View from Toronto: Energy, Gold, Defensive Sectors Could Outperform

10/31/2017 3:36 pm EST


Ziad Jasani

Managing Director and Partner, Independent Investor Institute

The setup is positive for Energy (XEG), Defensive Sectors and potentially Gold Producers (XGD). Negative for Financials (XFN, ZEB), Industrials (ZIN) and Material Stocks (ex-Gold Producers). Get your stop-losses in, writes Ziad Jasani of the Independent Investor Institute.

How did we get here over the past week? Q3 U.S. GDP beats forecast, Q3 Technology earnings create a buying bonanza, Abe-Nomics version 2.0 is in place, and Super-Mario-Draghi proves dovish even when tapering.

Trump leans towards Powell (Dove) as the next Fed-Head, and the House and Senate play nice on passing the U.S. budget paving the path for Trump’s tax-reform = new all-time-highs and bullish price momentum has picked up (short-term).

We did get the beginnings of a draw-down last week (-1% to -3%) but the aforementioned catalysts subverted further shaking of Mr. Market’s tree.

Yet, we did find some low hanging fruit to pick into last week’s end: XBI, XPH, XLU, XLRE, VNQ, XLY, XST-T, XRE-T, BCE-T, ZUT-T, GLD, SLV, GDX, TLT, LQD, XBB-T, XLE, RYE, XEG-T, ZEO-T with consideration to EFA, FEZ & EEM.

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There is no behavioral value proposition to invest in the S&P 500 at current prices, as we anticipate a test of the top-end of the trend channel (~2,600) followed by an abrupt move down to the bottom of the channel (~2,510 roughly -3.5%) next 2wks.

As traders we can play the continued up-side within the S&P 500 Index (SPX) momentum this week using macro-congruent spaces.

The macro-variables of note are: an expected softening of the USD ~0.5% to ~1% and U.S. Treasury yields (10 Year Note <2.4%) = Support for Gold/Silver/GDX, Oil (USO)/Energy (XLE) and Defensive Sectors (XLU, XLP, XLRE, VNQ, IYZ).

But under-performance from Financials (XLF), Materials (XLB, XME), Industrials (XLI).

While the late-comers to the Technology party (XLK, IYW, QQQ) come into play early in the week, we also have a pocket of upside on Healthcare (XBI, XPH) and Consumer Discretionaries (XLY).

We’re looking to add to all the aforementioned, early in the week and potentially open positions in XLP & IYZ once we have confirmation of a swing-high on Treasury yields and a mildly weaker USD, with Equities pointed north.

As investors, we’re getting our stops in on Financials, Industrials, Materials and Technology holdings waiting for a draw-down before we play the next macro-market-swing-low.

The TSX has broken-out to new all-time-highs (15,964), as Oil turns up on the Saudis calling for further production cut extensions, Q3 U.S. GDP beats forecast implying demand increases, and as the TSX rides the Q3 earnings wave higher south side of the border.

But the wave is likely to crest over the next two weeks of trade.

Why? The TSX remains highly over-bought (RSI), and dislocated and expensive on absolute annual routines (and vs. the S&P 500 and the World-ACWI), which are more likely to dissuade institutional investors from making big bets on Canada into year’s end.

Financials (XFN), Energy (XEG), Industrials (ZIN) and Material Stocks (ex-Gold Producers), roughly ~70% of the TSX’s market-cap-weight, is currently dislocated and expensive on annual absolute and relative routines, which in and of itself is an argument to lower Canada-related holdings for global funds.

Over the next two weeks, we can project the TSX up towards 16,060 or +0.66% higher.

We are likely to see Energy (XEG), Gold Producers (XGD) and Defensive Sectors (XST, XRE, ZUT, Telecom) outperform as we inch higher over the next week.

Why? Oil is expensive on all trading routines but positive momentum towards $55 is now in place as Oil has broken above resistance of $53.75-$52.50, and Bond yields are tilted down (short-term) as Poloz skipped the rate hike and U.S. Treasury yields are setting up for swing-highs, which equate to under-performance from Financials, and a mildly weaker USD that is likely to support the price of Gold/Silver.

From a trader’s perspective, we picked up long-side trades on XEG, ZEO, Gold, XST, XRE, ZUT and BCE to close off last week, and ride the bullish momentum up with macro-congruent assets.

From an investor’s perspective, we are highly cautious with our Financials (XFN, ZEB), Industrials (ZIN) and Material Stocks (ex-Gold Producers).

The setup into the week of Oct. 30 is positive for Energy (XEG), Defensive Sectors and potentially Gold Producers (XGD), but negative for Financials (XFN, ZEB), Industrials (ZIN) and Material Stocks (ex-Gold Producers).

Get your stop-losses in on at least one tranche of your longer-term holdings as the laws of physics continue to exist despite last week’s break-out!

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Watch my video with more commentary here

Watch my analytics workshop video recorded Oct. 30 here

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Join experts at the Independent Investors Institute for an online Deep Dive on Equities, Bonds, Commodities & Currencies on Saturday December 2 at 12 pm (ET): CLICK HERE TO REGISTER

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