A seasonal play on market volatility

“Moves by the [HUV] index above its 20-, 50- and 200-day moving averages is the preferred trigger for a seasonal trade (that is, to sell) lasting to at least mid-October and perhaps as long as the end of the year.”

seasonal_play

Seasonality analyst recommends a play for market uncertainty surrounding COVID and US presidential election politics.

Since 2020 has mostly been a roller-coaster anyway and there is no end in sight, savvy investors’ best bet may be simply throwing their hands in the air and enjoying the ride, argues longtime seasonality-based financial analyst Don Vialoux.

The analyst says of his ‘best buy’ selection, the Horizons BetaPro S&P 500 VIX Short-Term Futures ETF (TSX—HUV): “It gives you an opportunity to take advantage (of volatility),” of which he expects plenty in the coming months as a result of general seasonal patterns, ongoing COVID pandemic effects, and the quadrennial monkey wrench thrown by the US presidential election.

Mr. Vialoux, who lives in Oakville in the Greater Toronto Area, 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).

Low investor activity leads to volatility

The elder Vialoux observes that the VIX, the index that tracks the volatility of the S&P 500, historically moves higher from the third week of July until the second week of October.

“Volatility traditionally moves higher partially due to lower investor activity during the summer months and partially due to a tendency for analysts to lower overly-optimistic S&P 500 consensus revenues and earnings estimates prior to the release of third-quarter results,” he explains. The analyst adds: “Volatility is notable during a US presidential election year when an intermediate peak in the S&P 500 index frequently occurs near mid- or end of August followed by an intermediate trough into mid-to-late October.”

This year, he notes with a chuckle, “There’s been a complete disconnect between company revenue, cash flow, and earnings; and stock prices.” He notes that in the week beginning Aug. 2, the NASDAQ composite and NASDAQ 100 indexes reached all-time highs.

“The S&P 500 index is currently trading at an historic price-to-earnings multiple following a 36 per cent year-over-year drop in second-quarter earnings,” Mr. Vialoux also stresses.

Pandemic has also added to market volatility . . .

The COVID- and oil price-based market setback that began in the last week of February reached its nadir in mid-March. Gains in the US equity markets since the third week of March have mainly been triggered by US economic recovery following the relaxation of some COVID restrictions when the frequency of new US cases and deaths fell in May and June.

“Unfortunately, frequency of new cases and deaths moved higher into July and early August,” says Mr. Vialoux. As a result, equity analysts are lowering third-quarter sales and earnings estimates after reviewing second-quarter results and expecting similar conditions to prevail. At present, the consensus expects an average 2020 third-quarter, year-over-year loss of 23 per cent among S&P 500 companies. “You’re going to see that number in the coming weeks increase, to 24, 25…” predicts Mr. Vialoux.

. . . and so does US presidential politics

As for the presidential race, he advises investors to expect heightened political rhetoric from Republican incumbent Donald Trump and Democratic challenger Joe Biden, and rising investor uncertainty, between now and election day Nov. 3.

Mr. Vialoux adds that Mr. Biden’s platform to date suggests a “progressive” agenda, including higher corporate taxes and possibly higher tax rates for the wealthy and on capital gains.

“Governments around the world are throwing money at people to keep the economy afloat but this can only go on for so long. . . . Ultimately, all this money needs to be paid back,” says the analyst of COVID stimulus. “It’s not going to be a pleasant experience for anyone who owns securities.”

“With US equity indexes at or near record levels, many US investors are holding equities and funds with substantial unrealized capital gains. Temptation will be to take profits prior to Biden becoming president in the third week in January 2021 (if he wins).”

Uncertainty will continue into 2021

As the weather cools and these factors play out, “You’re probably going to see the VIX index starting to climb again,” says Mr. Vialoux. He concedes of COVID concerns, “All of this will disappear once the vaccine becomes available,” but also underlines that the uncertain timing and availability of a vaccine will keep investors guessing, most likely well into 2021 at a minimum.

While there are many unknowns ahead, the analyst expresses optimism that any storms will eventually give way to more sunny economic and market conditions.

“It’s changing the way the world is working and in some ways it’s positive and in some ways it’s negative,” he says of COVID. “Once all the really bad stuff gets out of the way, then you’re going to see a different side of the coin.”

If buying into HUV, Mr. Vialoux says: “Moves by the index above its 20-, 50- and 200-day moving averages is the preferred trigger for a seasonal trade (that is, to sell) lasting to at least mid-October and perhaps as long as the end of the year.”

This is an edited version of an article that was originally published for subscribers in the August 21, 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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