How to use market volatility as a buying opportunity for seasonal strength

Those who follow seasonal investment trends will know that the “best six months” strategy begins in late October or early November.

Now that we’re about to enter into this favourable period, investors should consider buying good quality stocks and ETF’s with any cash that they’ve held over the summer or fall.

Volatility that resulted from the ongoing noise in Washington presented an excellent entry point in the first few weeks of October. Further volatility should be used as a buying opportunity.

We’re largely avoiding any index strategies revolving around the Canadian market this year. The TSX chart shows little sign of breaking into a bull market at this time.

Instead, we’re focusing on U.S. and international index-based investments. That’s not to say that we won’t hold any Canadian stocks. In fact, one of the sectors that we are outrageously bullish on is the Canadian pipeline sector.

GO WITH PIPELINES

Our overall thesis when looking at Canadian stocks is to look at companies that pay dividends with great charts. And given the appealing charts, the outlook for domestic pipeline development going forward, and the strong dividend yields, you should be well invested in the pipelines.

We recommend positions in Pembina Pipeline Corp. (TSX- PPL, $33.50), Keyera Corp. (TSX-KEY $57.81), Parkland Fuel Corp. (TSX-PKI, $18.18) and Enerplus Corp. (TSX-ERF, $16.91). All pay good dividends, and have exhibited technical patterns that suggest a potential for upside over the winter.

You should also own a few stocks that trade on the TSX whose earnings are at least partially derived from U.S. and International sales. One example is CAE Inc. (TSX-CAE, $11.15).

The company provides simulation and modeling technologies and integrated training services primarily to the civil aviation industry and defense forces worldwide.

CAE was in a long-term consolidation pattern with a “ceiling” on it at around $11.00. A breakout through that ceiling (also known as technical resistance) inspired us to recommend a position in early October. We’re targeting about $13.00 for the stock.

BANK STOCKS AND INSURERS

We’ve also been looking at some really interesting U.S. buying opportunities. In the financial sector, for example, we are very intrigued by both the banks and insurance.

US banks have been a bit weak lately, but we view this weakness as a good entry point. We recommend the BMO Equal Weight U.S. Bank Hedged CAD (TSX-ZUB, $17.35) to play the large-cap banks in a currency-hedged strategy.

If the longer-termed trendlines for this sector are not disrupted, we would view any volatility as a good entry point.

While we are seeing value emerge in sectors like the U.S. banks, we wonder if the same holds true for other sectors. For example, Canadian banks appear (at best) “fairly priced” but we would prefer to buy them at lower than current levels.

Insurance companies, meanwhile, are just now starting to break out to the upside from multi-year consolidation patterns.

U.S. giant AIG, or American International Group, is an excellent example of this type of company. It is a much different firm from what it was five years ago. This insurance company has shown its confidence in the future by declaring a dividend and authorizing a share buyback.

Here in Canada, Manulife Financial Corp. (TSX-MFC, $16.51) may also fit the bill. The company has made strides in managing its market hedge, taking signif icant risk out of the stock, and its major divisions continue to deliver strong operating performance.

We also like a few select technology stocks along with “old school” stocks that have reinvented themselves. Texas Instruments Inc. (NASDAQ-TXN, $40.22) is one such example.

Not only has the stock broken out of a consolidation pattern that we technical analysts like to call a “symmetrical triangle”, it has also broken through a decade-long ceiling of just under $40.00. Such

breakouts, if held, can result in significant long term upside.

The seasonally-favorable time to be invested in equities is soon upon us. Market volatility over the coming weeks will present opportunities to invest any cash investors may have been saving up in their portfolios.

 

– The MoneyLetter

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