Feb 5, 2018

Keith Richards' Top Picks: Feb. 5, 2018

BNN Bloomberg

Keith Richards , BNN

Keith Richards, portfolio manager at ValueTrend Wealth Management of Worldsource Securities
Focus: Technical analysis

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MARKET OUTLOOK

I noted on my technical analysis blog last Monday that markets were setting up for a correction. No sooner had I posted the blog on that morning when the markets began a two-day markdown. Sometimes we get it right!

The U.S. state of the union speech on Wednesday temporarily inspired markets. Interestingly, they do have an historic tendency to spike after the speech. After that brief reprieve, the market resumed its volatility later in the week. The question now is: will the markets move lower still, or “was that it”?

Some observations:

Markets moved from overbought for the last half of 2017 to “mega-overbought” at the beginning of January, as indicated by very high readings on technical momentum indicators such as the Relative Strength Index (RSI), stochastics, etc. It was also indicated by the fact that the S&P 500 was 12 per cent over its 200-day moving average. My research indicates that markets don’t like to stay higher than 10 per cent above the 200-day simple moving average for long. Typical bull market trends see five to 10 per cent over the 200-day moving average.

It’s my opinion the market has room to float sideways or move down a bit more in the near term. Should such a pattern occur, it’s likely not going to be a drastic or long-termed situation. I would expect that any sideways or negative market activity will be short and shallow, with a return to the bull trend before too long. Potential downside targets for the S&P 500 are 2,700, or 2,500. The TSX 300 targets the mid-15,000’s. I covered those targets on my blog here and here.

The current volatility might present an ideal time to buy stocks on your radar screen. Keep your eyes open for a bounce off of one of my support levels noted.

TOP PICKS

SPDR CONSUMER STAPLES (XLP)

This sector ETF has been stuck in a sideways pattern with a ceiling at around $56 since the middle of 2016. Recently, it broke out through that ceiling. Technically, a breakout after an 18-month consolidation implies money is rotating into the sector. We bought the ETF on the breakout a few weeks ago. This position, and other positions in the sector represent about 9 per cent of the ValueTrend Equity Platform.

BROOKFIELD ASSET MANAGEMENT (BAMa.TO)

This stock holds the other “Brookfield’s” (renewable energy, infrastructure, real estate), and adds in its financial business, which includes investment management. It's pulled back in the past month, but it’s still nicely on the trendline. Likely reasons behind this pullback are interest rates (aggressively rising rates negatively affects their business) and possibly due to some real estate deals they recently entered into in the U.S. — but we feel that the reality is the company is not going to be too negatively affected by rates, and the pullback represents a buying opportunity so long as the stock stays on its trendline.

CGI GROUP (GIBa.TO)

CGI reported better than expected numbers last week. We have held the stock since November when it was trading-range bound — we bought near the bottom of its range at just under $67.

This is one of the more stable, better run Canadian tech companies. It has a tendency to move sideways for periods of time, then break out. Last week’s earnings boost gave it the opportunity to break out of its recent ceiling of about $70. We think it will leg up for a while before it starts to consolidate again.