Market Outlook: Hold your cash; bargains are coming

Despite hand-wringing over America’s rising debt levels, U.S. markets continue to lead the world and the S&P 500 Composite Index has risen sharply over the past six years. Keith Richards, Barrie, Ont.-based portfolio manager of Value Trend/Wealth Management, assesses the market outlook from that perspective and advises keeping a close eye on oil stocks, financial stocks, gold stocks and agriculture.

Say what you will about the U.S. But the fact remains that its stock market has remained the strongest in the world — both before and after the financial meltdown of 2008.

And although not without its faults, the U.S. economy shows the value of both investing and doing business with a country that puts capitalism next to godliness.

This is particularly evident in the sharp rise of the S&P 500 Composite Index over the past six years.

At Value Trend, we’ve been focusing on U.S stocks and now hold only a few Canadian stocks.

Finding bargain stocks for value investing

As a contrarian, I’m always interested in discovering deep-value turnaround plays.

Technically, such stocks can be spotted through the successful breakouts from their trading base — something I’ve discussed in my previous columns. It’s also something I take up in my book, Sideways. I’ve also made no bones about my belief that stock markets will be volatile this summer.

Whether this results in a 20 per cent correction from the highs that stocks made on the S&P 500 last May or that they made on the S&P/TSX Composite last June remains to be seen.

In any event, we at Value Trend remain cautious. As such, we’ve now cashed out well over 40 per cent of our portfolio.

This has saved us from recent bear runs — especially in light of the plunge in equities on the Shanghai Exchange, as well as the possibility that Greece will still fall.

We’re happy to report that our equities have logged a positive return since the beginning of this year — and have done so while North American markets were struggling.

And if you’ve heeded my advice about tamping down risk, you might be mimicking some of our performance in your own portfolio.

Just to recap, we raised cash and sold some of our more growth-oriented stocks. We also added some equities sensitive to interest rates, i.e., real estate investment trusts. In addition, we stirred in some bonds and U.S. utilities.

Hold cash; bargain stocks are coming

That’s great, you might say, but now what? Well, you ought to continue to hold onto a big chunk of cash for most of the summer.

Still, by the time you read this, I may have used the recent market sell-off to buy a few high-value positions on North American markets, thereby cutting my cash hoard by five to 10 per cent.

Ironically enough, we followed this exact strategy in the summer of 2011. And it worked to our benefit, just as it’s working now.

Moreover, despite a degree of downside on the stocks we do hold — and downside is inevitable — our portfolio should continue to beat the market at its own game, while reaping the benefits of our cautious approach.

But please be patient before you invest your cash. That’s because if this summer does prove volatile, it will likely turn out to be a spectacular buying opportunity — just as it did four years ago.

Moreover, unlike those folks who are fully invested, we’ll have the cash to take advantage of the market’s dips.

And although there are some sectors in which we hadn’t yet made any investments as of early July, the sectors remain on our watch list. Consider adding them to yours as well.

Oil market outlook

First up, energy. We traded oil back in the spring for a short term rally off its low of US$44 a barrel, selling it as it bounced back toward $56.

And for investors who like to trade, we think petroleum may now be close to presenting another buying opportunity.

For one thing, West Texas Intermediate crude recently broke down from a technical “handle”.

On my blog back in the spring, I accurately called the sideways consolidation that occurred after oil finished making its double bottom early this year.

But since that consolidation has now been wiped out, the next level seems to be coming in on the spot market at US$50-$55 a barrel.

Although oil may stay at $50, I don’t want to place a trade until it makes a sustainable bounce — a bounce that should last for several days, if not weeks. After all, it’s better to buy a little higher than to try and catch a falling knife.

Some of the things now tamping down crude oil include the unexpected buildup in U.S. petroleum supplies in early July, the first increase in the U.S. oil rig count in over 30 weeks, along with reports of growing production in the Organization of Petroleum Exporting Countries — most notably in Iraq and Saudi Arabia.

Then, too, now that Iran has inked a deal to scale back its nuclear weapons program, more Iranian crude could hit global markets over the next 12 months.

All of these things only make us more reluctant to buy oil until it enjoys sustained support above US$50 a barrel.

Should seasonal cycles become positive for petroleum, we’d buy a commodity-based exchange traded fund, such as United States Oil ETF (NYSE─USO).

Not only does this fund boast the largest number of liquid crude oil contracts that are short-dated, it’s also the most widely traded such exchange traded fund in the world.

Or, we might buy Horizons NYMEX Crude Oil ETF (TSX─HUC). It’s more appropriate for a longer-term trade.

Market outlook for financial stocks

Now, let’s look at some other investments we like, such as Power Financial Corp. (TSX─PWT), the Montreal-based parent of such Bay Street stalwarts as Investors Group and Great-West Lifeco.

We positively love those masses of Investors Group “army ants” that swarm across Canada selling mutual funds over kitchen tables. So, keep selling those funds, guys!

An interesting consolidation followed by a few weak breakout attempts put Power Financial back on our radar screens. And we’ll buy it if its price continues to stabilize.

Market outlook for gold stocks

Let’s also look at gold. Wild and whacky, the trade on this precious metal hasn’t been for the faint-hearted for several years now.

But seasonal patterns for gold should soon pick up. Moreover, its price keeps bouncing off its support level of US$1,150 an ounce. We may buy a small position in gold and then look to trade it for a near-termed pop. We’ll see.

As for gold exchange traded funds, they’re everywhere. Consider SPDR Gold Shares (NYSE─GLD), or Horizons COMEX Gold ETF (TSX─HUG).

Agriculture market outlook

Elsewhere, a nice pullback early in the year has brought iShares Global Agricultural Index ETF (TSX─COW) back to its long-term trend line.

Moreover, this exchange traded fund’s seasonal tendencies are favorable from August through December. So, this may be a near-term opportunity to buy into a high-quality sector.

There will be lots of opportunities for patient investors this summer. Just don’t jump in with all your cash at the first sign of a pullback.

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846