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Jon Vialoux, Research Analyst, Horizons ETFs Management Canada Inc.
FOCUS: Technical Analysis & Seasonal Investing
Market Outlook:
We are reaching the time of year when investors start to contemplate the seasonal strategy of “Sell in May and Go Away.” The strategy implies broadly that investors should own equities during the period of seasonal strength from the end of October to the end of April and avoid equities during a period of seasonal weakness from the beginning of May to the end of October. Over the past 60 years, the S&P 500 Index has averaged a decline of 0.02 percent between May 5th and October 27th, however, positive results were achieved in 62 percent of those periods. Declines in the broad market benchmark were largely attributed to three sectors: materials, industrials, and consumer discretionary. Typically, opportunities to hold equity positions continue to exist through this seasonally weak period for equity markets. Utilities, Health Care, Consumer Staples, Energy, and Agriculture all have periods of seasonal strength that investors can rotate to during the off season. Outside of the equity market, bonds and certain commodities, such as Gold, also have historically added value during what is otherwise a volatile period for the broad market.
Mid-term election years, such as this one, have historically shown a deviation from the average trend over the past 60 years. During this second year in the Presidential Election cycle, returns for the S&P 500 have lagged through the first three quarters, including an average a decline of 4.79 percent between April 22nd and September 30th. Corrections during these years are common with 10 of the past 16 mid-term election years recording a decline of 10 percent or more at some time during the spring/summer months.
So what are the prospects of a mid-term election year swoon happening again this year? Sub-par returns have already been realized through the first four months of the year as the S&P 500 Index follows the familiar pattern. And now, entering the spring and summer months, investors are showing concerns over present valuations of the market, rotating from high P/E growth stocks and into value stocks that offer a low multiple. Expensive stocks that have outperformed since the 2009 low, such as in the consumer discretionary sector, are being dumped in favour of the Utilities sector, the sector that has lagged the most over the past five years. This rotation towards more defensive positioning doesn’t necessarily indicate the conclusion of the long-term bull market trend, but it does suggest that volatility is to be expected as portfolios are adjusted.
TOP PICKS:
Kellogg Company (K NYSE)
Consumer Staple companies tend perform well from late April to mid-November; Kellogg Company is no exception. Over the past 29 years, the stock has averaged a gain of 9.18 percent from April 27th through to October 7th, outperforming the S&P 500 Index by an average of 8.02 percent. Positive results were realized in 22 of the past 29 seasonally strong periods. This low beta stock provides the defensive characteristics that investors often seek during the typically volatile summer months.
Scholastic Corporation (SCHL NASDAQ)
The children’s publishing, education, and media company derives the vast majority of its operating income in the quarter spanning from the start of September through to the end of November when the new school season begins; the stock tends to gain into this event. Over the past 22 years that the company has been trading, the stock has averaged a gain of 14.48 percent between April 30th and September 30th, outperforming the S&P 500 by 14.35 percent. The recessionary years of 2002 and 2008 were the only periods when the seasonal trade failed to produce a gain. The beta of the stock currently sits at 0.41, offering investors a low risk equity holding during an often volatile summer period.
Horizons Active Floating Rate Bond ETF (HFR TSX)
Horizons Active Floating Rate Bond ETF is a great alternative to cash during the summer. The ETF invests in a portfolio of Canadian debt securities and hedges the portfolio’s interest rate risk to generally maintain a portfolio duration of less than two years, providing the ability to profit in what could be a rising rate environment through to the end of the year. Bonds seasonally outperform stocks starting from the beginning of May through to October, making this fund an ideal hold to maintain a market neutral portfolio during the period of seasonal weakness for stocks.
| Disclosure: |
Personal |
Family |
Portfolio/Fund |
K
|
N |
N |
N |
| SCHL |
N |
N |
N |
HFR
|
N |
N |
N |
Past Picks: January 3, 2014
iShares Russell 2000 Index (IWM NYSEARCA)
The Russell 2000 Small Cap Index is seasonally strong from December 15th to March 7th. Gains over the period, based on data from the past 25 years, average 5.69 percent, outperforming the S&P 500 Large Cap Index by 3.25 percent. This year, the trade topped that with a gain of 9.04 percent, outperforming the S&P 500 by the average 3.25 percent. Money managers tend to take on additional risk at the start of the year to get a jump on equity benchmarks, which benefits the higher beta small cap benchmark. In addition, the U.S. Dollar seasonally strengthens during the first two months of the year, pressuring the profitability of large, international companies. Small companies tend to have a domestic focus, therefore negative currency translation impacts stemming from a rise in the dollar will be less detrimental.
| Then: $114.69 |
Now: $114.62
|
-0.06%
|
TR: +0.20%
|
Energy Select Sector SPDR® Fund (XLE NYSE)
Over the past 20 years, the Energy sector has averaged a gain of 7.86 percent between January 17th and May 5th. As of the end of last week, the trade was higher over the period by 8.24 percent versus the 1.03 percent gain for the S&P 500 Index. Canadian investors did even better with the S&P/TSX Capped Energy Index up 16.32 percent. Momentum continues to be firmly positive with a couple weeks left in the trade. Next period of seasonal strength runs from August into October.
Then: $86.93
|
Now: $93.27
|
+7.29%
|
TR:+7.82%
|
iPath Dow Jones-UBS Copper TR Sub-Index ETN (JJC NYSE)
Copper typically gains from late December through to late April for an average return of 9.3%. Improving industrial demand acts as a positive catalyst for metals, such as Silver, Platinum, Palladium, and Copper. Various event risks stemming from China negatively impacted the trade this year. Shortly after the appearance on the show, manufacturing indicators moved from expansion to contraction, re-igniting fears of a slowdown. As well, following first onshore corporate bond default in China back in March, concerns started to emerge pertaining to the extent that Copper is used as collateral for loans in the country. Speculation was that further defaults would lead to a massive liquidation of the collateral stockpiles. Since the start of the seasonal trade in mid-December, Copper is down by 8.12 percent.
Then: $40.91
|
Now: $37.02
|
-9.51%
|
TR: -9.51%
|
Total Return Average : -0.49%
| Disclosure: |
Personal |
Family |
Portfolio/Fund |
IWM
|
N |
N |
N |
XLE
|
N |
N |
N |
JJC
|
N |
N |
N |
Fund Profile
Horizons Seasonal Rotation ETF (HAC TSX)
Performance as at: March 31, 2014
|
Fund |
Index* |
1 Month
|
0.72%
|
0.88%
|
| 1 Year |
7.73%
|
12.43%
|
3 Year
|
22.00%
|
1.55%
|
*Index: S&P/TSX Composite
*Returns do not include distributions and are after fees
Top 5 holdings
1. Horizons S&P 500 Index ETF (HXS TSX) – 53.83%
2. Horizons S&P/TSX Capped Energy Index ETF (HXE TSX) – 15.46%
3. Technology Sector SPDR ETF (XLK NYSE) – 9.97%
4. Materials Sector SPDR ETF (XLB NYSE) – 9.79%
5. Industrial Sector SPDR ETF (XLI NYSE) – 9.69%
Website: www.equityclock.com
Website: timingthemarket.ca
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