Jon Vialoux is Research Analyst at Horizons ETFs Management Canada Inc. His focus is technical analysis and seasonal investing.
Top Picks:
iShares Russell 2000 Index
The Russell 2000 Small Cap Index is well within its period of seasonal strength, which runs from Dec. 15 to March 7. Gains over the period, based on data from the past 25 years, average 5.69 per cent, outperforming the S&P 500 Large Cap Index by 3.25 per cent. Money managers tend to take on additional risk at the start of the year to get a jump on equity benchmarks, which benefits the higher beta small cap benchmark.
In addition, the U.S. dollar seasonally strengthens during the first two months of the year, pressuring the profitability of large, international companies. Small companies tend to have a domestic focus, therefore negative currency translation impacts stemming from a rise in the dollar will be less detrimental.
Energy Select Sector SPDR® Fund
The period of seasonal strength for the energy sector is approaching. Over the past 20 years, the energy sector has averaged a gain of 7.86 per cent between Jan. 17 and May 5. Stocks lead the commodity as oil finds seasonal strength from the end of February through to May.
iPath DJ-UBS Copper TR Sub-Idx ETN
Copper appears to have begun its seasonal run earlier than usual this year. The metal typically gains from late December through to late April for an average return of 9.3 per cent. Improving industrial demand acts as a positive catalyst for metals, such as silver, platinum, palladium, and copper. Recently, the price of copper broke above its 200-day moving average, a level that had previously acted as resistance. Throughout the month of December, the metal has outperformed the S&P 500, a trend that has a high probability of continuing now that the period of seasonal strength is upon us.
Past Picks: November 18, 2013
Materials Select Sector SPDR ETF
Then: $44.65; Now: $45.74; Total return: +3.08 per cent
Industrials Select Sector SPDR ETF
Then: $50.09; Now: $51.67; Total return: +3.69 per cent
Technology Select Sector SPDR ETF
Then: $34.17; Now: $35.22; Total return: +3.58 per cent
Total return average: +3.45 per cent
Market outlook:
The topic of seasonal market tendencies remains at the forefront of investors' minds at this time of year. Coming off of a stellar "Santa Claus rally" period, which runs from Dec. 15 through to Jan. 3, on average, focus is now on the "January Effect" and the "January Barometer". The January Effect primarily relates to the increased risk sentiment that investment managers are prone to at the start of the year in order to get a jump on their respective benchmarks. The month falls right in the middle of the positive seasonal trend for the riskier small cap stocks, which typically gain from the end of November through to the beginning of March.
January tends to be a positive month for equity markets with 66 per cent of periods showing positive results for the Dow Jones Industrial Average over the past 85 years. Average gain for the blue-chip benchmark is 1.15 per cent over that same 85 year history. And, despite the 26.5 per cent return for the Dow Jones Industrial Average in 2013, there is little reason to expect that gains have been exhausted coming into 2014. January returns for the Dow following years with gains of 25 per cent or more have averaged 2.40 per cent; subsequent years have averaged a gain of 10.63 per cent. Despite the poor performance to open the first trading day of the year, there is little reason, as of yet, to count out a positive January Effect this year.
The other seasonal topic that is receiving much discussion is the January Barometer. The January Barometer relates to the predictive power of January's performance on the performance of the rest of the year. Over the past 85 years, when the Dow Jones Industrial Average recorded a gain in the month of January, 77 per cent of the time the benchmark has continued to chart gains throughout the remainder of the year. The predictive power of the barometer comes into question when looking at years when a loss was recorded in the first month of the year. The Dow Jones Industrial Average has shown an equal likelihood (~50 per cent) of charting gains or losses throughout the rest of the year following a negative January performance. Perhaps we'll leave the January Barometer as more of a "talking point" rather than anything that can predict the trend in the remaining 11 months of the year.