Canadian small caps: trading strategy

September 18, 20184 Comments

I have written about stocks that like to trade in sideways patterns in this blog before. For example, here and here.

As I have noted on those two blogs – and others – a stock or sector that is trading sideways likey remains in that pattern until it breaks out – either up or down. Once a stock or sector is confirmed as a breakout candidate (recall that I use a rule of minimum 3 days or longer to confirm a breakout) – it can be considered something to hold for a potential new uptrend – or sold (or sold short) for a potential new downtrend.

Recently, I noted that the Canadian small capped stocks ETF run by iShares (XCS, above) is trading in such a pattern. This is interesting, given that the US Russell small capped index – as represented by the iShares IWM ETF, has been in an uptrend. Yes, I know, IWM pulled back a bit recently, but its major trend has not yet ended.

The Canadian small caps have never really followed the pattern of the Russell 2000. That’s because the Russell 2000’s major components lie within the Healthcare, Cyclical, Technology and Financial sectors.

Meanwhile, our Canadian ETF is concentrated into Materials, Energy, Industrials and Real Estate. In fact, the Materials and Energy small caps make up about half of the Canadian ETF (!)—with another 13% going to Industrials and 11% in Real Estate stocks. The US small capped index is far greater in diversification.

So, beyond looking at the chart of XCS, we need to understand what the seasonal patterns, and the trading patterns are for these top 4 Canadian holdings.

Briefly: Materials and Industrials are seasonally strong over the winter.

Canadian Industrials – illustrated via BMO’s ZIN ETF are trending up.

Materials, as illustrated by the iShares Materials ETF, are trading very sideways – and are near the bottom of the pattern (NAFTA?).

Canadian energy stocks are trading sideways, and are nearing the bottom of their range – as illustrated by the iShares XEG ETF. Energy is seasonally best from January to the spring.

There is no real estate ETF for Canadian markets – beyond a number of REIT – dedicated ETF’s. I note that Tricon is one of the top holding in the Canadian Small Capped ETF, so I posted its chart below. It’s now heading south after hitting the top of its sideways trading range. Seasonality is kind of shaky for the sector, but I note that on the US side it has better performance in the summer –so take that for what it is worth.


Given that almost 2/3rds of the Canadian small capped ETF is comprised of Energy, Industrials and Materials – and these can all do well of the winter – this may help the ETF perform well after the Sept-October “danger zone” ends. I’m going to keep an eye on this ETF for possible entry in a month or two.


Keith on BNN next Wednesday Sept. 26th at 6:00pm


  • Two comments, one investment and one not. .
    I have noticed that a number of stocks I have been watching have been doing well but with a downtrend on volume. The S&P 500 is shows that but TSX does not.
    You and I have talked cycling before so I thought you might be interested. I just bought an ebike. At my age (81) I am the slowest just too often climbing hills while group riding (but I always make the hills; I never walk). And riding 65 to 75 km at 20 to 22 km average leaves me pretty bonked.

    • Fred–slowing volume can be a seasonal thing – eg volume slows down on most NA indices during the summer. But if it is slowing on an individual stock, it can be a red flag. In and of itself it is NOT a sell signal, but it is certainly showing that there is less interest in the stock. If the stock is growing in price, the volume may slow due to that higher price. So you might want to put the cumulative Accumulation Distribution line–available on — on the individual stock charts, and look at a weekly 5+ year picture. If the AD line is rising despite lower volume, its ok–it shows that moneyflow is still positive. Here is the link to an explanation:
      You will note that I put this indicator on many charts that I post here.
      Re the e-bike–yeah, I think they are a wonderful way for new people and people like yourself who are getting a bit older (just a bit!) to get and stay on a bike. Good stuff!

  • Hi Keith, this is a question about a recent market development regarding Tech stocks. The Tech sector (XLK?) composition is changing with some of the FANG’s being moved into a new Communications sector. Can you please comment on what this change is exactly, and how the ETF composition for Tech will change?

    Also, will this change affect the stock composition of the Nasdaq or the S&P 500? I trade both the Nasdaq and the S&P and am wanting to know if the stock listings for each will remain the same or will change.

    Thank you,

    • Hi Dale
      I’ve got to do some homework on this, but it has given me inspiration to do a blog-I’ll research it and write an article in the coming 1-2 weeks. Thanks for the idea and I’ll present what I learn, and how it might impact trading on the chart data given a new mix or weighting structure (an important factor)


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