CIBCMay 31, 2022 Industry Update
The Most Dominant Trend - Volatility
CDN Matrix Portfolio – June 2022
Our Conclusion
May lived up to its reputation and offered challenges, albeit staging a rally
attempt into month-end. In our opinion, the recent sharp bounce off the lows
in equity indices is a tactical deep oversold mean-reversion to what has
proved to be a down-cycle. There is no real evidence of any technical
alteration to volatility factors that show an up-trending backdrop - VIX, VXN,
and MOVE indices. Additionally, we have often published that the U.S. mid-
term election years tend to buoy volatility factors – historical data shows that
the second year has generally been the weakest for U.S. equities in a
presidential cycle, with Q4 often being the best part of the year (back-end
loaded). History doesn’t repeat itself, but it often rhymes (Mark Twain). SPX
historical median returns (since the ‘40s) shows a repetitive pattern when
averaged by the U.S. presidential term – year 1 (+13%), year 2 or mid-terms
(+4%), year 3 (+17%), and year 4 (+7%). In other words, whichever way we
put it together, we find ourselves advocating a more defensive bias
throughout the current down-cycle. The U.S. midterm election, oil price
shock and the global Feds’ rate-hike cycle are likely to keep an upward
pressure in volatility factors.
Key Points
The rate-of-change (1-3-9 month) of technical internals for equity indices,
measured by breadth factors, is still negatively skewed. The Arms index, that
often records distribution/accumulation forces, shows distribution. Volatility
indicators continue to trend in an orderly rising format. Market breadth is
quite narrow with the Energy and Utility GICS sectors ranking the highest
when measured by relative-strength factors. On that note, it would be
reasonable to suggest that the Energy sector is currently the most
overbought and susceptible to mean-reversion risk (median -13.7%
retracement potential to 50-day average). It also merits highlighting that,
using 30 years of historical data, the Energy sector is entering a weaker
seasonality period average (June & July).
On the portfolio side, our defensive tilt in May helped in our favor and
returned +0.40%, reflecting +56 bps of Alpha. Year-to-date, our process has
returned +2.93% (+526 bps of Alpha). Comparatively in May, TSX returned
-0.16% and SPX returned +0.01%.
Similar to May, our breadth table for the month of June is also narrow with
heavy concentration in Energy and Utilities. We have opted to use relative-
strength factors and our TSM scores to build our selection for the month of
June.
The following list represents our selection for the month of June: AltaGas
(ALA), Capital Power (CPX), Chartwell Retirement Residences (CSH-U),
Cogeco Communications (CCA), Alimentation Couche-Tard (ATD),
Dollarama (DOL), Fairfax Financial (FFH), Hydro One (H), Intact Financial
(IFC), and Keyera (KEY)