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The Summer Set Up: Moving on from Spring Investments

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The Summer Set Ups

The change from spring to summer in markets tends to usher in a more conservative portfolio stance.  In general, this is a result of fewer catalysts, lower volumes and trading desks staffed by more juniors.  While the conditions are not favourable to drive prices across the board higher, there are areas that show strong historical absolute (and relative) performance. Technology, for example, is considered a cyclical sector, and thus prone to a summer swoon as with industrials or financials, yet due to its all-cycle growth profile it performs well through to mid-July and on a relative basis right on through to winter with a couple weak spots in late July and late September.

The meat of the summer strength however is found in the defensive sectors such as utilities, consumer staples, pipelines, and healthcare due to their predictable earnings and higher yields.  Government bonds too show strength due to their reliability and as a counter to volatility.  On an industry level (areas within a sector) biotech has its strongest period starting in June and lasting through to December due to several large conferences in June and its all-cycle growth profile like tech.

All this said, once we complete manager quarter end rebalancing – the selling of cyclical winners and the buying of beaten down defensives –  a set up for a short summer rally in cyclicals and commodities (post June’s quadruple witching) is in place with the larger moves in the defensives really not starting until late July/early August.

The high Put/Call Ratios supports a near term reversal to the June weakness

Here is a snap shot of the market structure on June 12th, before the move down in the cyclicals and the rise in the defensives, before manager rebalancing.

…and here it is in the midst of the quarter end, and before the start of the summer rally season.  Though there are no guarantees the set up is fairly decent this year.

 

Current Momentum Analysis

Asset class rankings have stayed fairly stable with only two notable moves: commodities fell and the US dollar rose.  They of course normally have somewhat of an inversely correlated relationship.  Giving the analysis above in terms of market structure, current assets classes that favour a growth bent are expected to do well through to mid-July. This also includes another resurgence in commodities which ends its strong period at the end of July.

The same pro-growth structure is evident in the Canadian sector rankings. Notice the defensive areas of consumer staples and utilities at the bottom of the rankings.  Historically they do not pick up until mid-July through to early August.  Many portfolios have started to accumulate or hold positions in Dollarama and Saputo (staples) and Inter Pipeline and AltaGas (pipelines, quasi utilities) in advance of their periods of seasonal strength for strong stand-alone technical reasons. We anticipate broadening out in these areas through July.

The US sector rankings look very similar to the Canadian ones, however, the moves lower in energy and materials in the US was sharper than in Canada.  Technology and the separate internet and NASDAQ rankings (we only track “technology” in Canada because we do not have the depth in the space like the US does) are showing quite well because they are less deep cycle growth like commodities.  Too notice the move higher in healthcare and biotech, two spaces represented in most client portfolios. As with Canada, both utilities and consumer staples are at the bottom of the rankings, making the set up for seasonal plays attractive. 

The TSX 60 weekly stock rankings reflect the broad comments already made in the sector sections above. On individual company basis moves up were seen in Restaurant Brands (Tim Hortons, Burger King, Popeye’s Louisiana Kitchen) Rogers Comm, Thomson Reuters, and Saputo.  Downside moves were seen in Shaw Comm, Tech Resources, Encana, Cenovous and Crescent Point Energy.

 

Seasonally Relevant Stocks

Analysis of the Inter Pipeline Ltd. (TSE:IPL) seasonal charts above shows that a Buy Date of June 8 and a Sell Date of August 31 has resulted in a geometric average return of 4.47% above the benchmark rate of the S&P 500 Total Return Index over the past 15 years. This seasonal timeframe has shown positive results compared to the benchmark in 14 of those periods. This is an excellent rate of success, but the return underperforms the relative buy-and-hold performance of the stock over the past 15 years by an average of 1.67% per year.

 

Analysis of the Fairfax Financial Holdings Limited (TSE:FFH) seasonal charts above shows that a Buy Date of June 18and a Sell Date of October 15 has resulted in a geometric average return of 1.88% above the benchmark rate of the S&P 500 Total Return Index over the past 20 years. This seasonal timeframe has shown positive results compared to the benchmark in 14 of those periods. This is a good rate of success and the return strongly outperforms the relative buy-and-hold performance of the stock over the past 20 years by an average of 3.79% per year.

Analysis of the Dollarama Inc (TSE:DOL) seasonal charts above shows that a Buy Date of March 23 and a Sell Date of August 19 has resulted in a geometric average return of 19.22% above the benchmark rate of the S&P 500 Total Return Index over the past 8 years. This seasonal timeframe has shown positive results compared to the benchmark in 8 of those periods. This is an excellent rate of success, but the return underperforms the relative buy-and-hold performance of the stock over the past 8 years by an average of 3.68% per year.

 

Analysis of the Rogers Communications Inc. (TSE:RCI.B) seasonal charts above shows that a Buy Date of June 29 and a Sell Date of October 18 has resulted in a geometric average return of 4.76% above the benchmark rate of the S&P 500 Total Return Index over the past 17 years. This seasonal timeframe has shown positive results compared to the benchmark in 15 of those periods. This is a very good rate of success, but the return underperforms the relative buy-and-hold performance of the stock over the past 17 years by an average of 0.97% per year.

 

Analysis of the AGF Management Limited (TSE:AGF.B) seasonal charts above shows that a Buy Date of June 27 and a Sell Date of September 15 has resulted in a geometric average return of 4.64% above the benchmark rate of the S&P 500 Total Return Index over the past 17 years. This seasonal timeframe has shown positive results compared to the benchmark in 13 of those periods. This is a good rate of success and the return strongly outperforms the relative buy-and-hold performance of the stock over the past 17 years by an average of 11.97% per year.

Analysis of the Suncor Energy Inc. (TSE:SU) seasonal charts above shows that a Buy Date of January 12 and a Sell Date of May 21 has resulted in a geometric average return of 9.37% above the benchmark rate of the S&P 500 Total Return Index over the past 20 years. The stock also has a second period of season strength from the end of June to mid September averaging a 7.5% return the past 20 years.

 

Analysis of the Baxter International Inc. (NYSE:BAX) seasonal charts above shows that a Buy Date of May 27 and a Sell Date of August 19 has resulted in a geometric average return of 4.72% above the benchmark rate of the S&P 500 Total Return Index over the past 20 years. This seasonal timeframe has shown positive results compared to the benchmark in 17 of those periods. This is a very good rate of success and the return strongly outperforms the relative buy-and-hold performance of the stock over the past 20 years by an average of 2.6% per year.

 

Analysis of the First Quantum Minerals Limited (TSE:FM) seasonal charts above shows that a Buy Date of November 20 and a Sell Date of March 4 has resulted in a geometric average return of 21.43% above the benchmark rate of the S&P 500 Total Return Index over the past 17 years. This seasonal timeframe has shown positive results compared to the benchmark in 15 of those periods. This is a very good rate of success. The stock has a second period of seasonality from the end of June to the end of July averaging 11% the past 20 years.

 

Analysis of the Microsoft Corporation (NASDAQ:MSFT) seasonal charts above shows that a Buy Date of June 13 and a Sell Date of November 8 has resulted in a geometric average return of 8.23% above the benchmark rate of the S&P 500 Total Return Index over the past 20 years. This seasonal timeframe has shown positive results compared to the benchmark in 17 of those periods. This is a very good rate of success and the return strongly outperforms the relative buy-and-hold performance of the stock over the past 20 years by an average of 4.82% per year.

 

 

Robert Sneddon Portfolio Manager

robert@castlemoore.com