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Top Picks from Keith Richards: CurrencyShares Euro Trust, iShares S&P/TSX Global Gold Index ETF, and cash

Tags: Market Call

Keith Richards, portfolio manager, ValueTrend Wealth Management of Worldsource Securities

FOCUS: Technical Analysis

MARKET OUTLOOK:

Near-termed outlook

Both the daily charts and the weekly charts of the S&P 500 showed a “hammer” formation last week. The hammer is a pretty good indicator of a turnaround point – it results from a washout intra-day with a close near the open of the day. It’s a sign that the weak players capitulated in the morning, and strong/smart hands came in to take advantage of their panic selling by scooping up the washed out stocks.

Last Wednesday was the hammer candle date, having watched the market melt down from an open of near 1870, melting down to 1810, then closing not too far off of the open at around 1860 for that index. The weekly hammer was punctuated by the strong recovery days on Thursday and Friday. Probability is for a rally the coming 1-2 weeks. Target range for the S&P 500’s rally, assuming it continues, lies between 1950 and 2000. Backing the hammer formation on the charts, some sentiment indicators such as put/call ratio and Smart/Dumb money movements showed an overly pessimistic environment coming into last week. These signals can also indicate the potential for a rally. Similarly, a few of the more whippy breadth indicators such as the percentage of stocks over various Moving Averages and New High/New Low indicators were oversold coming into last week.

Mid-termed outlook

Bearish macro indications are seen on U.S. broad market indices include:

· A declining Advance/Decline line since the beginning of 2015

· A break below the 200 day Moving Average

· A break below the summer lows across all U.S. broad market indices

· A break of midterm trend line drawn from 2009

These technical factors suggest this market is entering into a mid-termed bear phase. This bear phase could last a few months and take us down into the low 1700’s on the S&P500. A new leg in the bull market will eventually break out…but it may take several months to happen. Breakouts need a catalyst – in either direction. We cannot see a positive catalyst to push the markets up from this point. Eventually, a bottom in oil may become that bullish catalyst. Further evidence of basing in oil is necessary before confirming that potential.

Given this bearish outlook, rallies should be sold, unless you have enough fortitude to withstand what could be a strong correction before the next bull phase begins. I don’t have such a strong stomach. My plan is to sell stocks incrementally starting around 1950, and leg out if the rally continues. If it reverses strongly from my first leg out, I will sell more aggressively.

Top Picks:

CurrencyShares Euro Trust (FXE)

As the European economies recover from the malaise that has hit them in recent years, we note that the Euro has been stabilizing of late. Given a potentially overbought U.S. dollar, the Euro could benefit as a value play on world currency markets. We are less interested in European equities than we are in the Euro itself – although this is not to say that we are avoiding them. Note the base on this chart after the Euro’s decline in 2014. Should the Euro move up and out of this base, that would suggest a new uptrend may begin. Should the Fed become more dovish (as might be expected), we can expect the Euro to outperform the U.S. dollar

iShares S&P/TSX Global Gold Index ETF (XGD.TO)

Gold has returned to acting as a negatively correlated security vs. the stock market very recently. In other words, it zigs when stocks zag. We have noticed a possible basing action on the charts for this much unloved commodity—although at this point it is too early to be overly optimistic on its upside. In any case, we may execute short termed swing trades (in and out) in gold and gold equities to counter stock market volatility. This ETF is our vehicle of choice to play the producers. We expect to own a position in this ETF shortly- although we don’t hold it yet. Same with a bullion ETF.

Cash

We’re holding 12 percent cash in our equity platform now, and expect to increase that into the 30 percent range shortly. Beyond cash holdings, we are strongly considering bearish hedge strategies.

Disclosure:

Personal

Family

Portfolio/Fund

FXE

Y

Y

Y

XGD

N

N

N

Cash

Past Picks: December 18, 2015

WSP Global (WSP.TO)

Despite the stocks poor performance, which is more or less in line with market performance, the stock remains on its longer termed trendline on the weekly chart. We originally bought this stock on a breakout from a long termed lid at around $35. So long as that $35 price holds along with the longer trend line.

  • Then: $43.04
  • Now: $38.71
  • Return: -10.06%
  • TR: -9.28%

BB&T (BBT.N)

The stock had been trading $34 - $40 since early 2014. We bought it at the bottom of that trading range. The recent bear put significant pressure on the U.S. banks, and BB&T went down with them. Its broken its support at around $35. BB&T, like most stocks, is oversold according to momentum indicators we look at. This is one of the stocks we are selling –we’d prefer to sell it on an oversold bounce, which we suspect will occur soon.

  • Then: $37.23
  • Now: $31.66
  • Return: -14.96%
  • TR: -14.96%

Chemtrade Logistics Income Fund (CHE_u.TO)

We continue to hold this stock in our income model, given the stability of its rather high dividend. However, we are looking to exit the stock on an oversold bounce given the break below $16 support. We fundamentally believe the stock is fine as a 5-year hold and will likely return to the high-teens in price over the next year or so, but it is no longer suitable for the equity growth portfolio we manage given its break in technical support.

  • Then: $16.94
  • Now: $15.81
  • Return: -6.67%
  • TR: -5.53%

Disclosure:

Personal

Family

Portfolio/Fund

WSP

Y

Y

Y

BBT

Y

Y

Y

CHE

Y

Y

Y

 

 

 

 

 

 

 

Total Return Average: -9.92%

Fund Profile

ValueTrend Managed Equity Platform

Performance as of: January 31, 2016

1 Month: Fund -4.20%, Index* -2.00%

6 Month: Fund -3.30%, Index* -10.80%

1 Year: Fund 1.80%, Index* -11.10%

* Index: The North American Index is comprised of 85 percent S&P TSX300 total return index and 15 percent S&P500 U.S. dollar total return index

* Returns are gross of fees and assume reinvested dividends with no cash outflows or inflows.

Twitter: @ValueTrend

Website: www.valuetrend.ca

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