Chartered Market Technician Don Vialoux combines technical, fundamental and seasonality analysis to predict that Canadian metals and mining companies and U.S. industrial companies are set to rise this spring. He names 2 exchange-traded funds that are best suited for Canadian investors to profit from the trend.
Like anyone else, longtime analyst Don Vialoux cannot say for sure what the sky will do on a given day. Nevertheless, he argues that comparing historical climate and market data can teach investors plenty about how the latter will react to the former and which businesses benefit from what types of weather.
“Just looking at the things happening around you can often help,” Mr. Vialoux says. For example, winter in the eastern parts of North America has been far warmer than average due to the effect of El Nino, a sharp departure from the remarkably cold first quarter of 2015. As a result, the analyst says, “They’re putting up houses like crazy right now. Last year, there was no construction.”
Mr. Vialoux has worked in the investing industry for the last 46 years. In the early 2000s, he founded a website, timingthemarket.ca, focused on seasonal analysis. His favoured approach to investing has reached a large audience; timingthemarket.ca’s seasonality studies on stocks currently receive 1.5 million hits per month. Mr. Vialoux formerly served as advisor to a seasonality-based exchange-traded fund (ETF). He also frequently appears on BNN.
“We try to combine seasonality and technicals as the primary way of making investment decisions,” the analyst explains.
“Seasonality happens because of fundamental reasons.”
With those principles in mind, Mr. Vialoux singles out two groups of businesses set to rise with the coming of spring and beyond: Canadian metals and mining companies, and U.S. industrials.
Weak end to 2015 gives way to higher prices
Mr. Vialoux’s first “Best Buy” selection is the BMO S&P/TSX Equal Weight Global Metal Hedged-to-CAD Index ETF (TSX─ZMT). Per its name, metals and mining firms on the TSX make up the exchange-traded fund’s underlying assets, the shares of which are weighted in direct proportion to their market capitalization on the index.
Whenever he examines a stock or security, the analyst considers the seasonal, technical and fundamental trends related to it.
According to him, ZMT’s traditional period of seasonal strength begins in the third week of January and continues into the first week of April. “The sector normally has a good strong spurt prior to the Prospectors & Developers (Association of Canada) convention each year,” the analyst points out, especially precious metals companies.
Aside from the bullish hot air that investor relations staff at the convention blast into the atmosphere, demand for metals generally tends to rise as weather improves.
The reason is simple, says Mr. Vialoux; consumers think more about buying goods such as cars and homes when it becomes nice outside, so suppliers like automakers and contractors need more raw materials to satisfy the growing demand for their products.
In technical terms, both precious and base metals bottomed out in December (first the precious, then the base), according to the analyst. Their prices have been rising since then.
Finally, fundamentally speaking, Mr. Vialoux says, “There’s a huge negative anticipation for the bad fourth-quarter results.”
Due to lower commodity prices in 2015’s fourth quarter compared to the present, most mining companies will report lackluster results in coming weeks and their shares will then fall, he says.
However, many would-be buyers are waiting in the wings to pounce on the miners when they drop and then benefit from stocks rallying on the back of higher commodity prices, the analyst adds.
A U.S. investment for the Canadian buyer
Mr. Vialoux’s other “Best Buy” recommendation is First Trust AlphaDEX U.S. Industrials Sector Index ETF (TSX─FHG).
The analyst prefers the FHG over another U.S. industrial exchange-traded fund because it trades in Canadian dollars and is thus more widely accessible to domestic investors. In addition, FHG shareholders can benefit from stateside trends while being protected from any unfavorable effects from foreign exchange rates.
Seasonally, the U.S. industrial sector trades most robustly from the third week of January until the middle of May, says Mr. Vialoux. Given the recent El Nino effect (which adds an average of three per cent to the TSX index over a year, according to the analyst) and last year’s remarkably frigid winter, this year’s first-quarter results will compare well to those of 2015.
Technically, the fund hit a floor in the third week of January and has since outperformed the S&P 500.
Fundamentally, many industrial firms are transportation businesses, such as delivery companies, aircraft producers, and automakers, Mr. Vialoux notes. Therefore, lower energy costs should benefit both the operations and sales of industrial firms, he says.
Investor’s Digest of Canada, MPL Communications Inc.
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