While major North American stock markets are starting the year near record highs, their performance has been off to a bumpy start. However, CIBC’s chief market technician Sid Mokhtari believes the bull market remains intact and anticipates investors may see another year of double-digit gains.
Mr. Mokhtari has a proven track record. In 2024, his stock screening process captured solid gains, delivering a 23.8 per cent price return for the year, outperforming the 18 per cent return for the S&P/TSX Composite Index.
Each month, he publishes ten stock recommendations based on his screening process. For January, his top 10 best ideas are: ARC Resources (ARX-T), Aritzia (ATZ-T), Bank of Montreal (BMO-T), Brookfield Corp. (BN-T), CAE Inc. (CAE-T), Empire (EMP-A-T), Gibson Energy (GEI-T), Onex Corp. (ONEX-T), Peyto (PEY-T) and Shopify (SHOP-T).
Last Friday, The Globe and Mail spoke with Mr. Mokhtari. He provided his technical road map on where he sees equity markets headed in the new year and discussed how investors may want to position their portfolios.
How do you see trading action unfolding in 2025?
We are approaching 2025 with more of an active approach as opposed to passive because we’ve had very strong back-to-back years of advance for both the S&P 500 Index and the S&P/TSX Composite Index. We believe that 2025 is likely to be another good year, but it should have some volatility by historical measures.
We had a Dow-theory buy signal in the fourth quarter of last year. In November, we did see new highs in the Dow Jones Industrial Average as well as the U.S. transportation index, and when the two confirm one another by making new all-time highs, we get a buy signal. By historical measures, a procyclical market behaviour begins to emerge following a Dow-theory buy signal and I think that’s what we’re going to be experiencing.
The Dow-theory signal is a very late signal. It’s a signal that gets triggered, but it is faced with mean reversion as we go forward. That’s why I think we need to see a rotation that may begin to find preference for mid-caps and procyclicals in the U.S. I do have a tilt and a preference for the mid-caps in the U.S. as opposed to large caps as we go forward. I do have a tilt toward financials, industrials and consumer discretionary.
We did some work on the offence/defence part of the market, and we looked at the equal weight baskets of U.S. sectors. We put industrials, consumer discretionary and financials together, and put them against health care, consumer staples and utilities. There is a very visible monthly strong trending backdrop that favours the offence sectors being industrials, consumer discretionary and financials relative to health care, consumer staples and utilities, which are typically the defensive part of the market.
We should not be dismissing a potential retracement or a correction that should have an amplitude of about 7 per cent for the U.S., and for Canada maybe 10 to 12 per cent, looking at where we are relative to longer-term averages. When we look back historically to see what kind of corrections or max drawdowns that Dow-theory signal may have, we found it to be not to be too severe and we would view it as the next best buying opportunity.
For 2025, your return expectations for Canadian and U.S. markets are very similar. Your target for the TSX composite in 2025 is between 27,300 and 27,600, implying a price return of between 10 to 12 per cent. For the S&P 500, you see the Index climbing to between 6,570 and 6,650, suggesting a return of 12 to 13 per cent. A key difference, as you noted, is the timing of the returns. The U.S. market may outperform in the first half of the year as strength, which you said in a previous interview, is typically seen at the beginning of the first year of presidential cycle.
I believe the S&P 500 should be able to reach those targets within the first six months of the year and I do believe that the TSX should be able to capture those gains in the back half of the year. The reason being that it is a U.S. presidential cycle, historically it’s very front-end loaded. By historical observations, we also note that year two of the presidential cycle is very weak, the weakest time frame in the cycle. The market begins to price that in as we go into the back half of the year and that may bring about volatility for U.S. equities.
We also think that the money-flow going into the U.S. markets right now is well supported by the fact that there’s more evidence of growth in the U.S. compared to other global regions. We also find that U.S. growth-ETFs continue to show better price performance as well as relative return and alpha attribution.
I’m of the view that as long as we can show growth in the U.S., the S&P 500 is likely to be able to perform well. We will have to see what earnings are going to bring about for the next quarter.
Generally speaking, we do believe there is that growth narrative in the market, at least from a Dow-theory perspective, which is a very procyclical, pro-growth signal in the market. We think that should be able to manifest itself to what we think is a good first half of the year for the S&P 500. And that’s going to keep rates, at least on the U.S. 10-year Treasury, somewhat elevated on the upper side.
We think rates are probably going to stay range bound, but I’m not going to dismiss the fact that there is a possibility of rates to be able to push higher toward the upper range. If that’s the case, U.S. dollar strength is likely to persist.
We favour the U.S. dollar as a major currency against others, and we think that is likely to persist until we go into the second quarter and maybe even the third quarter. But as we go past the second quarter, the majority of our indicators are likely to begin to show a peak-like or negative divergences to the U.S. dollar, which may be associated with a shifting trend, and that would mean the U.S. dollar will begin to ease from its strong performance, and that should help Canada. It should be able to help commodity-based regions. It should help some of the emerging markets as they may benefit from a stronger U.S. dollar coming off from its peak.
When you said the 10-year Treasury yield may rise to the upper end of its range, what is that upper end?
Our base-case technical scenario for the 10-year U.S. Treasury yield is that it is likely to stay range bound. The upside is close to 5 per cent, neutrality is marked at 4.50, 4.60, and the lower end of the range is closer to 4 per cent.
Back in November, you made an accurate call when you said the Canadian dollar might break below 72 cents relative to the U.S. dollar and potentially dip down to 68 cents. What are the charts telling you about the next move for the Canadian dollar?
In our opinion, we are likely to stay in a lower range for much longer than we’d like to. So, we think that the upper band for the Canadian dollar is now pegged against 72 cents and then the low end of the range is closer to 68 cents. Those would be my ranges.
I’m not going to dismiss the fact that we potentially may even push lower, but I do think that at this stage, we’ve done a lot of the damage to the Canadian dollar. It is very oversold by many measures.
Many long-term investors would welcome a pullback in the stock market given the strong double-digit gains in the S&P/TSX Composite Index and S&P 500 in 2024. Earlier you indicated that these indices may decline anywhere between 7 to 12 per cent. Are you seeing any warning signs calling for a pullback in the near-term?
I do believe the correction that we witnessed in December, following a strong October and November, forced a lot of breadth indicators to come down to a point where maybe we’ll push a little bit lower potentially, but we don’t see that becoming a major problem. We don’t see that to end this strong bull narrative.
We’re already washing out the breadth indicators. We’re already seeing some oversold readings by measuring what is the percentage of the stocks in the U.S. and the TSX below the 50-day average, and we’re already reaching trough-levels readings, so I’m more inclined to assume that we’re closer to a bottom in the near-term.
So, I’m optimistic for January, and if I had to have a narrative for a correction or volatility, it would be February because February is historically the second weakest month of the year.
What’s the weakest month?
September has the highest peak-to-tough retracement by historical measures.
Each month you publish your Top 10 best ideas based on your screening process that looks at the largest 100 members by market capitalization within the S&P/TSX Composite Index. This month, you have seven new stocks and three carry-overs, Onex, Peyto and Shopify. Can you touch on a few of your recommendations?
We like natural gas. Last month, Peyto performed well for us.
The first quarter is historically very favourable for natural gas. At the risk of stating the obvious, it’s colder and seasonality has a backdrop of bullish price action for natural gas. But we’re also hearing more about data centres and AI and that natural gas has become a major commodity in that field.
We are noticing that a lot of natural gas stocks have been showing strong price performance as well as alpha relative to broader indices in recent weeks and months, and I do think that is likely to persist.
So, we added ARC Resources, which is a good name for us fundamentally on the desk as well as how it shows in our matrix process. So, ARC and Peyto, those two have natural gas exposure.
We also added Gibson Energy. It does have a lot of positive catalysts. It does have a strong technical backdrop. The majority of its indicators are still showing durable relative strength against the energy sector in Canada. And its yield is very attractive from an income investor perspective.
Bank stocks are ranking well this month in your screening process. The Bank of Montreal moved into the leading quadrant from the improving quadrant. Royal Bank (RY-T), Scotiabank (BNS-T) and CIBC (CM-T) are all in the leading quadrant.
In general, we like financials.
We typically see positive behaviour within the banking sector in Canada going to earnings season. It’s usually post-earnings where there may be some volatility, but going to earnings, we believe that banks are probably going to perform well.
We chose Bank of Montreal because it has been emerging positively within our matrix process and quad-model. Bank of Montreal is in the improving-category of the leadership-quad. We also note that Bank of Montreal is likely to benefit from a weaker Canadian dollar narrative, because of its U.S. dollar revenue exposure. Given the strength of the U.S. dollar, we generally favour TSX stocks that have higher top-line and revenue exposure in U.S. dollar terms.
And this is in-line with your Dow-theory buy signal that suggests financials will perform well.
I do believe that every bull market needs to have the financial market backdrop as a leader behind it, and I do think we will have that.
Last month, you highlighted a mid-cap and small-cap stock, Exchange Income (EIF-T) and Cineplex (CGX-T), which rallied nearly 4 per cent and 12 per cent, respectively in December. Outside of large caps, what are a few stocks that are demonstrating strong technicals?
Transcontinental (TCL-A-T) would be one name that we favour. And Kelt Exploration (KEL-T) has been improving.
You’ve already touched on natural gas, you’re constructive on it. Are there other commodities whose trends or patterns appear attractive to you?
There are three commodities that we favour as we go into 2025.
Natural gas is certainly one that we want to focus on.
The second commodity would be gold, but that’s more of a back half of the year, in our opinion. When gold reached the upper band, which is at about US$2,800, we saw a lot of peak-like momentum readings. I do think we may have seen the peak of the price action for both gold and silver in the next, call it, six months. But the action, in my opinion, should be friendly for the gold commodity again with the downside being closer to its lower range of its averages, which is about U.S.$2,480 for gold.
And then the third commodity for me would be lumber. Lumber has been bottoming for a while. It does have some perhaps tariff risk, but I think that it’s one commodity that has been building a better bottom relative to other commodities.
The price of bitcoin soared after the U.S. election. There are two diverging opinions, those who believe bitcoin could decline substantially, and others who argue it will continue to rally. Where do you see bitcoin potentially headed in 2025?
Bitcoin is a vehicle that is slowly becoming of asset allocation importance.
We are hearing more and more larger institutions that didn’t have exposure to bitcoin are now slowly beginning to add exposure to bitcoin. I think that gives more validity to the strength of bitcoin as we go forward.
I think bitcoin does have potential mean reversion risk. It has had a fantastic run so I do think that if we can bring bitcoin lower, closer to $80,000 and under, that would be a very good area to revisit bitcoin again from a long side.
Where it stands today, it’s very neutrally based.
Last month, you suggested investors consider U.S. mid and small-cap stocks expecting breadth to widen out to these groups. You highlighted IWR, an ETF that tracks the Russell Mid-Cap Index, and IWM, which tracks the Russell 2000 Index. Along with those recommendations, you mentioned a handful of other ETFs across a variety of industries. Can you highlight a few ETFs that are currently ranking well?
We run about 100 US ETFs to see what’s showing well.
In the near term, semis have begun to pick up positive delta in our work, which is typically a net positive. The ETF is VanEck Semiconductor ETF (SMH-Q).
I’m also positively skewed towards space ETFs. ARK Innovation ETF (ARKK-A) has a lot of space exposure, an area that we are seeing a strong set of readings.
And then finally, I would say an area that I think is worth highlighting would be robotics. Global X Robotics & Artificial Intelligence ETF (BOTZ-Q), that’s another one that is picking up a lot of positive delta for us.
For investors who are new to technical analysis and want to incorporate it in their investment process, what’s one of the most useful technical analysis indicators?
As a technician whose been doing this for quite some time, I think it’s very important to make sure that we follow fundamentals to understand what’s developing beneath the surface. Usually, it’s the fundamentals the create the trend that technicians are then able to validate. I’m always aware as to what are the fundamentals that are driving the force behind technical picks that come into our baskets. So, it’s very important to be very aware of what’s going on from a top-down perspective as well as the fundamental factors.
In our own matrix, we look at rate of change of EPS [earnings per share]. We look at the rate of change of ROE [return on equity] as well as the SMR [sales, margins and ROE]. So, it’s very important from our matrix perspective to have a fusion approach to our process, and then check mark everything to say, earnings have been cleared, we have top-line growth that has also been cleared, ROE is also showing well, and trends for all those fundamental variables are being backed by MACD [moving average convergence/divergence] indicator, which shows the momentum for price at any point in time.
The other indicator that may be worth having some close eye on is weekly and monthly RSI, which is a relative strength indicator, which is a force of mean reversion. When something gets very stretched on the upside, it should be able to give us at least a flag that maybe we are susceptible to mean reversion. Or if something gets very stretched on the downside, we should be flagged that there is a positive mean reversion that may be developing.
Is there anything that we didn’t discuss that you think it’s important to mention?
REITs are becoming very oversold in the short to medium-term in Canada, and I think it’s reasonable to say that there are so many very good risk/reward candidates within the REIT space that investors should begin to pay attention to.
We think government bond yields are likely to stay range bound with upside limitation. As they are pushing higher today, inversely, the REITs space is pushing lower accordingly. And since we believe we are getting closer to the upper range of the bond yields, we are inclined to believe that the REIT space may be getting closer to a trough point.
I believe REITs are going to be able to positively mean revert as we go forward, particularly during the RRSP season when REITs have historically done quite well. So, it’s worth reviewing ideas within the REIT space, looking for opportunities that are very deeply oversold.
Are there any REITs that you want to highlight?
One name that we like both fundamentally and technically given how oversold this name has become is Dream Industrial REIT (DIR-UN-T).
This Q&A has been edited for brevity and clarity.