Election cycles and seasonal trends say it’s time to buy

Key market indicators are back in a ‘buy’ mode and it’s time to buy says Keith Richards, a portfolio manager at ValueTrend Wealth Management in Barrie, Ontario.

“It’s no secret that I was cautious on the markets over the summer. Back in April, I recommended that readers of The MoneyLetter consider taking at least some of their equity holdings off of the table and sit on cash for a while.

At that time, I was taking note of the overbought technical readings, euphoric investor sentiment and basic seasonal factors, including the common trend to “Sell in May and go away”. All of these suggested that investors should consider a cautious approach.

It is my hope that at least some readers took advantage of that advice by holding some cash. In doing so, not only have you captured the gains made to that date, but you are now sitting on some cash that you can utilize to buy into what I think is now an ideal re-entry point for equities.

Certainly, the tables have turned for the stock market at this point. American and Canadian markets moved down over the fall aggressively. The S&P 500 Composite Index reached my minimum target of 1930, then broke below 1900 in October to test my ultimate low target of 1820 (its last low on the weekly chart). That was fine by me. I was happy to have missed out on the market volatility over the summer by holding cash.

Three reasons stocks should start to rebound

My projection was for a final test near one of those support levels in October, and then on to a bullish winter. The seasonal trend for markets to move into their stronger six months starts in November. That there are fewer opportunities on the bond markets at this time also suggest that investors will start redirecting their capital into stocks, after pouring money fearfully back into bonds over the fall.

That inflow of capital creates the potential for a strong stock market rally over the coming winter months. Further, my key sentiment studies are finally back into “buy” mode, due to the current levels of pessimism by retail investors.

Finally, it’s worth noting that we are about to enter into a third year in the standard four-year election cycle in the United States—a period of time that has historically proven beneficial to stock markets.

Third year in U.S. electoral cycle lifts markets

Theories abound as to why stock markets rise in third year electoral terms. My thoughts are that the politicians in power want to ensure re-election of their party by doing all they can to make things look good. As their four-year term comes to an end, they want to end on a high note.

By the way, the presidential cycle played out to its historic pattern of selling off in the third quarter in the second term.

Again, you can apply your own logic as to why this happens, but my guess is that the political party in question gets his or her dirty work done in the second term. It’s far enough away from election year to win back points with the voters in the back-half of the electoral term.

(Note: Some people might see the U.S. Federal Reserve’s decision this year to begin tapering its Quantitative Easing program, along with hints about potential interest rate increases in the coming year, as examples of such unpopular, but necessary politics. Keep in mind, though, that the Fed operates at arm’s length from the government.)

Where to put new money now

If you are inclined to share my belief that now is a good time to be deploying your cash into the markets, there are a few sectors that you might consider trading to maximize the potential for returns in your portfolio.

Recommended broad-based ETFs

A broad market play on index exchange-traded funds (or “ETFs”) is a conservative bet for playing the larger bullish trend. I would advise that investors continue to avoid commodity-based markets such as the S&P/TSX Composite Index in terms of ETFs that give you broad market exposure. For example, I would avoid S&P/TSX Composite-derived index ETFs. That includes avoiding Canada’s largest ETF, the i-Shares S&P/TSX 60 Index Fund (TSX–XIU).

Instead, consider playing the S&P 500 Composite Index through Vanguard’s widely held U.S. currency offering, the SPDR S&P 500 ETF (NYSE–SPY).

Bank of Montreal, which offers its own ETFs, has introduced a currency-hedged Dow Industrials play though its BMO Dow Jones Industrial Average ETF (TSX–ZDJ) for those who feel that the Canadian dollar has gone too low.

If you are a conservative investor, consider taking one of these broad-market approaches to limit your individual security risk.

Sectors, stocks that should benefit most

Coming into a bullish environment, I tend to favour individual stocks and sectors with high betas; that is, a high degree of leverage to the market.

Individual sectors that I am taking positions in include the consumer discretionary and technology sectors.

You can look at individual names within these sectors such as  Intel Corp. (Nasdaq–INTC) in the technology space, which you could consider owning; we are thinking about it ourselves, but don’t currently hold it. Another idea, in the consumer space, is Walt Disney Co. (NYSE–DIS), which we do hold a position in.

Or, for those who want broader diversification within targeted sectors, you can buy Vanguard’s SPDR Technology ETF (NYSE–XLK) or the SPDR Consumer Discretionary ETF (NYSE–XLY), both of which we own.

A good time to be in the market

The coming months will, in my opinion, be a great time to play the markets.

I remain a long-term bull and I believe that there are profits to be made in these markets by actively trading according to technical trends, market cycles, and fundamental valuations.”

 

The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846