Investor's Digest of Canada, MPL Communications Inc.133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846
Investors who follow seasonal trends know that the best-six- month strategy begins in late October or early November.
The first analysts to note that stocks tend to outperform from November to May were Americans Yale and Jeffrey Hirsch, who've been publishing the annual Stock Trader's Almanac since 1968.
Yet, the Hirsches, along with their Canadian counterparts, Don Vialoux and Brooke Thackray, sound a note of caution.
They say the six-month strategy doesn't mean that things will always be bullish between November and May. Nor will the worst six-month stretch necessarily be bearish every year.
For example, this past summer, as well as the worst six months of 2012, have been anything but bearish - at least for U.S. markets.
The problem that arises over the summer and fall is the tendency for markets to experience proportionately larger sell-offs - if and when one occurs.
Thus, as we noted in the Oct. 4 issue of the Digest, the problem with buying stocks in the fall is a geometric one - that is, the size of the sell-off. It's not an arithmetic problem; it doesn't pertain to the frequency of the sell-offs.
Nonetheless, now that we're re-entering the best-six-month period, you should consider using any cash you've held over the summer to buy good quality stocks and exchange-traded funds.
We've been doing our homework, and we've come up with some brand new positions for our equities portfolios.
You should take advantage of any volatility over the coming weeks to buy sector-specific ETFs, as well as stocks in the broad market. In the latter, avoid any index strategies that revolve around Canadian stocks. Instead, focus on those ETFs that are hitched to international or U.S. stock indexes.
For example, as a play on the broad S&P 500 Index, consider iShares S&P 500 Index Fund (CAD Hedged) (XSP-TSX, $19.41). This fund allows Canadian investors to participate in the index's returns, but without currency risks.
Of course, with any currency-hedged vehicle, you also lose out on any upside in that currency. So, if you want to own the S&P 500, as well as take advantage of currency movements, consider the SPDR S&P 500 index fund (SPY-NYSE, $169.36), the benchmark for funds in this space.
As mentioned in the Oct. 4th issue, we said investors would do well to add a position in a European exchange-traded fund. Here, we'd consider the iShares MSCI EMU Index (EZU-NYSE, $38.19).
Although Europe's risk profile is certainly higher than America's, it's also possible Europe's upside may be quite a bit higher, given a gradual recovery on the Continent.
As mentioned above, you can also focus on specific sectors. For example, U.S. banks now appear to offer better value than their Canadian counterparts. And the fall pullback in America's banking sector could give investors a good entry point.
To play the broad U.S. banking sector, consider the BMO Equal Weight U.S. Banks Hedged-to-CAD Index ETF (ZUB-TSX, $17.50). From a technical perspective, this fund is now testing its two-year trendline.
If you believe America will continue to ride the arc of economic recovery, U.S. banks are certain to benefit - and benefit in a big way.
But not all the best equity plays are outside the Great White North. Consider Canada's pipeline sector. It's now one of the best sectors in which to be.
Recently, we recommended Pembina Pipeline Corp. (PPL-TSX, $34). Since then, Pembina's shares have been steadily rising, notwithstanding stock market volatility.
You should also consider Keyera Corp. (KEY-TSX, $57.58), a Calgary-based pipeline operator that we've added to our portfolio as well. At four per cent, Keyera's yield is investor-friendly. And its recent pullback to its four-year trendline makes its current pricing attractive.
Pipelines in general are extending their reach throughout Canada. So, it's probably a good time to capitalize on solid long-term appreciation in their shares, as well as growth in their dividends.
Lastly, here are some special situation stocks that have recently caught our attention.
CAE Inc. (CAE-TSX, $11.18), a Quebec-based maker of flight simulation equipment, recently broke out of a long term base formation at just over $11 a share. Although CAE faces growing competition, it's still tops in its market. And over the long term, it should prove to be a winner.
Stock is small
Parkland Fuel Corp. (PKI-TSX, $18.33) is our smallest capitalized stock in the ValueTrend portfolio. But the company has a solid business, given that it's Canada's premier distributor of heating fuel.
Parkland also owns a few convenience stores and gas stations. With a great chart pattern, as well as a six per cent dividend yield, Parkland is now an attractive buy.
We also like the Bank of Hawaii Corp. (BOH-NYSE, $55.31), which has relatively predictable revenue from traditional banking business. Moreover, it operates in a region where nearly all its residential mortgages originate on the Hawaiian islands. And its dividend yield now tops three per cent.
Seasonally, we've entered a good phase for stocks. Now is the time to become fully invested in anticipation of strong markets ahead.
Investor's Digest of Canada, MPL Communications Inc.133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846