The foundation for successful portfolio management is adhering to a disciplined investment process.
Sid Mokhtari, chief market technician at CIBC Capital Markets.Supplied
The Globe and Mail recently spoke with Sid Mokhtari, chief market technician at CIBC Capital Markets, about his matrix process that has a strong performance track record. Year-to-date to Sept. 30, this process has delivered a 21.9 per cent return, surpassing the S&P/TSX Composite Index’s 14.5 per cent.
Each month, Mr. Mokhtari publishes a Top 10 ideas list, selecting stocks from the largest 100 members by market capitalization within the Composite Index. For October, the recommendations are: Bank of Nova Scotia BNS-T, Capital Power CPX-T, Capstone Copper CS-T, Cargojet CJT-T, Colliers International CIGI-T, Granite REIT GRT-UN-T, Power Corp. of Canada POW-T, Shopify SHOP-T, West Fraser Timber WFG-T, and WSP Global WSP-T.
During our discussion, Mr. Mokhtari discussed his stock market outlook along with potential buying opportunities.
To start, could you briefly explain your stock screening process?
We have a matrix of variables that scans for certain criteria and measures the rate of change of those variables within those predefined criteria. The process, later, adjusts every name for seasonality. We then identify the pool of names that may be clustered within the TSX sectors that are showing better breadth conditions.
In other words, we are scanning for names that may be part of an ongoing or developing theme such as fund flows, emerging or established narratives, or simply accelerating uptrend forces. After all, momentum is one of the strongest factors in generating alpha.
And then we build a pool of stocks that rank well in our matrix-process.
The reason, in recent weeks, we have favoured dividend yield, low vol as well as value areas is because we see financials, REITs and utilities showing breadth that is running at about over 80 per cent and that’s a good thing – broadening and the clustering effects of an ongoing theme have helped bring about positive flows in those sectors. Breadth expansion is a sign of a healthy market or a sector on a smaller scale.
Is there a certain environment where your screening process has the greatest predictability and reliability?
Trending environments, especially in this secular bull market that we’ve been in over the past few years.
But I would say even in a non-trending environment, we tend to outperform. The reason being is the fact that the relative strength factors will kick in and keep you at a better level. Absolute you may go under, but your relative performance keeps you above the water against your peers and against others on the Street.
You have seven different styles that you screen: low volatility, growth, momentum, value dividend, yield, quality and size. What styles are currently leaders and which ones are improving?
I would say that we’re still seeing dividend yield, value, quality and low vol in our leading quad. With that in mind, we are also seeing GARP [growth at a reasonable price], which is an element of growth and momentum, and other momentum factors coming into our improving quad. It’s because the market is broadening out and you’re seeing a lot more participation in equities performance.
What are your targets for the S&P/TSX Composite Index and the S&P 500 Index?
Upside for the TSX is close to 25,700.
And then for the SPX, I think we may be able to have an element of retracement to the downside, call it a corrective phase. We assume, given the historical backdrop of seasonality as well as election years, post November we should be able to resume an uptrend force towards 5,800 to as high as 6,000.
I’m still very positively skewed for the market internals because we’re not seeing anything that is showing any distress, any detrending.
On a relative basis, we are favouring the TSX index.
What is the timeframe for your TSX target of 25,700?
We’re calculating that to be on a three-month to a nine-month basis.
Energy that has been stuck in the low end of our baskets, if energy begins to participate on the upside, if the energy sector kicks in, by year end the TSX may be near our target of 25,000, and higher into the first half of next year, closer to 25,700.
And your target range of 5,800 to 6,000 for the S&P 500 Index, is that also over a three to nine-month period?
Yes, I would not be surprised to see that those levels validated by year end as well.
You mentioned in the U.S. there is an element of risk where we could see a pullback.
That’s correct. We are measuring a potential retracement because by historical measures, when September is as strong as we’ve had, the odds of repeatability drops to about 50/50.
We don’t see a major drawdown, but we do see risk of a normalized correction, if not in October, potentially in November. But we do think that should be another big buy opportunity just given how strong breadth of the market is. Trends never go into a disarray format when breadth is this strong.
When you say a “normalized correction”, what are we talking about in terms of downside risk?
By historical measures, a normalized correction for the SPX is 4 per cent to 7 per cent.
Of your Top 10 stock best ideas for October, which ones stand out?
The one that is standing out for us is West Fraser Timber. It looks pretty good on the back of rate cuts. Lumber and the broader cyclical commodities are in the bottoming format, ex-energy. So that’s one that stands out for us.
The other one, which has been a laggard within the REIT space, is Granite REIT. And REITs generally do well between the fourth quarter all the way into the RRSP season.
The Bank of Nova Scotia is on your Top 10 list. How do the other Canadian banks rank?
I would say CIBC CM-T is the number one stock in terms of the process we run, then it goes to Royal Bank RY-T and National Bank NA-T, then the Bank of Nova Scotia.
We have noticed that National’s ranking, its delta, is sharply coming down and we’re seeing a sharp improving delta in the ranking of the Bank of Nova Scotia. The Bank of Nova Scotia is a name that has lagged within a sector that is showing strong relative performance and it has a dividend that is paying quite nicely. It is a dividend yield environment that we’re in as well.
If other banks stocks have higher rankings, why aren’t they included on your Top 10 best ideas list?
The delta in the ranking is very important. We want to pick names that are not in a very stretched fashion of the trend. You want to own names that are emerging from the improving quad to the leading quad and Bank of Nova Scotia is in my improving quad relative to National Bank, Royal Bank and CIBC that are in our leading quad. The Bank of Nova Scotia is rapidly picking up delta in our ranking space.
Please explain what you mean by delta for readers who may not be familiar with that term.
So, delta in our work is the rate of change of any stock’s rank today relative to its previous month rank. When a stock rank has a positive delta, especially one with a double-digit delta, we pay closer attention to its factors. As an example, The Bank of Nova Scotia has a double-digit delta in our ranking order, which means it has experienced a lot of positive rate of change in its factors in order to force its rank to come up in the past month. Through our own work, we have learned that a double-digit delta is often associated with a shift in the underlying trend posture; it merits to pay closer attention.
Why are gold stocks not on your Top 10 list?
We had them for quite some time. We are seeing a softer seasonality. We are seeing a stalling format. They’re fine. But if you look at our ranking process, other things are coming up.
How about how about oil stocks? How do they rank?
In our matrix process, the energy sector is one of the weakest sectors from a breadth perspective.
The only names that are coming up are the midstream stocks and pipelines, Enbridge ENB-T, TC Energy TRP-T, Pembina Pipeline PPL-T, Gibson Energy GEI-T, and Keyera KEY-T. That makes sense because of the dividend yield narrative.
Is there a commodity that is looking interesting to you?
Copper has certainly reversed its course. We believe the economic stimulus measures taken by China is likely to have a trickle effect for a lot of commodities, copper being number one on that front. And we’re already seeing that with Ivanhoe Mines IVN-T or Capstone Copper CS-T, which is in our Top 10 basket, they are showing positive absolute and relative performance in our process.
Any stock or stocks where further price weakness arising from tax-loss selling would represent a potential buying opportunity?
Nutrien NTR-T would be one of those stocks because it’s a very deeply oversold name and may be susceptible to tax-loss selling.
To your point, it would not be a bad idea to use the tax-loss selling in some of the TSX Index members, Nutrien, Parkland Fuel PKI-T or Magna MG-T, as opportunistic buys perhaps.
We don’t have a lot of tax-loss candidates this year. Many of the TSX Index members have worked in 2024.
Broadly speaking, what are your overall thoughts on U.S. megacap stocks?
If there is a cyclical rotation that may be taking hold, in our opinion, you probably want to assume those megacap stocks should pause.
I don’t see a major detrending bias for them, because I still think the narrative of quality and large cap leadership is still the right market call. And not to mention given their weightings in the S&P 500, I think that the U.S. megacaps need to be able to follow through in order to carry the Index higher going into the first half of next year.
But I do think there are early signs of a cyclical rotation in the market that are beginning to favour basic materials and industrials. I hear from a lot of professional technology experts that industrials in the U.S. may benefit with the AI narrative.
I like the industrials in the U.S. There is an infrastructure ETF in the U.S., PAVE ETF, that has plenty of stronger technical ranking members in its constituents.
Returns in October have been mixed for the TSX Composite Index. What does your analysis reveal?
It’s positive 60 per cent of the time over the past 10 years, 63 per cent of the time over the past 30 years. So, I would say it’s mixed, but it becomes more of a 50/50 hit rate with a median return of 0.39 per cent if we look at October following a very strong September and that’s what we had this past month.
How do the months after October fare?
You’re running at almost 70 per cent plus positive as you go into year end. So, I think odds would be in our favour to approach equities as a buying opportunity, both in the U.S. and Canada, if we get a pullback for whatever reason.
Is there anything I did not ask you that think is important to cover in this Q&A?
I would say it’s very important for one to be able to build a process that can be validated, that can give some confidence to the decision-making process. I would say a process is a good thing.
It’s good to have a story for a stock but it also should be validated by a process because with your process, you can always go back and see why it didn’t work, why it’s not working. Whereas with stories you really can’t. You end up with biases when you have only stories behind a stock pitch.