Seasonal investing strategist picks CAE as ‘best buy’

The warmer months typically bring about falling stock prices, but the key to using this information is figuring out what sectors will do well before the inevitable setback, says longtime seasonal financial analyst Don Vialoux. He says the Paris Air Show and higher U.S. defence spending will lift Q2 results and maintain momentum in the aerospace and defence industry.

cae_manufacturing_stockDon Vialoux specializes in seasonality analysis, plotting how sectors and stocks move depending on the time of year across decades of data. Together with his son, Jon, the analyst runs the seasonality-focused investing websites timingthemarket.ca and equityclock.com.

He says: “We’re into a very interesting period right now. Typically something weird happens between May and October. In the last 20 years, there has always been some correction.” Over the last two decades, market declines between May and October have averaged 14.9 per cent. The smallest retreat was just 5.3 per cent in 2003, while the largest, in 2008, took prices back 41.7 per cent.

“Moreover, most losses were abrupt and severe. They tended to happen within one month during the May-October period,” Mr. Vialoux notes. However, he adds: “It doesn’t always start early in May and go away at the end of October.”

Comparing history to the present

Typical warning signs of an emerging correction include a high VIX (an index that measures volatility) and when U.S. benchmark indexes slip below their 50-day moving averages.

By contrast, the VIX hit a 24-year low on Monday, May 8, Mr. Vialoux points out. Meanwhile, the major U.S. equity indexes traded at volumes comfortably higher than their 50-day moving average including the S&P 500 Index at 2,399 with a 50-day moving average at 2,366 and the NASDAQ Composite Index at 6,101 with a 50-day moving average at 5,904.

In Canada, the TSX Composite Index, at 15,582, was flirting with its 50-day moving average at 15,563. Triggers to avoid damage in Canadian equities and ETFs during the May-October period frequently occur at the same time as triggers by U.S. equity indexes, the analyst says.

“We’re not about to go into a correction yet but we know it’s going to happen in the next four months,” Mr. Vialoux concludes. “Basically, the bottom line is I’m cautiously optimistic right now but watching the market indicators very carefully.” Looking toward short-term swing trades in this period, the analyst says that in general, the technology, biotechnology and aerospace sectors are all due to do well in the warm part of the year and worth picking up. They are good candidates to hold as well. The Canadian grocery sector is also gaining steam, according to Mr. Vialoux.

In the case of the biotech and aerospace sectors, major conventions and trade shows tend to create share-price bolstering buzz. The analyst cites the American Society of Clinical Oncology annual meeting scheduled for June 2 to 6 as an example. “A lot of new, particularly cancer, drugs are introduced at that conference. Historically, the biotech sector does very well leading up to that.”

Consumer electronics and technology businesses usually start unveiling new products that they plan to start selling for the Christmas shopping season. Not only do the major players like Apple Inc. receive a boost from anticipation surrounding flagship products such as the iPhone 8, companies that make parts for such devices also benefit. More precisely, they do well between now and late July, then they slow down, picking up again around September, Mr. Vialoux says.

CAE taking off

Mr. Vialoux’s ‘best buy’ pick, CAE Inc. (TSX—CAE; NYSE—CAE), is part of the aerospace and defence industry.

It designs and builds flight simulators for both the civilian and military markets. The company also offers training facilities related to flying as well as emergency preparedness. “It’s just virtually exploded on the charts,” the analyst says of recent performance, adding that seasonal, technical, and fundamental research reflects well on the company.

The Paris Air Show, taking place from June 15 to 19, should inspire higher prices in anticipation of sales contracts. The analyst says commercial aircraft demand is “very, very strong” since companies are introducing more product into the market. Thus, he predicts that sales will lift up second-quarter results and keep up momentum. Higher U.S. defence spending should also encourage simulator sales, likely before a recession, given aerospace seasonality.

This is an edited version of an article that was originally published for subscribers in the May 26, 2017, 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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