Jon Vialoux, research analyst at EquityClock.com

Focus: Technical analysis and seasonal investing
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MARKET OUTLOOK
Following a string of disappointing economic reports over the past couple of months, the equity markets have remained resilient with benchmarks in the U.S. continuing to hold near their all-time highs. The Citigroup Economic Surprise Index has fallen to the lowest level since 2011 as analysts contemplate revising expectations in the midst of the below consensus data. But beyond the headline print, data has generally been mixed. Home sales and prices have shown above-average gains so far this year, thanks to a big jump in the month of May. On the flip side, manufacturing activity has been below average, contradicting much of the sentiment data that has been provided by some of the regional manufacturing surveys. Retail sales and employment have been merely average, trending in line with seasonal norms. Net-net, an average economy is implied, giving little to be excited about as the economic expansion that brought us out of the 2008/2009 recession and, more recently, the manufacturing recession in 2015, matures. Investors have placed a lot of hope on the Trump administration’s agenda to reform taxes and reduce regulation, an effort to reinvigorate economic activity. Any hiccup or delay in implementing these initiatives could have investors seriously question the above-average equity market valuations, potentially resulting in volatility for equity prices into the third quarter of the year, as per seasonal norms.

Over the next few weeks, equity markets on both sides of the border will enter into the summer rally period which peaks, on average, by mid-July. The S&P 500 Index has posted gains during this timeframe, averaging 1.11 per cent with two-thirds of the periods over the past 50 years recording positive results. But beyond this short-term uptick, seasonal volatility spanning the remainder of the third-quarter can cause erratic performance within equity prices. It is during this span that yield plays, whether in the fixed income or equity market, have historically been beneficial to portfolio performance. Yields can be found in many places, the obvious sectors being consumer staples and utilities. Here in Canada, investors may be more familiar with the yields presented by the bank and pipeline stocks. These high-yielding areas of the market are less prone to seasonal fluctuations than some of their cyclical counterparts, which can suffer from the diminished economic activity that is common through the summer months. Beyond these more defensive areas of the equity market, gold has historically acted as an effective hedge should volatility become really pronounced between now and the start of autumn.

TOP PICKS

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 just broke out from a long-term trading range than spanned between $240 and $300, which projects upside potential towards $360, or another 12 per cent above present levels.

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 next three 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. Coming into the more volatile time of year for stocks, investors will want to find ways to reduce risk and enhance yield in equity portfolios, and this ETF is an ideal way to do that. The fund will provide continued participation to the ongoing 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.

PURPOSE HIGH INTEREST SAVINGS ETF (PSA.TO)
With the period of seasonal volatility for equity markets near, 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.
 

PAST PICKS: MARCH 2, 2017

CASCADES (CAS.TO)
This packaging and tissue products company is an effective way to play the improving trend of shipments across the economy, particularly from e-commerce. Cass Information Systems is citing “outstanding rates of growth” in parcel volumes as its shipments index recovers from the recessionary conditions of the past couple of years. Seasonally, the stock benefits from a period of strength that runs between mid-March and late May. The average gain over this period is 11.76 per cent with 65 per cent of periods showing profits over the past 20 years. The stock is higher by around 28 per cent through the end of its period of seasonal strength, still maintaining its long-term positive trend.

• Then: $13.39
• Now: $17.61
• Return: +31.51%
• TR: +32.26%

LINAMAR (LNR.TO)
The best time of year to invest in the auto industry is in the spring as consumers purchase and repair vehicles following the winter months. Auto parts companies have been well positioned to take advantage of this trend. Between mid-March and early June, shares of Linamar have gained an average of 30.93 per cent with positive results realized in 80 per cent of the seasonally strong periods over the past 20-years. Fundamentally, despite calls for “peak auto,” manufacturers’ new orders of motor vehicle parts continues to show above-average growth as consumers seek to repair an ever aging automobile fleet. The stock is higher by around four per cent through the period of seasonal strength, attempting to hold support at previous resistance around $62. The stock is seasonally weak between the end of July and mid-November.

• Then: $60.80
• Now: $63.25
• Return: +4.02%
• TR: +4.43%

SUNCOR ENERGY (SU.TO)
Following strong earnings reports from the oil titan, shares of Suncor found support around $39, eventually moving above resistance around major moving averages during its period of seasonal strength. Between late January and mid-May, the stock has averaged a gain of 14.68 per cent with positive results realized in 75 per cent of the seasonally strong periods over the past 20 years. The strength in energy stocks at this time of year is “fuelled” by gains in the price of oil as the commodity trades higher ahead of the summer driving season. The sector failed to realize broad strength this year as investors battled with the ongoing oil inventory glut and one of the largest year-to-date increases in domestic production in history. As suggested during my last appearance on the show, “until greater certainty over the oil supply situation is achieved, investors are probably best suited to maintain conservative positions in the sector with tight stops in place should the price of oil breakdown.” Suncor topped out with a gain of around six per cent by the end of its period of seasonal strength in mid-May, one of the few energy sector constituents to show a positive result in this seasonal timeframe. The stock is presently suffering from double-top resistance around $44, a negative setup that presents risks all the way down to $35.

• Then: $30.93
• Now: $29.57
• Return: -4.39%
• TR: -3.67%

TOTAL RETURN AVERAGE: 11%