Market Call Tonight for Friday, August 18, 2017
Jon Vialoux, research analyst at TimingTheMarket.ca and EquityClock.com
Focus: Technical analysis and seasonal investing
Volatility has returned to equity markets as geopolitical risks create uncertainty for investors. Markets in the U.S. abruptly declined last week, fuelling a shift towards risk aversion as investors look to shelter their portfolios in this slower time of the year for stocks. Erratic equity moves in either direction have become all too typical at this time of year given the lack of positive catalysts through the end of the third quarter. The S&P 500 quickly fell to its rising 50-day moving average, instantly finding buying demand as investors maintain the “buy-the-dip” mentality. But cracks have emerged with last week’s selloff. Long-term rising trendline support was breached and momentum indicators are negatively diverging from price, an indication of waning buying pressures. In addition, the defensive sectors of consumer staples and utilities have been outperforming the market for the past month, as per seasonal norms, an indication of diminished risk sentiment. The market activity over the past few weeks has been indicative of potential weakness ahead.
On the economic front, the manufacturing economy has posted some impressive numbers, particularly with respect to durable goods. The 12-per-cent gain in durable goods orders through the month of June presents the best first half of the year since 2000. This has presented a positive influence for the price of base metals, mainly copper and zinc, which have seen gains exceed 15 per cent in the past couple of months. This manufacturing renaissance has been giving lift to employment in the sector, allowing the economy to mitigate the typical summer factory slowdown that tends to take a bite out of activity in the month of July.
On the flipside is the consumer, which is showing minor signs of slowing as they become more selective of where and how to spend their hard-earned dollars. In the recent report on retail trade in the U.S., spending at food services and drinking places, arguably the most discretionary category of the report, showed an increase through the first seven months of the year of a mere 0.5 per cent, well short of the 6.1 per cent average increase through this point in the year. This is the second-worst first-half-of-the-year increase on record, presenting cause for concern that the largest input to GDP, the consumer, is weakening going into the critical holiday spending season ahead. The diverging forces between manufacturing and the consumer are likely to keep investors on their toes in the remaining months of the year when emphasis amongst investors generally leans towards consumer spending through the fourth quarter.
PURPOSE HIGH INTEREST SAVINGS ETF (PSA.TO)
With the period of seasonal volatility for equity markets upon us, investors may be tempted to sell to cash to wait out the potential market storm. This ETF allows investors to park their unused funds while earning a stable return. The current yield is one per cent with distributions occurring monthly. The fund invests in high-interest deposit accounts with one or more Canadian chartered banks, providing investors with greater yield than traditional money market funds.
Analysis of FedEx Corporation shows that a buy date of August 27 and a sell date of November 29 have resulted in a geometric average return of 7.63 per cent above the benchmark rate of the S&P 500 Total Return Index over the past 20 years. This seasonal timeframe has shown positive results compared to the benchmark in 17 of those periods. This is a very good rate of success and the return strongly outperforms the relative buy-and-hold performance of the stock over the past 20 years by an average of 3.87 per cent per year.
FedEx broke out of a six-month trading range in June and has since retraced its gains to test the breakout point around $200, providing a level for investors to shoot off of for the period of seasonal strength ahead. Seasonal strength peaks, on average, prior to the height of the holiday shipping season in December.
PAST PICKS: JUNE 28, 2017
ISHARES NASDAQ BIOTECHNOLOGY ETF (IBB.O)
The biotech industry benefits from a period of seasonal strength between mid-June and mid-September, moving higher alongside the ramp-up in production and shipments of pharmaceuticals through the end of the third quarter. During this timeframe, the Nasdaq biotechnology index has gained an average of 8.17 per cent since the index’s inception in 1993, with positive results recorded in 70 per cent of those seasonally strong periods. The biotech ETF broke out from a long-term trading range that spanned between $240 and $300, which projects upside potential towards $360. While shipments of pharmaceuticals and medicines have shown above-average gains through the first half of the year, the rhetoric surrounding drug prices remains a stubborn overhang to the industry, causing the ETF to pull back to its breakout point at $300. Momentum has since come out of the industry and confidence in the seasonal trade that concludes within the next month is no longer present.
- Then: $316.88
- Now: $304.05
- Return: -4.04%
- Total Return: -4.04%
BMO COVERED CALL DOW JONES INDUSTRIAL AVERAGE HEDGED TO CAD ETF (ZWA.TO)
This is effectively a “no-vote” on the broad market direction over the summer months. The ETF offers a simple covered call overlay to the well-known blue-chip benchmark, providing investors with an enhanced yield above that of the market. Into the more volatile time of year for stocks, investors are best suited to find ways to reduce risk and enhance yield in equity portfolios, and this ETF is an ideal way to do that. The fund provides continued participation in the positive trend in equity prices, but the benefits of the strategy really materialize in the flat to negative trending markets that are common between mid-July and early October. The ETF has a listed yield of 4.59 per cent, approximately two per cent above the yield of the Dow Jones Industrial Average.
- Then: $21.14
- Now: $21.22
- Return: 0.35%
- Total Return: 0.73%
PURPOSE HIGH INTEREST SAVINGS ETF (PSA.TO)
- Then: $50.04
- Now: $50.02
- Return: -0.04%
- Total Return: 0.13%
TOTAL RETURN AVERAGE: -1.06%