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

NAFTA auto talks converging between the US and Canada. Positive comments from US Trade representative on NAFTA auto talks progress is seen as good news for companies like Linamar (LNR-T) and Magna (MG-T). Also positive for North American automakers in general, where uncertainty over trade between Mexico, Canada and the US was causing some concern in that sector.

No question, people are aging all around the world. Couple this with advances in medtech, pharmaceuticals and biotech while people grow wealthier, spending disproportionately more on healthcare. Altogether, healthcare looks
robust going forward. Pharma and drug spending are a political lightning rod, though, with the drug companies targeted before, but now the middlemen being targeted. Drug spending amounts to 10% of all healthcare expenses. Medical cannabis still hasn't entered his thesis; he needs to see more stability and history in these stocks, even though cannabis makes up a huge part of Canadian healthcare stocks.

Assessing FDA approval when evaluating healthcare stocks: Smaller companies, but also large, enjoy huge stock moves when they receive FDA approval, like AZN. He follows the trials of the large companies from an options standpoint. Moves can be 10-20%.

We may have more dislocation (volatility) going into April, but after that we will see 20% growth YOY in most U.S. stocks while global stocks remain strong. Altogether this will get us back on track. Also, the U.S. housing market is picking up for the first time in 10 years. Add to that U.S. companies bringing back back capital from overseas is like six Marshall Plans, like Microsoft and Apple, which will create stimulus. Europe and Asia are booming. Everything's good. Interest rates will creep higher. Diversify away from Canada. Global trade is still good. Any interest rate increases will be moderate and won't seriously punish equities. Trump may be loose-lipped though.

Market. He came into the year with a conservative frame of mind and more cash than usual. Valuations were too high at the start of the year but there have been good opportunities as volatility has gone up. In terms of FAANG stocks, he thinks they are hitting a wall in terms of what regulators will ignore. There is downside risk as new regulations are created, but he cannot yet tell how much. When asked which sectors he prefers, he said that his process is bottom-up, focused on individual stocks rather than sectors. However, the opportunities that have been most attractive this year have mainly been utilities and other stocks that people often think of as boring.

Canadian Banks. He doesn’t own any of the Canadian banks. He sees risk because of the level of consumer and mortgage debt. He doesn’t see attractive rates of return in the near future but if investors must hold Canadian banks, he would recommend a higher-quality bank such as the Royal or TD.

Volatility in the market. The tax package in the United States is raising concerns about inflation and rising interest rates. As the market transitions from a pairing of high growth and low inflation to its next stage, higher volatility is normal.

General Market Comment. The next rate hearing meeting will be a big one. Expectations are a 25 basis point rate hike and this is fully priced in the market. The question is what is the outlook -- hawkish or dovish? He is also watching Facebook closely. There were 50 million people who had a data breach. There is a zone of support around $165-$170 for the stock, if this news causes a breach of this level it would be a really bad sign that the market feels this is bad news and will impact earnings going forward. He is also concerned about China and the threat the US will put tariffs in place. He thinks Kudlow will be pro-tariff against China.

Canadian Bond ETFs. The current rate increases are still in the early cycle in the US and Canada will continue to lag behind. There will be some inflation pressures and bonds will sell off a bit. He expects US long bonds to yield 3.25% or higher, US 10 year 3% or higher. He does not like the yields here, he will wait a while. ZFL-T is the best ETF to play this, but be patient and wait for the yields to hit his targets.

Canadian Insurance Companies. He prefers the diversification an ETF offers rather than holding individual stocks. When yields are rising, the profitability of lifecos goes up. The next recession will likely cause interest rates to fall, even go negative, and this is a real risk to this sector. This is a trade – don’t get married to it.

Educational Segment. Richard Arms, technical expert passing. He was a legendary mentor for technicians. The Arms Index was designed by him. It looks at the number of stocks advancing and declining relative to their trading volume in a ratio. When the Index exceeds 1 it implies more selling volume. The current market action is telling us we are getting selling into strength. He applied candlestick patterns to trading volume -- the width of the candlestick shows significance based on volume. The sell-off of the S&P in early February indicated a potential reversal pattern. Now, the sell-offs on recent highs are confirming we are seeing more selling into the up-tick rather than buying into the pullbacks.

General Market Comment. He thinks the S&P500 has tried to regain lost ground, but it is stalling at a critical level. The Nasdaq made a new high recently, but there was a key reversal and it could be a false breakout. The TSX is having a bearish setup, unable to trade back above key resistance and is in a worse setup than the S&P500. The Canadian dollar is the symptom of all our problems. He thinks it will continue to weaken against the US dollar and could weaken another 3 cents.

TSX Composite Comment. He is worried in the short-term. There has been an over-supply built up in the market and there has been two key peaks, which we have not been able to trade above and that could signal a move lower. Weak consumer spending and a wide WCS discount for Canadian crude oil are all hurting the economy. He sees July 1 key in the NAFTA discussions as it is the Mexican general election.

MACD Comment. Moving average convergence divergence signal measures two moving averages against each other. He likes the 5-day and 34-day moving averages. When prices are going up, the 5-day rises faster, which can be a signal of a bull trend when it crosses above the 34-day average. As the price increase accelerates, it begins to be divergent to the 34-day average. When prices plateau, the 5-day average may flatten and converge with the 34-day average. It becomes ominous when the 5-day moves below the 34-day average as it could signal a trend reversal.

Should one invest in GICs and wait for the market to trend? He thinks if you can afford to lose a little bit of money, stay in stocks. No one knows the future, but he feels US investors may be settling into the political environment. However, if investors begin to pay more attention to changing political winds, it may signal a down turn in the market. The other sign post to watch is if central banks are raising interest rates too fast. If they are cautious and accommodative, this will be bullish. Finally, the economic data needs to be watched – recently it has been weaker.