. the VIX) normally spikes between July and September. He advises to purchase an ETF that tracks the VIX or keep cash on hand for stocks or sectors that get caught in a selloff. Iain Marlow / The Globe and Mail

Iain Marlow/The Globe and Mail

Financial markets are the last thing most people want to think about during the carefree days of summer. Even trading firms tend to employ a skeleton staff of juniors as the big shots head off on vacation. Yet, the summer downtime also provides the perfect chance to review investment strategies.

“Markets slow down, trends have been digested, and it’s a wonderful opportunity to step back from the day-to-day news and think about where the trends are coming from and where they might be going,” says Liz Miller, president of Summit, N.J.-based Summit Place Financial Advisors LLC.

This year, those trends centre on two key market events currently unfolding, she says: the uncertainty caused by the unresolved trade dispute between China and the United States and a potential reversal in interest rate policy by the U.S. central bank. (After gradually increasing the benchmark interest rate, the consensus is for a certain rate cut later this month as global economic growth wavers.)

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“I don’t see these uncertainties going away quickly,” says Ms. Miller, who advises investors to set up stop-loss orders on key portfolio positions and keep an eye on their smartphones during their vacations. “I am enjoying the rally we just had, but because of the big-picture uncertainties, you need to stay participating this summer and use the opportunity to build in some safety going forward.”

Low trading volumes and more preprogrammed trades tend to increase volatility during the summer months and news on a stock – good or bad – can be exaggerated as a result. Thus, short-term sell-offs could offer some of the big technology names at a discount, Ms. Miller says.

“If you want tech exposure for the long term, there’s some pretty good opportunities to be adding companies like Apple [Inc.],” she says.

In contrast, Ms. Miller cautions long-term investors not to sell during a summer dip.

“You certainly can get more volatility in the summer, but [these dips] don’t tend to be lasting because they’re driven by lower volume and less participation,” she says.

Christine Poole, chief executive and managing director at GlobeInvest Capital Management Inc. in Toronto, says this summer brings a good pause for investors to reflect on the double-digit equity rally that took place in the first half of 2019.

“Investors can look to rebalance their portfolios,” she says. “Look at the stocks that have done well and are at a bigger weight than whatever their target weight is and take some money off the table. If you can reinvest it in another name that is attractively priced, do that – or leave it in cash for now.”

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Ms. Poole suggests investors with cash should look for opportunity in the U.S. Federal Reserve Board’s interest rate decision later this month in the event Fed chairman Jerome Powell doesn’t cut the benchmark interest rate as expected.

“If he doesn’t cut, there may be a knee-jerk negative reaction from the market,” she says, adding that interest rate sensitive stocks such as banks and utilities could be oversold.

“They are not expensive stocks. You get a yield of 3.5 to 4.5 per cent and the share price appreciation could be another 4 to 5 per cent,” Ms. Poole says.

Although nobody knows what surprises could move summer markets, human behaviour tends to be more predictable during these months. That’s why this season can be like Christmas for technical investors who invest based on past trends, such as Hap Sneddon, founder, president and chief portfolio manager at CastleMoore Inc. in Mississauga.

“With low [trading] volumes, stuff can whip around very easily,” he says, adding that a decrease in hard financial data makes markets more susceptible to political events. “They get amplified. Maybe something politically can be absorbed easy in March. That same event in August can whip the market around – usually to the downside.”

Mr. Sneddon notes that during the past 20 years, volatility – measured by the Chicago Board Options Exchange’s volatility index (a.k.a. the VIX) – normally spikes between July and September. His advice to investors is to purchase an exchange-traded fund that tracks the VIX or keep cash on hand for stocks or sectors that get caught in a sell-off.

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In anticipation of a volatile summer, Mr. Sneddon sold off his stake in Shopify Inc. after shares in the e-commerce company more than doubled in the first half of 2019.

“The catalyst to push it higher drops, and when you add the lower volumes and trading desks manned by juniors, it tends to have a big impact,” he says.

According to past trends, health care and biotech tend to do well in the summer, while industrial stocks tend to decline in value, Mr. Sneddon says.

Furthermore, in light of this summer’s expected reversal in the Fed’s interest rate policy, his focus has turned to interest rate-sensitive investments such as bonds.

“The bond trade is getting a little toppy, so we might see bonds sell-off in the next little bit,” he says.“ Lots of things could happen this summer.”

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