Market Call: Brooke Thackray's outlook on Seasonal Investing & Technical Analysis

Key Concepts

Seasonal Investing: The practice of investing based on predictable patterns of price movements that occur at certain times of the year.
Technical Analysis: A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume.
Greenfield Development: The process of building a new facility from scratch on undeveloped land.
Covered Call Options: A strategy where an investor sells call options on a stock they already own, generating income from the premium.
AI (Artificial Intelligence): The simulation of human intelligence processes by machines, especially computer systems.
CapEx (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, and equipment.
Zombie Companies: Companies that are unable to meet their debt obligations from their operating earnings and rely on continued borrowing or asset sales to survive.
Take or Pay Contracts: A contract where a buyer agrees to pay for a specified quantity of a commodity or service, whether they take delivery or not.
Tidewater: Refers to access to the sea for transportation of goods.
Blue Sky Going Up: A term used in technical analysis to describe a stock that is reaching all-time highs with no apparent resistance.
Higher Beta Play: An investment that is expected to be more volatile than the overall market.

Summary

This episode of Market Call features Brooke Thackray, a Research Analyst at Global X, discussing seasonal investing and technical analysis, with a focus on current market trends and specific stock and ETF recommendations.

Cameco and US Government Partnership

The discussion begins with the announcement of a partnership between Cameco and the US government. Thackray views this as a positive step, indicating it's just the "start" of similar setups needed to boost nuclear energy. He dismisses concerns about US government partnerships with Canadian companies, citing shared technology and national security aspects of uranium as not being a significant issue. A key challenge highlighted for nuclear power is the lengthy "greenfield" development time, which can take up to 15 years, especially in Canada due to slow processes. The hope is that by standardizing unit construction, Canada can "piggyback" and work with the US.

Energy Sector Seasonality and AI Demand

Thackray notes that while the energy sector is traditionally weaker at this time of year, this is primarily for oil. Natural gas, however, performs well seasonally. He explains that the period from February to May is typically stronger for energy, ramping up for the driving season, but it can sometimes start earlier, potentially in December.

The surge in demand for power due to AI and infrastructure is discussed. Thackray argues that natural gas will fill this short-term demand, while nuclear is a longer-term solution. He points to projections showing natural gas as a significant future power source, citing the recent deal between Pembina and Meta as an example. Investors are looking to "front-run" the colder season, which tends to drive up natural gas prices and stocks.

Healthcare Sector Performance and Evolve Global Health ETF (LIFE)

The healthcare sector has been "beaten down," partly due to investors heavily favoring tech, causing other sectors to take a backseat. Policy uncertainty regarding medication pricing and pipeline concerns about drugs reaching patent expiry have also contributed. However, Thackray believes the sector is now attractive from a "value perspective," with hedge funds showing increased interest and a slight bounce occurring.

He analyzes the Evolve Global Health ETF (LIFE), describing it as an "enhanced ETF" that includes covered call options to provide income. While volatility is usually beneficial for covered calls, it might be challenging in healthcare. The ETF has been trading in a range for the past couple of years, mirroring the healthcare sector's underperformance relative to the S&P 500. Thackray expects LIFE to return to its trading range, around $20, and notes that healthcare can perform well in November, making the ETF "poised quite well at this time."

Amazon and Layoffs

Regarding Amazon, Thackray notes the announced job cuts (14,000) and suggests that AI might be making it easier for companies to let go of employees in "backroom jobs." He clarifies that these layoffs are not necessarily a sign of the company doing poorly but rather an indication of increased efficiency, with Amazon embedding AI effectively. He expresses concern about Amazon lagging overall and the broader discretionary side of the market underperforming due to weaker consumer demand, rising credit card delinquencies, and car repossessions. Technically, Amazon has broken its upward trend and is moving sideways. A strong sign would be a break above $240 with rising volume, but he advises waiting for a purchase.

UnitedHealth Group Analysis

UnitedHealth has started to climb back after being pushed down, along with the broader healthcare sector. The company also faced its own internal setbacks. Thackray highlights that UnitedHealth has broken its downward trend and is moving higher. From a fundamental perspective, it offers good value relative to its peers, and technically, its time to improve. He "likes this stock from this perspective" and reiterates that healthcare can perform well in November.

Nutrient and Agricultural Sector Seasonality

Nutrient is considered a seasonal stock. The agricultural sector generally performs well at this time of year due to cash flows from the harvest in the Northern Hemisphere. While Nutrient hasn't fully benefited, Thackray notes it has broken its downward trend and is forming a base, indicating a positive sign. It's looking for a catalyst to move higher and is more likely to do so than fall. Technically, it has a "decent technical profile," trading around $80.

Brookfield Renewable Partners and Renewables Sector

Brookfield Renewable Partners saw a surge due to the Cameco-Brookfield deal. Thackray observes a renewed interest in the renewables sector and electricity generation overall. Brookfield Renewable Partners has broken out above its previous resistance level of around $38. He notes that while renewables don't typically perform exceptionally well at this time, utility stocks and renewables are acting as "higher beta plays" due to AI. Despite some pushback on green energy in the US, Canadian investors see it differently, and there's still enough interest for the sector to perform well.

Intel and Semiconductor Sector

Intel is discussed in the context of US government investment. Thackray acknowledges that Intel has been lagging but is now benefiting from government interest and inter-company investments. However, he expresses concern about Intel lagging in key AI components, making it difficult for them to catch up fundamentally. Technically, Intel has shown positive momentum with strong breakouts. While he likes it technically and seasonally, he is "not totally keen on it" fundamentally. He also expresses concern about the circular nature of investments and the sheer amount of capital expenditure (CapEx) in the tech sector, questioning the objectivity of some transactions.

Constellation Software Analysis

Constellation Software has dropped about 20% from its high due to AI concerns and the stepping down of Mr. Leonard. The company is trying to find a base, bouncing off support levels around $36-38. Thackray questions the long-term viability of its business model of acquiring and assimilating businesses, especially in leveraging AI across siloed operations. He notes that software companies like Adobe have also suffered due to challenges in functionally using AI. Technically, Constellation Software is in a downward trend, but there is "fairly good support" around $38. A breakdown below this level would be problematic.

Canadian Pipelines Seasonality

For Canadian pipelines, seasonality can begin before the broader energy sector. Thackray suggests that November and December are good times to look at pipelines, even before the major oil companies see their seasonal strength. He advises staying away from major oil companies at this point but focusing more on pipelines.

Past Picks Review

Technology Select Sector SPDR Fund (XLK): Recommended on December 5th, 2023, at $239.91, it has returned 25.26%. Thackray notes the technology sector is "sucking the air out of everything" and has seen strong seasonality from December to March. He believes the sector will continue to do well if major companies report strong earnings without surprises.
Global Gold ETF (HUG) on TSX: Recommended last year, it has seen a 44% upside. Gold has experienced a strong rally but has also seen a pullback due to being "most overbought in history" according to monthly RSI. The strong seasonal period for gold runs from July to early October, and another from December to March. His fund sold gold holdings recently but plans to re-enter in December. A breakdown would occur if the ETF goes below $25.
iShares Russell 2000 ETF (IWM): Held for a month or two and then exited. While technically looking fine and having surpassed its December high, it's not outperforming the market as much. It's considered a "riskier play" due to exposure to regional banks and "zombie companies" (30% of companies in the Russell 2000). It is expected to do well if interest rates go down or during "risk-on" periods. The strong seasonal period starts in December and runs into March.

CargoJet Analysis

CargoJet is in the transportation space, and Thackray notes that trucking volumes are down, impacting the industry. He expresses concern if CargoJet breaks below $80, which would be a "bad sign" and likely lead to further declines. He attributes this to the broader transportation industry being under pressure rather than specific issues with CargoJet, though he lacks detailed company-specific information.

Texas Instruments Analysis

From a technical perspective, Texas Instruments is "range bound" and has not performed as well as expected. Thackray would be inclined to invest in another company in the semiconductor space. A sell signal would occur if it breaks below $160.

CNQ (Canadian Natural Resources) Analysis

CNQ is primarily an oil company, and while it has changed its mix over time, it's mainly oil-focused. Thackray considers it a "great long-term hold." Technically, it has broken its downward trend line, which is a positive development. He advises continuing to hold it, as there's nothing breaking down, though it might lag in the next couple of months. He cannot comment on potential natural gas acquisitions.

Natural Gas and Pato

Natural gas tends to do well seasonally coming into the colder months. Thackray sees a "solid upward trend developing" for natural gas companies and has "nothing negative to say about that chart." He notes increased demand for natural gas investment as investors realize the need for it while nuclear power is developed. He also believes Canada will eventually facilitate getting natural gas to tidewater.

Diversified Commodity ETF (Z.COM)

For investors seeking exposure to materials like gold, silver, copper, and uranium, BMO recently launched an ETF with the ticker Z.COM. This multi-asset ETF in the commodity space also includes agricultural commodities. It's a new offering launched on Friday, reflecting a renewed interest in commodities.

Denison Mines Analysis

Denison Mines is seen as having enough positivity in the uranium mining space, and Thackray doesn't worry about it being left behind by Cameco. Technically, it has experienced a "positive breakout" above its resistance level and has done very well since. He has "nothing negative to say about this space."

Celestica Analysis

Celestica is experiencing "blue sky going up" with no apparent resistance, reaching all-time highs. It has performed extremely well due to its involvement in AI data center build-outs. While it has done a turnaround, Thackray suggests that at some point, such companies become sensitive to negative news. He would personally be more inclined to pick up an ETF representing the broader space, believing it's further along in that cycle.

MEG Energy Analysis

MEG Energy has gone through its deal drama with Cenovus, Strathcona, and Synovus. Thackray believes this is now "baked into the cake." He advises holding back on buying MEG outright at this point and waiting for a potential "down tick" after consolidation, especially as it's not a strong seasonal period for oil.

TFI International Analysis

TFI International, a transportation company, along with other trucking companies, has suffered. Thackray notes that too many drivers were brought on board while shipment volumes decreased. He sees a "base case which is positive overall for TFI," suggesting it might be basing out and starting to move up. He expects it to build sideways, with transportation and trucking industries picking up seasonally in the cooler weather and winter, correlating with the economic cycle. He believes there isn't much downside left and it could potentially start picking up soon, but patience is required.

New Top Picks

Industrial Select Sector SPDR Fund (XLE): This ETF includes major industrial companies like Honeywell, GE, and Boeing. Thackray chose it because it has been consolidating sideways and is entering a strong seasonal period from October 28th to May 5th. He sees economic strength in the US and globally, with no recession in sight.
Snap-on (SNA): This company manufactures tools and equipment for vehicle repair. With more cars being held longer, the life cycle of vehicles is increasing, benefiting companies like Snap-on. It tends to have a strong seasonal period from now until the end of the year, outperforming the S&P 500 80% of the time since 1990.
Global Uranium Index ETF (URNX) on TSX: This ETF offers diversified exposure to the uranium sector, including companies like Denison Mines and Cameco, as well as Sprott Physical Uranium Trust. Thackray highlights that the demand and supply for uranium are well-understood long-term, despite its volatility. He believes it's a fantastic sector to be in long-term due to a known deficit in supply for reactors. The ETF provides diversification, mitigating the risk of individual stock performance.

Conclusion

Brooke Thackray emphasizes the importance of understanding seasonal trends and technical analysis to navigate market fluctuations. He highlights opportunities in sectors like uranium, natural gas, and industrials, while also cautioning about the current challenges in areas like discretionary spending and the need for patience in certain transportation stocks. The discussion underscores the growing influence of AI on various industries and the ongoing shift towards nuclear and natural gas for energy needs.