Hap Sneddon, president and chief portfolio manager at Castlemoore

FOCUS: Technical analysis

MARKET OUTLOOK:

Equity markets are overbought in the short term. A little tired. Many indicators, along with the price action, have begun to roll over. This is consistent with a regular soft spot that occurs very early each January. Normally, this works itself out through a bottoming process by late January. But here we are cautious, in February. 

This year is different because of the four-year U.S. presidential election cycle. During these years, markets head lower through to mid-March before rebounding into the end of the year.

This historical pattern occurs due to all the political noise and promises, and often erratic economic and corporate data of election years. Any significant societal or geopolitical events just add to this short, yet volatile period.

Earnings are a little weak, but not too bad, and the general economics are decent. However, both the consumer price index (CPI) and producer price index (PPI) came in hotter than expected for January. At the start of the year, investors had priced in seven interest rate cuts for 2024. Now, just a short time later, it's only three cuts, and the target is 100 basis points higher.

In the end, we’ll have a great set-up for lower-priced entries. However, when the strength - not the expected weakness - seen in markets in January and February is combined with currently rising bond yields, it extends the historical pattern of weakness from mid-March into April.

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS:

Invesco DB Agriculture ETF (DBA NYSEARCA)

This ETF is focused on agriculture-related commodities, with futures holdings in cocoa, live cattle, coffee, sugar, soybeans, corn, and lean hogs. The fund also holds a large position in short-term U.S. treasuries. Agriculture is a good timely seasonal trade now, but it also has some strong secular tailwinds. Over the longer-term, agriculture will benefit from a growing population, a shift to more healthy diets, interest in ESG investments, agtech advancements (AI), institutional interest and limited viable land.

Paramount Resources (POU TSX)

Paramount is a veteran-led intermediate exploration and production company with a focus on liquids-rich natural gas opportunities within the Deep Basin of west-central Alberta. The company is undervalued by 50 per cent, maybe more. This too is a position with positive outlooks on a shorter- and longer-term basis. Companies like Paramount, not only underpin the energy security that’s provided from natural gas, but also the energy transition. The long-awaited export of Canadian gas to the global market is fast approaching and is underappreciated!

iShares China Index (XCH TSX)             

With China’s main stock markets down over 50 per cent the last three years the pendulum was bound to swing back. Well, without knowing the outcome for sure, today’s price action – indicators, volume, impulsive moves - represents a good risk-to-reward entry. President Xi Jinping's leadership team made clear its commitment and need to reinvigorate the capital markets and boost investor confidence at a meeting of the Communist Party's Politiburo in July. As part of Beijing's measures to support stock prices, the national team of state-backed institutions has been pouring money into the market through the purchase of ETF’s and tightening short-selling regulations further. We’re wrong about the timing below $13.74.