Oct 31, 2017

Keith Richards' Top Picks: October 31, 2017

BNN Bloomberg

Keith Richards

Keith Richards, portfolio manager at ValueTrend Wealth Management of Worldsource Securities
FOCUS: Technical analysis
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MARKET OUTLOOK

Here’s some scary statistics that might horrify you ever more than running out of candy for shell-outs tonight:

According to sentimentrader.com, the S&P 500 has, since 1937, lost an average of 1.6 per cent in the following month after trading at all-time highs, and Donald Trump's presidential approval rating has dropped below 35 per cent, according to Gallop. Fear the demise of a president’s popularity!

The market, like most scary monsters, has bad breath (breadth, actually). The recent highs on the S&P 500 was led by very few stocks - only two other times in history have we seen a new high on the index with so few new highs within its components. The last time the NASDAQ had such narrow leadership (breadth) was in the year 2000. Those who were invested in tech stocks that year may feel a Halloween chill up their spine when they hear this fact!

More than 20 per cent of the S&P 500 is comprised of five stocks - AAPL, MSFT, FB, AMZN, GOOGL. The NASDAQ’s top five stocks, making up some 40 per cent of the index, are completely different. They are AAPL, MSFT, FB, AMZN, GOOGL. Hey - wait a minute! That sounds like both large capped stock market indexes (to which all U.S. portfolios are judged against) are leveraged to the success of five arguably overbought, single-sector (tech) stocks. Now that’s kinda scary!

The S&P has closed lower one per cent or more only four days this year - the fewest for a full year since 1964, according to LPL Research. In fact, in any given trading year, stocks will fall by more than -0.70 per cent on 43 trading days on average, according to U.S. portfolio manager Eric Parnell. But this year, we are on pace for just five (including last Wednesday's 0.8 per cent drop), which represents about two per cent of all trading days for the year. So, is this time different? John Templeton once told us that those four words ("this time is different") are the “scariest” words for any investor to believe. History does repeat itself. Stocks should experience healthy corrective periods. The longer it takes for one to happen, the worse it may be.

Finally, the markets' latent disregard for horrifying world events (everything from North Korean nuclear threats to an impeachment of the president) is showing through a constantly low VIX level. My studies show that prolonged VIX readings averaging around 12 or lower tend to suggest complacency, and that condition, if seen for too long of a time, eventually leads into bear markets.

We’re buying select stocks and ETFs as the “best six months” seasonal period gets under way. But we still hold some cash on the sidelines to stay comparatively defensive and to take advantage of a higher than average potential for a pullback. Further, we have a tight sell discipline in place should things turn ugly. We remain more than a little spooked by this market!

Note that we publish a bi-weekly blog on technical analysis at www.valuetrend.ca. If viewers want to follow us on twitter (@ValueTrend), they will be informed of the new blogs when they come out.

TOP PICKS

VANGUARD FTSE DEVELOPED ALL-CAP EX-NORTH AMERICA HCAD INDEX ETF (VI.TO)
This ETF gets you into developed countries outside of the emerging markets and the North American markets. We like names in North America, but the U.S. in particular is pretty overbought. It's not a bad thing to start owning assets outside of our continent. This ETF is currency hedged, which makes sense given its hard to predict where such a wide variety of currencies may end up in the coming months on a relative basis to our own.

FAIRFAX FINANCIAL (FFH.TO)
We have watched, and watched, and watched this stock for a sign of a bottom reversal. Finally, after a nice base over the past year, it has broken out. We’re in. We think it’s going back to its old highs in the $750 area. We also like Prem Watsa’s decision to stop fooling around with hedging techniques and focus on what he knows best: investing. He’s got a nice chunk of insurance and some exposure to India, which we quite like too.

BMO LOW VOLATILITY CANADIAN EQUITY ETF (ZLB.TO)
In our thesis we are worried about the market, but acknowledge the need to be in during the “best six months.” We are sticking to lower volatility stocks and ETFs for the most part. We also like the breakout for the TSX. The only problem with buying a broad TSX60 index ETF is the large weighting in oil. Our worry is the large wall of resistance that WTI oil is approaching in and around the mid-US$50’s. The ZLB shares are far less exposed to oil than a TSX60 orientated ETF. It's only got about 2.5 per cent exposure to energy.