Don Vialoux, Technical Analyst at TimingTheMarkets.ca and EquityClock.com

FOCUS: Technical Analysis & Seasonal Investing

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MARKET OUTLOOK:

North American equity markets are about to enter into a period of higher volatility, typical of the period from mid-June to mid-October when North American equity markets experience at least a mild correction.

The correction in summer associated with higher volatility has occurred during each of the past 8 years for a variety of reasons: problems in China, conflicts in the Ukraine, a financial crisis in Greece. This year possible reasons for a correction this summer include concerns about the U.S. Presidential race, control over Congress, Brexit, racial tensions in the U.S.

Another reason for a correction this summer is the reporting of second quarter results. Consensus is calling for a 5.6 per cent year-over-drop in earnings by S&P 500 companies. The earnings picture is slightly better for Dow Jones Industrial Average companies with an average (median) gain in earnings of 2.1 per cent and for TSX 60 companies with an average (median) gain of 0.68 per cent). Of greater importance, consensus earnings estimates for the remainder of the year typically are too high and second quarter reports frequently include lower third quarter and annual guidance. Analyst estimates for a 7.1 per cent increase in fourth quarter earnings by S&P 500 companies are too high and will be lowered after companies release second quarter results.

Top Picks:

Gold Bullion - iShares Gold Bullion ETF (CGL.TO)

The period of seasonal strength for gold bullion is virtually identical from early July to mid-October to the period of seasonal strength in the VIX Index.

Silver Bullion – iShares Silver Bullion ETF CAD-Hedged (SVR.TO)

Silver has similar seasonality to gold. Recently the silver/gold ratio bottomed near 0.12 and has started to trend higher implying better medium term performance for silver.

Cash

North American equity prices technically are overbought. Medium term momentum indicators for the S&P 500 Index and TSX Composite Index already are slowing. Better to take some equity money off the table and wait for the next buying opportunity (probably in late October just before election of the next U.S.President.

Past Picks:  May 17, 2016

First Trust AlphaDEX Canadian Dividend ETF (FDY.TO)

• Then: $18.06
• Now: $18.54
• Return: +2.66%
• TR: +3.20%

First Trust Technology AlphaDEX ETF (FXL.N)

• Then: $31.06
• Now: $33.90
• Return: +9.14%
• TR: +9.33%

Fortis (FTS.TO)

• Then: $40.04
• Now: $44.53
• Return: +11.21%
• TR: +11.21%

Total Return Average: +7.91%

Twitter: @EquityClock

Website: equityclock.com/ timingthemarket.ca