Mar 2, 2017

Jon Vialoux's Top Picks: March 2, 2017

BNN Bloomberg

Jon Vialoux , BNN

Jon Vialoux, research analyst, TimingTheMarket.ca and EquityClock.com
FOCUS: Technical analysis and seasonal investing

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MARKET OUTLOOK:

While easy to pin the recent equity market strength on the pro-business agenda of the Trump administration, it would be inappropriate to discount the strength that has been realized in economic data over the past few months. The Philadelphia Fed’s General Business Conditions Index, a gauge of manufacturing conditions, jumped to the highest level since January of 1984, jobless claims in the U.S. continue to hover around the lowest levels since the early 1970s, the NFIB Small Business Optimism Index charted the highest level since December of 2004, and consumer confidence remains at a 15-year high. Each of these data points relates to the heightened optimism pertaining to the economy, which has inevitably spilled over to equity markets.

The economy is gradually healing from the manufacturing recession that was fueled by strength in the U.S. Dollar and depressed commodity prices over the past couple of years. Last year, factory shipments showed the strongest calendar year growth since 2011, helped by above average strength in the month of December. PMI’s around the globe continue to move firmly into expansionary territory above 50 with many at multi-year highs. Should these trends continue, expenditures are sure to follow.

Looking at the S&P 500 Index, the equity gauge recently became the most overbought since December of 1996, according to the 14-day Relative Strength Index (RSI). On Wednesday, the benchmark hit a critical target of 2400, which represents the calculated upside potential following the breakout of the 300-point trading range from the past few years. The next consolidation range is likely near as investors weigh the near-term risk-reward of stocks at these elevated valuation levels. Seasonally, stocks typically remain strong through March and April, representing two of the strongest consecutive months on the calendar. While unlikely to see any major drawdowns over this period, investors should be prepared for a possible earlier than average conclusion to the best six month trend for stocks, which typically peaks at the beginning of May.

Top Picks:

Cascades Inc (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 is on the doorstep of its average 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 recently broke above resistance at $13.42, maintaining its long-term positive trend.

Linamar Corp (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 look 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 has been attempting to carve out a bottom after breaking a trend of lower-lows and lower-highs between mid-2015 and mid-2016.

Suncor Energy Inc (SU.TO)

Following last month’s strong earnings report from the oil titan, shares of Suncor gapped higher around $41, bouncing firmly from previous resistance, now support, around $39. Both horizontal and gap support provide levels that investors can shoot off of for the period of seasonal strength ahead. 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 “fueled” by gains in the price of oil as the commodity trades higher ahead of the summer driving season. The sector has yet to realize broad strength as investors battle with a growing oil inventory glut, which has pushed the days of supply of the commodity to the highest levels in over 30 years. Increasing domestic production in the U.S. is not helping the situation as producers take advantage of the apparent stability in the price of oil between $52 and $54. 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.