A Comment -- General Comments From an Expert (A Commentary)

His business partner is the fundamental guy. Their firm is driven by fundamentals, but at the end of the day you don't fight the tape. They won't buy a company that doesn't have a decent chance of earnings growth or a catalyst for it to go higher. Must have a decent balance sheet. Also doesn't like overvalued stocks. His firm's called ValueTrend for a reason.

Fundamental analysis will often steer him away from plays that look good technically.

Yes, the momentum indicators may be slightly different. RSI on a daily chart is 14 days, which is a big difference from RSI of 14 weeks on a weekly chart. He tends to use weekly charts for most of his work, relying on the daily charts to refine his entry or exit points. 95% of his thought allocation is to the weekly charts.

Likes it. If he remembers correctly, gold's seasonality is around the end of the year, but then has a more positive summer season from July-Nov/Dec. You can see how the latter part of the year's been very good for gold. Glad to see the pullback, as it provides an opportunity and takes out the overbought position. Might go sideways for a while.

Typically, but best seasonal trends come when September and October are inherently weak. We didn't see that. In the case of an election year, there's some relief around the post-election period and we've already seen a lot of that. 

When you listen to what's coming from the street, that they're going to tighten up their year-end targets, generally they're moving a bit higher. No one was forecasting a 6000 S&P target 3-12 months ago. Markets have surprised to the upside, and the street is playing catchup.

The question is, how much more is left? An awful lot of positives are priced into the market, but as long as there are no negatives there's no reason for people to sell and run. 

We pretty well know who Trump's cabinet's going to be, despite some approvals needed by the Senate. Absent any dramatic moves, the market's quite satisfied with the slate overall. Especially now that we know who's in Treasury.

Powell and the Fed think they have inflation under control, but the data will present differently. Stock market's at all-time highs, so why are they cutting rates? Yeah, inflation's come down, but the last few inflation prints are up. If PCE comes in at the core a little hotter than expected, those are the kinds of things that will upset the apple cart and prompt investors to want to take a bit off the table.

Managing inflation certainly doesn't mean cutting rates, but the Fed doesn't want to raise rates either. Economic weakness will define when the next big period of market unrest is going to come.

More pressure coming on the yield curve side. He's a bit confused as to why, but thinks it might be short-covering driving rates coming off their worst levels. There's a high probability we'll test the extremes of what we've seen in the last year or two. This means the long end of the curve would get a lot closer to 5% than it is today before things settle in.

Next quarterly funding announcement, which is where the Treasury tells us what the composition is, is going to be headed by Bessent instead of Yellen. We'll see if there's a change in policy with the issuance between bills and coupons; with more coupons, there's far more normalization of the process. More coupons mean longer duration and more competition with equities and other assets. Higher issuance of bills, as under Yellen, makes financial conditions easier. 

When you go for high-dividend payers in Canada you get the banks, insurance companies, pipelines, and some of the energy names. Yield will be a bit over 4%. A nice way to play.

Vanguard, iShares, and BMO all have offerings, but they all do it slightly differently. BMO has a covered call version, ZWC. There's ZDV, XDV, VDY. Take a look at them all and see what you like. All have different weights to the components. They're all equally good.

Trump effect

Now that we know who Trump's troops are, Larry's gone back to markets of 2017-18 to see what was similar or different. He pulled up a chart of the S&P 500. The rally for most of 2017 was mainly about the excitement of tax cuts coming, making companies more profitable. When it actually happened, markets went a bit higher, but then 2018 was pretty much a down year for equities. A lot related to tax cuts was already priced in in 2017.

What can we expect now? Reality is they're just talking about extending what Trump already put in place. So not much of anything new is going to happen. Bessent is a fiscal conservative. Doesn't think additional corporate and personal taxes are going to get through Congress, even given the Republican sweep. This time around there are a lot of fiscal challenges that there weren't before with the debt and the deficit. The more he cuts taxes, the more financing they need for deficits. The bond market won't like that, and eventually equity markets will care.

Not sure we can say that 2017, the first year of the presidential cycle, will be repeated in 2025. Far more likely to be a very choppy market like 2018. Fewer regulations will be great, but not much to look forward to beyond that.

As for Fed policy and inflation, we've had the ramp up in markets. Because of that, growth and inflation will be stronger than expected next year. This will limit the market's ability to get tailwinds from easier monetary policy. Harder for the Fed to cut rates. 

2025 will be a lot more like 2018 than 2017. Choppy and volatile.

Tax Loss Selling:

2024 has been a very solid year for the equity markets due to a favourable macro backdrop of declining interest rates, a slowdown in inflation, and especially after the election results, where the markets expect Trump’s policies of putting America first can help corporate earnings over the next few years. As a result, not only broad market indices but risky asset classes, such as small-cap, high-growth stocks, cryptocurrencies, etc., have performed strongly and hit new record highs.

That being said, despite a record year where both the S&P 500 and TSX achieved double-digit returns, not all sectors performed well, and there are some corners of the market that have been under pressure. These are where investors can take advantage of their temporary “losers” by claiming capital losses for tax-loss selling, which could offset capital gains.

This strategy can be accomplished by simply selling a temporary losing name in a non-registered account, which could then be used to offset the net capital gains tax investors have on their investments. The unused amount of capital losses can be used from up to three years in the past or carried forward indefinitely. After 30 days of the sale, these holdings can be bought back if investors believe in the long-term fundamentals of these companies.

Although writing off good companies based on one year of bad performance could become a regret for many investors, some of these names that have been under pressure may continue to see underperformance over the long-term. During a bull market cycle, we think investors should respect the wisdom of the crowd. Therefore, investors need to evaluate these names for future reinvestment on a case-by-case basis.
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Everybody gets enthusiastic about something, whether it's a particular stock or a type of trade, and then it unwinds. There's an ebb and a flow. We haven't seen that yet, but there's definitely a divergence. If you follow technical analysis, you may know about Dow Theory and the differences between Industrials and Transportation.

If we look at divergences between different markets, such as US versus international, US is up almost 30% and the others are up 5-10%. The S&P 500 is doing really well. There's even an index with the top 10 from the S&P, and it's up 10% over the base index. That divergence is focused on a few stocks, with NVDA being a key one that everyone's talking about all the time.

He can explain this using technical analysis, which looks for trends and reversals. Right now, we're in a positive trend, and it's a positive trend with a reversal in October 2023. If you're not making 20-30% from then till now, you may want to reevaluate.

It's been a great market, there's no indication of a reversal yet. Technical analysts wait for a reversal before they jump; they don't say to sell just because the markets are the highest they've ever been. If you look at when markets have been high in the past, they usually go higher.

Depends on how it looks. Looking at the reversal of 24 March 2020, there are some times when there are sharp reversals or recoveries and a ton of volatility. Right now what he's looking for is a flaming out, lower momentum. We've already seen lower momentum in that buying isn't as steep, the prices don't go up as fast (still going up, but without the same acceleration).

This is the beginning of an indicator, but doesn't necessarily mean there's going to be a turnaround. Many times in the past, we've seen the setup but the market continues higher.

Banks in general are entering a normal level. Concerns about high interest rates and defaults are mostly in the past. Banks are good to hold here if you want some dividend-paying stocks. 

A good strategy would be to hold an ETF with equal-weight banks, such as the ZEB.

Notable Companies:

The criteria below reflect Canadian companies that have had share prices under pressure since the beginning of this year, depreciating at least by 15%, while the momentum of the underlying businesses continues to be strong, growing by at least by 8% on average in the last three years.

Premium Brands Holdings Corporation (PBH): PBH has been held in our Balanced Model Portfolio for some time. Over the last few years, the company has been in an investment cycle to drive growth going forward. However, PBH has recently seen weakness in sales growth, which dropped to a low single-digits growth primarily due to a weak consumer spending environment. Consequently, PBH’s valuation multiples contracted, which was the major reason for the underperformance. We continue to believe PBH is a high-quality consumer staples name that is experiencing short-term challenges. If PBH can manage to accelerate its topline growth, the stock can see a multiple re-rate from here.

Algonquin Power & Utilities Corp. (AQN): AQN has been one of the favourite dividend names in Canada until recent years when the company mismanaged its leverage levels. AQN has experienced negative free cash flow over the last few years while continuing to invest heavily in capital expenditures. Consequently, its debt level reached an unsustainable level of 7.8x net debt/EBITDA, which is much higher than peers and its historical averages. We don’t think investors should try to catch the bottom in AQN at any price until the company manages to reduce its debt levels to conservative levels. 

BRP Inc (DOO): DOO used to be one of the names we own in our Growth Model Portfolio. However, we recently downgraded the company and sold the entire position in our Model Portfolio due to concerns that the duration of the industry downturn cycle, as well as the timing of the recovery, is highly uncertain and may take a long time to recover. Although DOO went through similar cycles and came out strong in the past, we think the current market environment offers the chance to acquire a stake in businesses with strong momentum, which in general, has a much higher chance of doing well relative to turnaround situations.
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