3 ETFs to buy on seasonality trend

Biotech stocks typically get a second wind after the American Society of Clinical Oncologists annual conference in June and climb for the rest of summer. “Usually it’s in late June,” he says, lasting until the third week of September.

Depending on your timeline, the market may have good news or not-so-good news to offer you in the months ahead, says seasonality-focused financial analyst Don Vialoux. Mr. Vialoux runs the popular seasonality-focused investing website Timing The Market, which he founded with his son and fellow analyst, Jon, who also created and runs the website Equity Clock.

Seasonality_Trend

Bio-tech stocks usually catch their second wind in late June and climb for the rest of the summer.

Timingthemarket.ca receives 20,000 hits daily while equityclock.com’s account on stocktwits.com (a Twitter-style platform for stock-related discussion) connects to 47,000 followers.

In an interview with the Toronto area-based analyst he said, “There’s lots of political news that seems to be having an impact on the markets right now,” suggesting the volatility typical from May to October is already underway in 2019.

Stocks react to US politics, overbought markets

Mr. Vialoux attributes the recent turbulence to renewed uncertainty surrounding China-US trade talks as well as US Democrats’ plans to hold Attorney General William Barr in contempt of Congress due to his handling of special prosecutor Robert Mueller’s report on possible collusion between Russian agents and US President Donald Trump leading up to the 2016 election.

“Most markets around the world are overbought based on a number of technical indicators . . . implying the market is vulnerable to a possible short-term correction in the summer as well,” he added. Fundamental measures of performance at major US and Canadian companies have also declined. Mr. Vialoux notes: “Consensus shows that first-quarter earnings for S&P 500 companies (once they all come in) . . . will be down slightly relative to the same period last year.”

North of the border, he says: “There’s definitely signs of the economy slowing in Canada.” Indicators include an expectation of nearly zero gross domestic product growth for the first three months of 2019. Meanwhile, constraints on pipeline construction have resulted in the construction and energy industries being constrained too. Commodity-sensitive sectors that dominate the Canadian market, such as lumber, have also been doing poorly, he says.

Long-term gain worth some short-term pain

Since rapid economic growth and inflation appear to be unlikely in the near future (to say nothing of central bankers’ dovish words) in both Canada and the United States, any expectation of interest rate increases has “basically disappeared”.

Even so, the analyst says his market outlook is bullish overall because historically the best time for US and Canadian stocks is between October and the end of the year. He suggests that long-term gain may be worth some short-term pain. “Any kind of weakness in the next few weeks will actually be a buying opportunity.”

Mr. Vialoux explains that the most cyclical economic sectors, such as materials and technology, were the weakest at May’s start, consistent with historic patterns. On the other hand, this sets them up for a more dramatic recovery later, when the analyst says he expects US dollar strength to rebound as well.

Oncology conference drives bio-tech share gains

Between May and October, more defensive sectors such as health care, consumer staples “and even bonds” enjoy a history of growth, says Mr. Vialoux. Accordingly, the analyst highlights US biotechnology stocks as his ‘best buy’ selection. Biotech firms have faced downward pressure on share prices as Democratic presidential candidates’ push for health-care reforms. Since December, it had been the worst-performing sector in the US.

However, US biotech has very strong seasonality over two periods. The first occurs before the American Society of Clinical Oncologists’ annual conference, which ran from May 31 to June 4 in Chicago this year. The conference drives share gains as investors speculate about new products and ideas. Many major biotech firms make major announcements at the conference, says Mr. Vialoux. Meanwhile, biotech has been outperforming the S&P 500 since the middle of April in technical terms, suggesting the seasonal trend has indeed returned.

Mr. Vialoux says there is also a trend of selling off briefly right after the conference, but then biotech typically gets a second wind and climbs for the rest of summer. “Usually it’s in late June,” he says, lasting until the third week of September.

3 ETFs to buy to play the trend

To play the trend, Mr. Vialoux recommends iShares NASDAQ Biotechnology ETF (NASDAQ—IBB), the First Trust NYSE ARCA Biotechnology Index Fund (NYSEARCA—FBT) or the VanEck Vectors Biotech ETF (NASDAQ—BBH).

Mr. Vialoux says he prefers buying ETFs over individual stocks because of their much lower volatility and has no specific preference among the funds he named. “If you look at their charts, they’re almost identical.” Over the last 17 years, IBB has climbed an average of 10 per cent between the beginning of May and third week of September, illustrating the trend’s consistency.

This is an edited version of an article that was originally published for subscribers in the May 24, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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