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3 top picks from ValueTrend’s Keith Richards

Keith Richards is portfolio Manager at ValueTrend Wealth Management. His focus is on technical analysis.

Top picks:

BMO S&P/TSX Equal Weight Banks Index ETF

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I don't own this yet, but will be buying late July or early August if it nears support around $17 a share.

iShares S&P/TSX Canadian Preferred Share Index Fund

This is a preferred share ETF, and normally I don't talk about preferreds on BNN, but the sector is oversold and recently hit support in the mid-low $16's. It doesn't have tons of upside, but now is a good price to buy into the preferred share market given the overreaction to the sector after the bond selloff. These are a good "buy/hold" security for your fixed income portfolio.

CASH (third pick)

Seasonality suggests softness in August through to October, so you still want to hold cash to take advantage of upcoming opportunity in the fall.

Past Picks: June 13, 2013

PowerShares S&P 500 Downside Hedged Portfolio
Then: $27.34
Now: $27.18
Total return: -0.28 per cent

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Horizons Auspice Managed Futures
Then: $9.73
Now: $9.89
Total return: +1.64 per cent

Chemedtrade Logistics Income Fund
Then: $16.97
Now: $17.02
Total return: +0.89 per cent

Total return average: +0.75 per cent

Market outlook:

I have been calling for a market correction since April – and had given BNN viewers a "heads up" on this potentiality through my last 2 appearances. To insulate against such a correction, I recommended readers raise cash in their portfolios by selling some of their stock holdings. On my last appearance in early June, I specifically targeted selling some of the interest-sensitive stocks, citing my belief that a cyclical rotation out of the banks, pipelines and REITs might occur later in the summer – although it started earlier than I thought, I must admit. In the equity portfolios that I manage at ValueTrend Wealth Management, I raised about 40 per cent cash between late March and early April. The selloff that ensued on the TSX justified this decision. For a while, the American markets seemed to be immune from correcting their overbought conditions. U.S. markets climbed through the first half of May. Nonetheless, I stuck to my guns and held cash. May 22nd marked the peak of the U.S. markets, and my bearish prognosis has been proven correct. U.S. Federal Reserve Chairman Ben Bernanke recently implied that the Fed would begin paring back the monetary stimulus that has buoyed the economy (and markets) for over 4 years. We are now experiencing the correction that we anticipated. Lower highs and lower lows established since the peak on May 22nd confirm this trend.

No sectors were immune from the selloff. Virtually every world market sank in June (China, Europe, Emerging Markets, North America). No asset class was spared. Gold, bonds, preferred shares, and commodities sold off sharply through late May and June. Even short termed bonds (which are normally a safe haven) pulled back in price.

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It is my strong opinion that the Fed is now weaning the markets off of its favorite drug (monetary stimulus) as it enters a new era of "QE3-freedom". Through a carefully planned series of speeches and word-plays, I expect that the Fed will rotate between hawkish and dovish statements over the summer. This should gradually reduce excess market exuberance, while avoiding an outright bear market panic. The Fed knows that the money-printing game can't go on forever. But Bernanke and crew are also aware of the "wealth effect"; that is, the tendency for consumers to increase or decrease their spending habits according to the value of their investments. A higher portfolio value buoyed by bullish stock markets adds to consumer confidence and security, which in turn stimulates economic growth. So don't expect the Fed to sit idly by if stock markets correct too aggressively. At the same time, we can't realistically expect monetary stimulation to last forever. The Fed has tough job on its hands, but I believe that they will ultimately succeed. For that reason, although I do expect a choppy market this summer and into the fall, I believe that the market will remain in a larger-picture bull market for the next year or longer. Near termed support comes in at 1,500-1,540 for the S&P 500, and around 11,000 for the TSX—which is where I would look at deploying cash.

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