Brooke Thackray, research analyst at Horizons ETF Management Canada
Focus: Seasonal investing and technical analysis
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MARKET OUTLOOK

Overall, stock markets globally have been strong in 2017 as central banks have maintained high levels of monetary liquidity. Not only have the major North American markets set all-time high records, but volatility has been historically low. Recently, the S&P 500 has rallied largely based upon the increasing possibility that the Trump proposed tax reforms will be enacted into law. Currently, there are no major headwinds for the stock market, and as a result, stock markets can keep moving higher.

Seasonally, the S&P 500 tends to perform well in the second half of December and into the new year. This is often referred to as the Santa Claus effect. It is possible that the Federal Reserve’s actions of raising the Fed funds rate an expected three times in 2018 could cause trouble for the stock market by making borrowing costlier for individuals and businesses. It is also possible that investors could return to the markets in the new year with a new perspective and sell highly valued stocks, driving down stock markets. This phenomenon occurred in January 2016. Stock markets were highly valued towards the end of 2015 and investors, without an apparent strong reason, decided to sell the stock market, driving it lower in January and early February. By mid-February, investors reversed their perception of stock market valuation and saw the stock market as a buying opportunity. If the same event were to occur once again, the stock market would probably be a good buying opportunity once again.

TOP PICKS

ISHARES RUSSELL 2000 ETF (IWM.US)
The small cap sector (Russell 2000) rallied strongly in late 2016 after the U.S. election, but started to underperform the S&P 500 in early 2017. Recently, the small cap sector has shown improving signs of strength. In addition, the small cap sector has a strong seasonal period from December 19th to March 7th. In this period, from 1979 to 2017, the small cap sector has produced an average gain of 5.4 per cent and has been positive 76 per cent of the time. The small cap sector is expected to be a large beneficiary of the proposed tax reform in the U.S. Bought November 29th at US$153.37.

POWERSHARES QQQ (QQQ.O)
The PowerShares QQQ ETF is based upon the Nasdaq-100 Index, which is heavily weighted towards the technology sector. The Nasdaq Composite tends to perform well from December 15th until January 23rd. In this period, from 1971 to 2017, the Nasdaq has produced an average gain of 3.9 per cent and has been positive 72 per cent of the time. After underperforming the S&P 500 for a brief period towards the end of November, the Nasdaq-100 has recently started to show strength and is outperforming the S&P 500.

HORIZONS SILVER ETF (HUZ.TO)
Silver has a strong seasonal period from January 1st to March 31st. Silver has corrected sharply since early September, but has recently started to show signs of strength. Over the last two years in 2015 and 2016, the Federal Reserve increase in its Fed funds interest rate was largely anticipated and silver corrected sharply in October, November and most of December, leading to a strong rally starting in late December. This year a similar setup has occurred with silver declining in October and November and most of December. This could be leading to a good entry point for the silver seasonal period. Bought December 15th at $8.91.

PAST PICKS: OCTOBER 27, 2017

UNITED PARCEL SERVICE (UPS.N)

• Then: $120.75
• Now: $119.08
• Return: -1.38%
• Total return: -0.66%

BMO EQUAL WEIGHT BANKS INDEX ETF (ZEB.TO)

• Then: $29.24
• Now: $29.75
• Return: 1.74%
• Total return: 2.01%

TECHNOLOGY SELECT SECTOR SPDR FUND (XLK.US)

• Then: $62.54
• Now: $64.75
• Return: 3.53%
• Total return: 3.91%

TOTAL RETURN AVERAGE: 1.75%

TWITTER: @BrookeThackray
WEBSITE: www.horizonsetfs.com