Keith Richards & Craig Aucoin, portfolio managers, ValueTrend Wealth Management of Worldsource Securities

FOCUS: Technical & Fundamental Analysis

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MARKET OUTLOOK:

Any Technical Analyst worth their salt will tell you that the breakout through the May 2015 old highs (14 month resistance) of S&P500 at 2135 is bullish. When the Brexit selloff occurred, we took profits on our hedges, and bought a few more stocks on the Monday meltdown following the vote. The recent breakout has justified that move. It added nicely to our portfolio upside in July. However, we continue to retain about 20 per cent cash in our equity platform. Here’s why:

Seasonality

Seasonality show that the greatest period of volatility for markets is from late July through to October. Studies done by Yale/Jeffery Hirsch, and BNN guests Don Vialoux and Brooke Thackray verify this.

Presidential cycle

The end of a second term president's run can also add to potential downside. A chart that you can search at seasonal timing website www.equityclock.com, illustrates the standard presidential cycle vs. the second term presidential cycle. The chart shows us that the potential for loss is greater during the summer in the year of a second term election. This year could be particularly volatile given the political polarity of the candidates.

Sentiment

The defensive sectors such as utilities, bonds and gold are moving higher - a sign of mixed investor confidence. I noted this last week on this blog: http://www.valuetrend.ca/guilty-until-proven-innocent-2/

VIX is approaching my often noted low point of near 12. When the VIX gets around 12, it has been an accurate indicator of too much investor complacency – and that typically leads into a selloff. 

All in, we decided to add a little to our equity via an energy position that we had a buy price reached on Monday (top pick Vermilion). Other than that, we are keeping some powder dry to see how things play out for the next few months.

Top Picks:

iShares S&P Global Healthcare Index Fund CAD-Hedged (XHC.TO)

This sector was in a downtrend since last July. The sector broke out of its downtrend earlier this year, and we bought this ETF at around $38. Craig sees fundamental value in some of the larger holdings in the ETF.

Vermilion Energy (VET.TO)

Vermilion Energy is one of the more conservative plays in the sector, given its 6 per cent yield and conservative business model. The stock – like oil - broke its downtrend earlier this year. We just added this position to our equity platform this week at $41.16 – triggered by Monday’s test of $45 support on WTI oil. We expect WTI oil to reach $60 in the next 12 months or so based on technical targets –which would be bullish for the producers like VET. We expect to be legging into more energy positions as the seasonal buy point at the end of this month begins.

Cash

Due to the factors we mention on our market commentary, there is potential for further chop over the coming months. Like with the Brexit trade we executed recently, ValueTrend thrives on holding cash when others are joyfully pushing stocks higher, and then buying when those same investors are despondently selling. We expect such a buying opportunity to deploy this cash in the coming weeks or months – yet maintain enough quality equity exposure to participate in the current upside momentum.

Past Picks:  May 30, 2016

Chartwell Retirement Residences (CSH_u.TO) 

• Then: $14.91
• Now: $15.54
• Return: +4.23%
• TR: +4.54%

Consumer Staples Select Sector SPDR ETF (XLP.N)

• Then: $53.00
• Now: $55.71
• Return: +5.11%
• TR: +5.75%

Cash

Total Return Average: +3.61%

Twitter: @ValueTrend

Website: www.valuetrend.ca