The metals and mining sector typically outperforms from November 19th to May 5th. Last year this sector produced a 61% return. Recently it has been trading in a rising channel and has pulled back to mid-channel. Within the seasonal period of strength the materials sector can have a short period of strength at the end of December and then “soften” in the first week or two of January. Investors should consider adding this sector to their portfolio before its next run in January.

The period of seasonal strength for platinum is from January 1st to May 31st. The primary driver for this period of seasonal strength is the auto industry ordering platinum for catalytic converters and investors optimistically anticipating increased car sales at the beginning of the year. Last year platinum increased 29% during its seasonally strong period. Unlike gold, platinum is still well below its high set in 2008. Platinum has been increasing and has recently broken out of its trading channel, which is a positive indication.

Platinum is shaping up to be a good opportunity for the end of the year/beginning of the next year.

Large companies (large caps) have been outperforming in the stock market recently, but that might all change very shortly. Small companies (small caps) have on average outperformed from December 19th to March 7th. From 1979/80 to 2008/09, the Russell 2000, the venerable index of small companies in the stock market, has produced a return of 5.4% during its seasonally strong period. This compares with a return of 2.1% for the Russell 1000 (large cap index) during the same time period.

The Small Cap Effect is a modified January Effect strategy, which is one of the most researched seasonal anomalies in the stock market. This traditional strategy is based upon small companies outperforming in the month of January because of tax loss selling in December.

The premise of this strategy is that investors sell their small caps in December to generate losses in order to offset any capital gains that they created during the year. Investors are more likely to sell their small companies that are trading at a loss, rather than their large companies
because they typically see their large companies as longterm holdings. The net result is small company stocks are often beaten down in price and end up representing good value for an astute investor.

This strategy has worked well, but the entry date has shifted from December 31st to December 19th. The shift has been caused by the popularity of the strategy. As more and more investors have tried to capitalize on this strategy, the date has shifted. Seasonal investors take advantage of the “earlier” January Effect by getting into the sector before the other investors who are still operating under the old paradigm of the trade starting at the beginning of January.

In the next few days, I will write the highlights of approaching seasonal opportunities for investors.

Canadian financial stocks typically start their outperformance towards the end of October. Canadian banks have a year end of October 31st and they have often announced dividend increases at this time and forecasted positive results for the next year. In anticipation of positive announcements at the end of November, investors tend to increase their holdings in November.

So far this year, after positive announcements by most of the large banks, the sector has performed in a lackadaisical fashion. Despite the sector being in its period of seasonal strength it is not expected to dramatically outperform the market. As a result, it is not substantially overweighted in the HAC portfolio.

There maybe a pickup for Canadian banks after the American banks “prove” themselves. This is what took place last year. As it is the American financial sector that lead the market into its steep decline, investors will be looking for signs of change mid-January during the release of bank’s earnings. It is possible that the sector might pickup early if there is a expectation of strong earnings. Nevertheless, investors, like last year, will be hesitant to take a large position in Canadian banks until the sentiment for American banks becomes more positive.

The consumer discretionary sector has been performing as expected as it is outperforming the consumer staples sector. During the favourable six months from the end of October to the beginning of May the discretionary sector is the preferred sector. This year the consumer discretionary sector has been outperforming the consumer staples sector, as expected.

The agriculture sector, represented in the fund by the holding MOO, Market Vectors – Agribusiness ETF, has performed extremely well. On a seasonal basis the agriculture sector usually outperforms from August to December. This year the sector has performed particularly well as grains have benefited from the falling U.S. dollar, fertilizer stocks have benefited from farmers no longer on the brink of bankruptcy needing to apply fertilizer and increasing farm equipment sales.

From a technical perspective the sector has had a breakout and is expected to continue to do well. From a seasonal perspective the sector finishes its period of strength at the end of the month and investors should consider reducing or exiting their positions.