North American equity markets have come under pressure and volatility has increased.
The S&P/TSX Composite Index has declined nearly 5 per cent since closing at a record high on Jan. 30. The S&P 500 is down over 6 per cent from its record close set last month. Meanwhile, the Nasdaq Composite is in correction territory, falling more than 10 per cent from its record close.
Is there more pain ahead for investors?
CIBC’s chief market technician Sid Mokhtari believes so and says now is the time to be defensive. Mr. Mokhtari is someone to listen to given his proven track record.
Each month, he publishes a report with his Top 10 stock ideas and his disciplined process has consistently outperformed the broader index. He screens and selects stocks from the largest 100 members by market capitalization within the S&P/TSX Composite Index. In February, his basket of stock recommendations rallied 1.64 per cent compared to a 0.55 per cent loss for the S&P/TSX Composite Index. Year-to-date to Feb. 28, his portfolio of stock selections delivered a 5.09 per cent return, compared to a 2.69 per cent gain for the broader index. His stock selections also outperformed the S&P/TSX Composite Index in 2024, 2023 and 2022 by 5.8 per cent, 6.3 per cent and 2.7 per cent, respectively.
This month, his basket of stocks is defensively positioned. For March, his Top 10 stock ideas are: AltaGas (ALA-T), Boyd Group (BYD-T), Choice Properties REIT (CHP-UN-T), Fairfax Financial (FFH-T), George Weston (WN-T), Hydro One (H-T), Manulife (MFC-T), Parkland Corp. (PKI-T), Primaris REIT (PMZ-UN-T) and Waste Connections (WCN-T).
On Tuesday, The Globe and Mail spoke with Mr. Mokhtari and discussed his market outlook, his Top 10 best ideas list, and an ETF to own during this period of market volatility.
We’ve seen a significant decline in the growth and momentum stocks. Is the sell-off a buying opportunity for growth or momentum stocks, or would you expect to see a consolidation period once these stocks bottom?
I would say it comes down to what kind of a time frame an investor has. If we’re thinking longer term, generally, I think the backdrop for the U.S. market is still structurally and secularly bullish.
I’m of the view that this sell-off is not yet fully reached its point of capitulation or exhaustion. We still may have more downside risk for benchmark indices.
Risk is still on the rise for us. We see it in the VIX Index. We see it in the VXN. [Both are volatility indexes] We see it in the MOVE Index, which is the bond market volatility index, and we see it in the percentage of declines relative to advances - breadth has become much narrower and weaker than before.
So, if investors are thinking longer term, then it may be okay to look at this from a buy the dip perspective.
But, tactically speaking, we don’t think we have seen the capitulatory aspect or a trough aspect of the indicators for us to pound the table to buy into it yet.
Given your belief that we haven’t see a bottom yet for indices because we haven’t had market capitulation, where are the next key support levels for the S&P/TSX Composite Index?
I would say the 200-day moving average, which is currently at 23,900 - that’s our primary level of reference for support.
If we did breach the 200-day moving average during this time of market turbulence, where’s the next support level?
23,650 to potentially as low as 23,140, which are measured by Fibonacci retracements.
What does the trading volume suggest to you?
We’re not seeing a huge amount of volume conviction in the price action of equities, and that’s why we think we have not yet seen the ultimate flush or capitulatory price action in market internals. So, it may be reasonable to suggest that the recent shift in favour of defense over offence may still have more legs – investors may need more anti-beta exposure.
There’s something called the American Association of Individual Investors, AAII, survey. Sentiment has reached a very severe max threshold, which has historically been a contrarian positive. We’ve often seen that when that AAII survey reaches those max thresholds, it may last for a while before we see the ultimate low point as a contrarian buy - and that’s not the case yet.
Last week, the weekly AAII survey showed over 60 per cent of those surveyed had a bearish outlook on the stock market over the next six months. This high reading is very infrequent.
It can stay up there for some time so this could be one of those situations. It is a saving grace to see bearish readings having reached that reference high at this point. It’s the first step in the right direction from a contrarian perspective.
When we spoke last month, you noted that when President Trump imposed tariffs in 2018, the S&P/TSX Composite Index experienced a six-month decline of around 16 per cent and that no sector was immune. All 11 sectors realized losses over that six-month period. The technology, consumer discretionary and energy sectors experienced the greatest losses of 20 per cent or more. Are you expecting history to repeat itself?
I think if it doesn’t repeat, it tends to rhyme.
I’m of the view that the latest growth fears that have been reflected in our factor-analytics work are showing a weaker backdrop for cyclical sectors. Consumer discretionary and energy stocks typically stand out from a risk exposure perspective and are often the most affected ones. We’ve already seen a notable relative underperformance in the energy stocks, irrespective of their improving fundamentals and balance sheets. The market is still not giving a lot of value to the energy sector at this point. After all, the slippery slope trend of the oil commodity is not much to write home about.
Additionally, growth-oriented market leaders associated with the technology space are also losing a good chunk of their gains.
It is reasonable to suggest that market forces are shifting away from growthier sectors and leaning more toward defensive sectors with dividend yield exposure.
Speaking of which, your Top 10 investment ideas for March appears to have a defensive tilt with 50 per cent in the three industries: utilities, REITs and consumer staples. There are two utility stocks, one consumer staples stock, and two REITs.
We’re very process driven. And to your point, we’re seeing a positive relative strength conditions or emerging performance within the utilities, REITs, telcos and staples. For that reason, our exposure in those areas is rising. We want to make sure that we stick to our process and that’s definitely tilting us toward dividend yield, low volatility, and value by some measures.
Isn’t size one of your factors?
Yes. We do believe that having exposure to TSX 60 [large-cap stocks] from here onward is the best approach.
I do think an active style is better than a passive style, so investors should be focused on selecting the right stocks or sectors based on the relative strength. Generally speaking, buying SPDR (SPY-A) or XIU (XIU-T), I think that may not be the right approach for the next little while as I think an active style will be better rewarded than passive style.
What stocks on this month’s Top 10 list appear most attractive to you?
Choice Properties (CHP-UN-T). It’s buying a REIT that is like a bond, that’s how comfortable I feel about the metrics of Choice Properties. It scores well for us and has entered our improving quad. It has a structural longer-term uptrend, and it has produced buy signals in our matrix indicators. We like it fundamentally. The units are trading at about a 9 per cent discount to consensus on an NAV [net asset value] basis. And it has a healthy 5.5 per cent yield.
What’s your target for it?
On a measured move we are gauging to be able to get toward $14.60 to as high as $14.90 and if this call for income and bond proxies alike persists then we wouldn’t be surprised to see Choice Properties printing at a new price discovery high. In other words, to be able to push to a higher high level.
On a fundamental basis, I know our team that covers the REIT has a price target of $15.50, which lines up with our work.
Any other securities on your Top 10 list that stand out to you?
The other one that I also like, which is cheap and scores well for us, is Fairfax (FFH-T). It’s quite inexpensive relative to his peers in terms of valuation and it’s also showing quite well in our work. And it does have a catalyst as it’s a name that may be added to the TSX 60 as part of index rebalancing. So, it not only scores well for its fundamentals as well as our technical matrix ranking, but it also has a catalyst.
This month, there aren’t any bank stocks in your Top 10 list. Why is that?
ZEB (ZEB-T), which is an equal weight basket of banks in Canada, has become somewhat weaker based on relative performance. If we look at our quads for the TSX sectors on an equal weight basis, we find that ZEB has fallen into our consolidation quad.
Are you surprised by the resiliency of the Canadian dollar relative to the U.S. dollar given the tariff announcements? The Canadian dollar is holding above the 68 cents technical support level that you correctly identified when we spoke at the start of the year.
I think there was a lot of prepositioning for the Canadian dollar that took place ahead of the first announcement of the tariffs that we had back in early February. There was a very big flush at that point towards 68 cents and it did manage to mean revert some element of relief.
Now, I do think that downtrend forces in the Canadian dollar will persist. We will go back and retest 68 cents and, in time, we should also be able to push for a lower low condition for the Canadian dollar.
And where is that lower low?
In our opinion, the dollar will get weaker than 68 cents.
If we’re correct in our longer-term picture, we think the risk is below 68 cents, it’s closer to 65 cents to as low as 62 cents, technically speaking.
U.S. tariffs imposed on Canada has led many consumers to shift their buying habits to domestic goods. When you deal with clients are you seeing Canadian investors shift their focus away from investing in U.S. companies and U.S. ETFs?
No, it’s completely contrary to that view. We see a lot of investors focus on having more U.S. investment exposure.
Our structured product team at CIBC recently increased the number of Canadian Depositary Receipts – a suite of U.S. and European equities offered in Canadian dollar terms. We are certainly seeing a growing demand for CDRs, and we already have a matrix-process that ranks the underlying equities for those CDRs. My team is going to help our clients’ geography exposure from a trend-following and diversification perspective.
Any anything else that we didn’t discuss that you want to highlight?
Internals have become weaker and weaker and it’s very reasonable to assume that risk assets are probably going to stay stagnant if not pushed lower. So, it’s prudent to be more defensively biased and with an element of, I call it, a yield backdrop.
An ETF called CDZ (CDZ-T) that tracks the S&P/TSX Canadian Dividend Aristocrats Index is beginning to turn notably positively to the upside. I think that’s a very good ETF to get exposure to. It’s a good product to be to be engaged with over the over the course of the next few months.
This Q&A has been edited for brevity and clarity.