Canadian investors are facing a potentially turbulent November after markets experienced their worst start to a month since the dramatic "Liberation Day" selloff in April. The technology-heavy Nasdaq Composite plummeted more than 3% recently, sparking concerns among market participants about whether the AI-fueled rally has pushed valuations beyond reasonable fundamentals.
Market Turbulence and Technical Concerns
The recent market weakness has been particularly pronounced among technology giants, with the so-called Magnificent Seven stocks shedding approximately 3% as fears escalated about stretched valuations. According to Sid Mokhtari, chief market technician at CIBC Capital Markets, investors have been heavily concentrated in tech stocks, pushing the S&P 500 technology weighting to historic highs while market breadth has significantly deteriorated.
Mokhtari noted that the number of sectors in the S&P 500 with over 60% of their members above medium and long-term averages has dropped to just three from six over the past four months. More concerning is that a higher number of stocks are hitting new 52-week lows compared to highs, indicating underlying weakness beneath the surface of major indices.
Seasonal Trends Offer Hope
Despite these concerning signals, historical patterns might provide some comfort for nervous investors. Over the past decade, November has typically been a strong month for North American markets, with indices averaging returns of more than 2% and positive hit rates exceeding 80%. This seasonal strength suggests that buying market dips could be a profitable strategy, particularly on the TSX.
Market sentiment received a recent boost from developments in Washington, where U.S. lawmakers appear to be moving closer to a deal that would end the longest government shutdown in American history. This positive political development comes after a particularly difficult week for equity markets.
CIBC's November Stock Selections
In response to the challenging market environment, CIBC Capital Markets has released its top 10 stock ideas for November. The bank's recommended portfolio composition includes 30% allocation to financials, 20% to industrials, and 10% each to utilities, information technology, health care, and energy sectors.
The financial sector recommendations include Great-West Lifeco Inc., Manulife Financial Corp., and Toronto-Dominion Bank. From the industrial sector, CIBC selected AtkinsRealis Group Inc. (formerly SNC-Lavalin) and Element Fleet Management Corp. The remaining picks span various sectors: Quebecor Inc. from telecommunications, Chartwell Retirement Residences from health care, Shopify Inc. from technology, Capital Power Corp. from utilities, and NuVista Energy Ltd. from energy.
CIBC rates all recommended stocks as "outperform" except Manulife, which carries a "neutral" rating. The potential returns vary significantly across the selections, with AtkinsRealis offering the highest upside at 23%, followed by NuVista Energy at 20%. Chartwell Retirement Residences presents the most modest potential return at 2%.
The track record of CIBC's monthly stock picks provides reason for confidence among investors. Last month, the bank's best ideas returned 7.28%, significantly outperforming the TSX index. Year-to-date, CIBC's equal-weight baskets have delivered an impressive 48% return, nearly 26 percentage points above the broader index.
While more than 50% of companies in nine out of eleven sectors maintain positive returns year-to-date, Mokhtari cautions that investors might become increasingly risk-averse as the year draws to a close. Nevertheless, the combination of seasonal trends and carefully selected stocks positions investors to potentially navigate November's volatility successfully.
