Seasonality analyst names this conservative ETF, with a basket of diversified international healthcare stocks (which, he says, trumps all other market sectors), as his current ‘best buy’.
Market volatility will be the chronic condition of 2020’s first half as the flood of COVID-19 headlines continues. But financial analyst Don Vialoux suggests the best cure lies, logically enough, in health care.
“I’m not terribly bullish on markets at the moment,” Mr. Vialoux told Investor’s Digest. The Greater Toronto Area-based analyst runs the popular seasonality-focused website timingthemarket.ca, which he founded with his son and fellow analyst, Jon (who also created and runs equityclock.com). Earnings forecasts across the board in the United States and Canada are “brutal” for this quarter and the next, he notes. At the same time, unemployment numbers are skyrocketing.
The Chicago Board Options Exchange Volatility Index (CBOE—VIX), which tracks market volatility, stood at a “very, very elevated” level of 45 on April 8, as opposed to less than 20 before COVID-19 wreaked havoc on the economy.
Coronavirus news will dominate the market
Coronavirus news, mainly negative, will continue to fuel ups and downs this spring and summer, Mr. Vialoux predicts. “Prospects after this fall are positive. North American equity markets typically reach a low in October during a US election year, followed by an uptrend to at least the end of the year.”
Mr. Vialoux says of current conditions: “Although we have probably passed the peak in the coronavirus concerns, it’s far from gone. The net result of this coronavirus . . . is it’s created a lot of chaos in economies around the world.”
That said, the analyst adds, “Look for volatility but with an upward bias in the short term. That’s despite all the bad news. You got a lot of people who shorted the market, but they’re being forced back in.”
Bullish markets show signs of returning
On the trading week that began Monday, April 6, the North American stock markets reversed their previous bearish trend (defined as a drop of 20 per cent or more from recent highs) that began only in the last week of February and returned to bullish territory (defined as a rise of 20 per cent or more from recent lows).
However, Mr. Vialoux observes that those markets fell 35 per cent and have only since regained about 20 per cent so far. “I wouldn’t call that a bull market by any means.”
The timingthemarket.ca website includes a momentum barometer tracking the percentage of stocks on the S&P 500 and the S&P/TSX composite indices that are above their 50-day moving average; its range can vary from as low as zero to as high as 90 (50 is normal).
As investors woke up to the scale of the COVID-19 crisis, the S&P 500 barometer had dropped to 1 and the S&P/TSX to zero, indicating extremely oversold markets. Since the beginning of April, they have been recovering value.
“Clearly it’s got quite a ways to go” before the markets are again overbought, says the analyst.
Demand for healthcare is off the charts
Among the stocks breaking out of negative patterns April 8 were National Bank of Canada, General Motors Co. and Hudbay Minerals Inc. The major Canadian banks are showing good technical indicators, as are US semiconductor stocks, US home-building stocks and base metals stocks worldwide.
“We’re getting some green shoots, is the best way to put it,” says Mr. Vialoux, but the outlook for health trumps them all.
“Demand for healthcare services is just off the charts right now because of what’s happening with the coronavirus, but it doesn’t end there.”
The analyst argues that the more important boost for companies, which could last into the next year, will come from patients receiving unrelated medical procedures of all kinds that had been delayed by coronavirus.
Of course, the discovery of a COVID-19 vaccine and government efforts to build strategic reserves of medical supplies will also boost the industry’s prospects. Seasonally, it performs best relative to the S&P 500 between April 25 and Sept. 30.
To that end, he recommends the Harvest Healthcare Leaders Income ETF (TSX—HHL) as his ‘best buy’. The analyst underlines its conservative qualities, including a diversified basket of 20 well-known international (not just US but also European) healthcare stocks, full hedging against exchange risks since it trades in Canadian dollars, and its current yield on monthly distributions of about 10 per cent.
Harvest also writes call options against the fund’s securities holdings and adds those proceeds to the distribution pot.
(Disclosure: Mr. Vialoux does not currently own units of HHL but he has in the past.)
This is an edited version of an article that was originally published for subscribers in the April 24, 2020, 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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