Three strategies for the winter market rally
There’s a cold weather rally coming, says this Canadian analyst, who advises investors what to buy to get their portfolios ready for winter.
Down with gold, up with stocks.
There will be a winter stock market rally, says one expert (did it start yesterday or is it still too warm?) and it’s time to prepare for it.
This advice comes from an analyst who does not believe that the stock market is off on an extended bull run. Mr. Keith Richards believes we are entering an era similar to Japan’s “lost decade.”
Says Mr. Richards, a portfolio manager and technical analyst: “During periods like these, markets can experience multi-month bear or bull trends within the broader context of a sideways market.”
We are now in an upward trend that will take the Dow Jones Industrial Average into the 11,000 to 11,500 range, he believes. It is at 9,750 today.
Writing in Investor's Digest of Canada, he shares the strategies he will be following in his own portfolios as he anticipates the rally.
The easy money
Over the past year, Mr. Richards has accumulated gold in anticipation of the price reaching $1,000 per ounce. He added some silver as well.
As we know, gold has popped through the $1,000 barrier and is sitting there today. Now it is time to cut back, says the analyst. “I think that there may be some potential upside for gold in the future, but much of the ‘easy’ money has been made.”
He will stay invested in one exchange-traded fund, iShares Canadian S&P/TSX Global Gold Index Fund (TSX-XGD).
And now he’s gearing up to add to his equity portfolio. Here’s why.
Head and shoulders
There are three reasons to expect a winter rally, Mr. Richards explains. One is simply the historical pattern of the seasons — most of the gains in the stock market are made from November to May. This has been so for over 50 years.
Second, the market appears to have reached a technical bottom. The big indexes in North America have formed a classic “head and shoulders” formation, which has successfully predicted upward movement at a 95 per cent success rate, according to the Encyclopedia of Stock Patterns (no it’s not on our bedside reading table, either).
Lastly, many economists see an official end to the recession by the first or second quarter of 2010. Since the stock market anticipates a recovery by six months, a winter rally would seem to be in the cards.
There are also three ways to gear up for the rally, the analyst says.
One-stop shopping
The three strategic areas that Mr. Richards intends to visit are the consumer discretionary sector (that is, not the bare necessities like food), technology, and large-cap stock indexes.
This analyst is a great believer in using exchange-traded funds to invest in a promising sector. In fact, when it comes to consumer stocks, he prefers the one-stop shopping approach to individual stocks. His choice is SPDR Consumer Discretionary Select Sector ETF (MYSE-XLF).
In technology, he likes several individual stocks. Research in Motion (TSX-RIM) has had its ups and downs lately, but it has only reached 10 per cent of the global market, which leaves “plenty of room for expansion,” says Mr. Richards.
His other favourite is American giant Oracle Corp. (NASDQ-ORCL). He has owned it for a few years and is impressed “by the company’s ability to pursue steady and predictable earnings growth.”
If you’d rather cover the whole tech field, he has two ETFs to suggest. One is Canadian, the iShares Canadian S&P/TSX Cap Info Technology Index Fund (TSX-XIT). The other is American, the SPDR Technology Select Sector ETF (NYSE-XLK).
Old standbys
Cautious investors may want to approach the rally through the broader market rather than its parts. If so, Mr. Richards has two “old standbys.” The Canadian entry is iShares CDN S&P/TSX 60 Index Fund (TSX-XIT) (note that this is the large cap index, not the whole TSX). The U.S. fund covers more stocks — the iShares S&P 500 Index ETF (NYSE-IVV).
The manager adds one more group of stocks to his portfolio mix. This is the high-beta crowd — stocks that are more volatile than the indexes.
The analyst’s two favourites in this group are the big fertilizer stocks, Agrium Inc. (TSX-AGU) and the poster child for volatility, Potash Corp. of Saskatchewan (TSX-POT).
Finally, the analyst goes beyond specific sectors, index funds and high-beta stocks to embrace two stocks he just plain likes.
One is Novo Nordisk (NYSE-NVO), a Danish health care company founded in 1925. It sells its pharmaceutical products in the U.S., Russia, Japan, China, India, Turkey and other European countries. “A solid earnings growth rate and attractive valuation make this stock an attractive foreign holding,” he says.
An attractive Canadian holding is Alimentation Couche-Tard (TSX-ATD.B), the convenience store chain that has moved heavily into the U.S. market, featuring unconventional fare such as fresh food, as well as many gas ‘n go stops.
A number of analysts seem to think this stock is fully valued, but this portfolio manager says its earnings growth suggests otherwise. He does recommend buying this one on a pullback to $18 (it’s at $18.70).
Once the Dow Jones brushes 11,500, it will be time to develop a strategy for a potential market meltdown, Mr. Richards tells his readers in Investor's Digest of Canada.
But that exit is still well down the road, he reckons. In the meantime, get ready to heat up your portfolio for winter.
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