Don, thanks for joining us today.
Hi Darcy. I'm ready when you are ready
Just to start off, I was a bit struck by your pretty clear position right now on the US stock market: bet against it. September is a seasonal weak period – but I think you are sending the message that risks are much greater this year than normal. Is this true?
Yes, risks are greater than usual for U.S. equity markets. Seasonal influences are stronger than normal in a post U.S. Presidential election year and equity markets at the beginning of August have started to roll over from overbought levels. Downside risk for the S&P 500 is to its June low at 1,560. That's a much greater decline than the traditional 5% decline between now and the first week in October
So, you must be advising investors to take some profits here. Should they also consider things like the ProShares Short Dow 30, or even shorting stocks? Is such an aggressive stance a good idea right now?
Seasonal investors are taking advantage of the expected period of weakness in both U.S. and Canadian equity markets by taking trading profits in economic sensitive sectors and by hedging part of their portfolio with inverse equity index ETFs. DOG is a good example of an attractive inverse ETF. It tracks the inverse of the Dow Jones Industrial Average. The most actively traded inverse ETF is SH. It tracks the inverse of the S&P 500 Index.
Here's a related question from John. Maybe Don you could tackle the timing question: is today the right time to take a position in DOG
Hi John. Yes, GDX, GDXJ as well as XGD (tracking gold equity indices) all are doing well. Their seasonal strength continues until the end of September. Gold and gold equities have a history of trading inversely with broadly based equity indices at this time of year. Choosing to buy DOG for a move until the end of September is only slightly less attractive than choosing a gold equity ETF. The later has a higher risk/reward profile.
Just as a follow-up then Don, would you advise holding both physical gold ETFs as well as a gold equities ETF? And do you have a feel for how high gold and the related equities have to climb? It's a burning question right now.
Preferred strategy at this time of year is to do a ratio test e.g. GDX versus GLD. Better to choose the investment vehicle that is outperforming. Two years ago at this time, GLD (I.e the gold bullion ETF) outperformed GDX. Last year GDX outperformed GLD. This year GDX is outperforming GLD. Potential upside from current levels remains significant. GDX (and XGD) broke base building patterns to the upside last week implying that the current move in the sector is approximately half completed.
Don, you earlier mentioned the seasonal weakness is seen in both the Canadian and US markets. And, that economically sensitive sectors are the best places to take profits. Are both US and Canadian markets equal here in terms of your recommendation? Should investors take profits – and even bet against – both markets simultaneously?
The TSX Composite has outperformed the S&P 500 Index during the past two weeks thanks mainly to strength in the precious metals sector. However, the TSX Composite also is starting to show early signs of rolling over from an intermediate level. Yesterday, the Index fell below its 20 day moving average, the first technical sign of weakness. Excluding the metals and mining sectors, economic sensitive Canadian equities are following the trend of U.S. economic sectors. Lots of examples are out there. Take a look at Canadian Pacific and Canadian National Railways for starters. They both traditionally have a period of seasonal weakness at this time of year (as does the U.S. transportation sector).
Interesting, so this is very much a US and Canada recommendation to be wary of stocks.
Don, REITs and, to some extent, dividend stocks haven’t fared well over the last few months as the Fed prepares to wind down its bond buying stimulus, pushing bond yields up. What is your outlook for the income-producing sectors in coming months as the Fed cuts back on stimulus? Would any seasonal factors offset some of the macroeconomic-related pressures?
Concern about rising interest rates on both sides of the border are bothering equity markets. Interest sensitive sectors such as REITs and Utilities on both sides for the border have significantly underperformed major equity indices during the past three weeks. More on interest rates hopefully will be revealed as early as tomorrow when the FOMC Meeting Minutes for the end of July are released. The trend in interest rates is up. A move by 10 year U.S. Treasuries above 2.90% will trigger more selling of bonds and interest sensitive securities. Technical target for yield on 10 year U.S Treasuries by the end of September is 3.00%.
OK, thanks, here's a question for Newbee.
Hi Newbee. Yes, opportunities to purchase attractive sector and market ETFs are expected to appear some time in October (On average during the past 62 years, the best day of the year to buy the market is October 28th. By then, many of the current uncertainties impacting equity markets (interest rates, debt ceiling , hurricane season, higher energy costs, lower earnings estimates) will have passed. Preferred strategy is to buy economic sector ETF in Canada or the U.S. in late October for the next period of seasonal strength.
So mark Oct. 28 on your calendars....
Watch for ETF columns at globeinvestor about possible equity market entry as the end of October approaches
Don, the energy sector has been attracting more interest of late. It is economically sensitive though. Should investors stay clear of oil and gas stocks until October as well?
The energy sector this summer has been uneven. Historically, the energy sector has two periods of seasonal strength: July to September and January to April. This summer, crude oil prices have increased significantly, but natural gas prices have gone down. "Oily" stocks such as Suncor and recently Canadian Oil Sands have performed well. Natural gas stocks? Not so much. Stick with the "oily" stocks for now until the end of the current period of strength at the end of September.
Great, thanks Don. We only have about 15 minutes left, so if any readers have further questions, please submit them now.
Don, I was reading your top picks, which were made on BNN the other day. One is a short term money market instrument. A safe place to hide for the next couple of months, you suggest. Is there a particularly good ETF for the money market? Would it be best to use a US dollar money market fund or a Canadian one?
Here is another sector that normally outperforms North American equity markets in the summer. This summer is no exception. It's the Health Care sector. The sector normally outperforms the market from July to early October partially in anticipation of important health care conferences held early each fall where new drugs and health care services are announced. This year has a special reason for outperformance. Registration for ObamaCare starts October 1st. Lots of ways to play the sector. XLV in the U.S. is the most active ETF. IBB is the most active biotech ETF.
Best to find a hiding spot with a cash equivalent instrument for part of your portfolio between now and October. Lots of choices out there. If you have Canadian money, use Canadian instruments. If your have U.S. money, use U.S. instruments. The important thing to remember is that these instruments must be highly liquid in order to allow you to move quickly when equity markets reach an important intermediate bottom (probably sometime in October.
Hi Art. The best time to own the technology sector is from early October to the January. Traditionally, the day to take profits in the sector is the last day of the annual Las Vegas Consumer electronic show. Strength during this period is related to buying of consumer electronic goods for Christmas. This year, the sector is dominated by the technical action of one stock, Apple. The stock recently completed a base building pattern and looks good for a move until next January. Other stocks and subsectors in technology are following their traditional period of weakness at this time of year, notably the semiconductor sector that established a downtrend last week
Hi Heimen. The choice is yours. Depends upon liquidity that you need in your portfolio. SH and DOG have exceptional liquidity.
Hi Ben. POT has been a disappointment this year. It's period of seasonal strength is from late June until the end of December. Fundamental events have prevented the seasonal trade from working so far this year. Seasonality works most of the time, but not all of the time. The seasonal trade still has time to work, but it's not there yet. If technicals turn positive, the trade may still be there. Technicals required for a seasonal trade include on the long side include an intermediate uptrend, outperformance relative to the market (TSX or S&P 500) and trading above its 20 day moving average. At least two of these three technicals are needed and preferably all three
I see it's after 2 so we'll have to wrap things up for this week. Don, any final thoughts for our readers today?
Thanks, Darcy. Two opportunities for investors are highlighted today for seasonal investors. The first opportunity is to play the downside when appropriate (as seems to be the case between now and October) and prepare to play the next upside move in equity markets that is likely to appear from October to April next year. Happy seasonal investing!
OK, thanks Don - lots of good trading ideas today. Makes me a bit worried about hanging on to my US stock ETFs. Thanks to all for joining us. Remember, we do these investing chats weekly at Inside the Market at 1pm ET on Tuesday. Good bye all.