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