Thackray Market Letter

— Know Your Buy & Sells a Month in Advance —
Published the 10th Calendar Day of Every Month
Volume 6, Number 9, September 2012 Written by Brooke Thackray

Market Update
Super Mario to the rescue! In August, the ECB President Mario Draghi stuck his neck out and claimed the everything possible would be done to save the Euro. Despite the absence of an agreement amongst the EMU countries and no supporting details, investors took him at his word and pushed the markets higher. On September 6th,

he announced that the ECB was stepping up with an unlimited bond buying program in the secondary market to help the struggling countries. In addition he announced that the ECB would be pari passu with the private investors on new bond purchases, not have senior credit status over private investors. This is a big step, as previously when the government was seeking investor participation on bond purchases, the more the ECB bought, the worse 3

S&P 500 Technical Status
The S&P 500 has had a strong start to September on the back of latest ECB rescue package, reaching above the April highs – a bullish signal. In addition, the trend of higher highs and higher lows remains intact, another bullish trend. Despite the bullish performance of the market, there is reason to be cautious for the rest of September. Up until last Thursday, volumes have been very weak. A rising market on low volumes shows a lack of conviction and makes the market more susceptible to a correction. If the market is able to continue rising on stronger volume, the weight of the bullish case increases. Investors should be careful in declaring that the breakout above the April 1422 means that the market is in a strong bullish phase. Very often the market will just breakout and then come back and falter. The patriarchs of technical analysis, Edwards and McGee in Technical Analysis of Stock Trends (1948), set a threshold of 3% above the breakout point to establish confirmation, which is currently 1465 for the S&P 500. We are not there yet. In addition, investors should be watching for the S&P 500 to retest the April 1422 level. If the market rises further and then a retest occurs, the strength of the market will be either confirmed or negated. If it is able bounce higher after a retest, then this will increase the bullish case once again to an even stronger position. If it fails on the retest, then the bears will be in control and the market will be susceptible to a correction to 1350. The last half of September is often a weak time of the year and investors should be weary of the market backing off its current run. Other than the temporal effects of government or monetary stimulus, the market is susceptible to a pull-back and investors should wait until October before establishing greater equity positions.

alphaMountain Investments -

Horizons Seasonal Rotation ETF (HAC :TSX) Portfolio Exposure as of August 31st, 2012
Symbol Holdings Canadian Dollar Exposed Assets Equities iShares S&P TSX Capped Energy Index Fund Agrium Inc Fixed Income & Currencies Horizons Floating Rate Bond ETF United States Dollar Exposed Assets XLP MOO CF JNJ SCG CSX AA RSG WM EMN IYT XLY Equities Consumer Staples Select Sector SPDR Fund Market Vectors Agribusiness ETF CF Industries Holdings Inc Johnson & Johnson SCANA Corporation CSX Corporation Alcoa Inc. Republic Services Inc. Waste Management Inc. Eastman Chemical Company iShares Dow Jones Transportation ETF Consumer Discretionary Select Sector SPDR Fund Commodities & Energy SPDR Gold Trust ETF Market Vectors Gold Miners ETF Market Vectors Oil Services ETF Market Vectors Jr Gold Miner ETF SPDR S&P Oil & Gas Exploration & Production ETF SPDR Metals Mining ETF Fixed Income & Currencies iShares 7-10 Year Treasury Bond ETF Horizons U.S. Floating Rate Bond ETF US Dollar Forwards (September 2012) - Currency Hedge ** Cash, Cash Equivalents, Margin & Other Total ( NAV $93,956,539)
** Actual exposure reflects gain / loss on currency hedge (Notional exposure equals 65.5% of current NAV)

% of NAV


5.1% 1.1%



4.9% 1.2% 1.0% 1.0% 1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -4.7% -4.9%


12.1% 5.8% 3.1% 2.7% 2.0% -4.7%


9.5% 1.1% 0.1% 58.1% 100.0%

* Source: Bloomberg, HAC based upon NAV

The objective of HAC is long-term capital appreciation in all market cycles by tactically allocating its exposure amongst equities, fixed income, commodities and currencies during periods that have historically demonstrated seasonal trends. The Thackray Market Letter is for educational purposes and is meant to demonstrate the advantages of seasonal investing by describing many of the trades and strategies in HAC. — 2 — alphaMountain Investments -

off the private investors became. He also stated that the bond buys would be linked to “strict and effective conditionality” with the recipients of aid having to meet agreed austerity conditions. In addition, Draghi stated the ECB’s efforts would be focused on debt maturities up to three years. Investors should note that Draghi stated that he has support for his program, but it is not clear that he has full support of all the countries. Although there is no doubt that this new program is a major step forward, it is not quite as good as first portrayed in the media…… Just like the cell phone companies that claim “unlimited this” and “unlimited that”, it is only when the bill comes in the mail that you realize that the plan you bought into…is not so unlimited. By announcing an “unlimited” program Draghi is hoping to avoid the pitfalls of the previous programs where investors were able to see the inadequacies of the amounts and structure, and trade against the sovereigns. The word “unlimited” is meant to scare away any investors from betting against the sovereigns. The theory of the big unlimited bazooka is that it will not be seriously challenged because of its fire power, allowing for continued lower yields in the profligate countries. There are two trading problems with the current “unlimited” program. First, the ECB buying is designed to focus on bonds with a range of one to three years in duration. Naturally, investors are going to see the Maginot Line and attack the sovereigns at the longer part of the curve. This is going to create a steep yield curve and force governments to operate at the short end of the curve. Typically, and wisely, governments spread their debt out over the yield curve to diversify risk. The current rescue program is going to encourage governments to have a disproportionate amount of obligations at the short end of the curve. This is going to increase the risk of rising interest rates. If rates do increase in the future– a large amount of funds will have to be raised all at once. Oh well….who is worrying about the future, not the ECB, not yet. Second, do you really think that the bond buying program is unlimited? In theory, the ECB could print as much money as they desire to buy the bonds, but practically this would have a detrimental effect on the Euro. Germany and other countries with strong balance sheets will not be supportive of such inflationary measures. The program will be unlimited up to the point where one or more countries start to realize how costly it has become on their economies and consider leaving voluntarily if the program remains unchecked. This applies to both the receiving and giving countries. The receiving countries may reevaluate whether they can

live with the continued austerity programs and whether it is worth the pain staying in the EU. Some of the giving countries may reconsider staying in the Euro, wondering whether over the long-term they will be slowly dragged down as the profligate countries suck more and more money out of them. It is very conceivable that eventually one or more strong countries leave the euro or perhaps even form their own regional currency. If this were to occur the Euro would still survive and Euro financial obligations could still be met. The profligate countries could then inflate their way into oblivion. Although Merkel is making bold statements standing behind Draghi, all is not well in Germany. There is a rising number of German citizens and politicians against “unlimited” support– who can blame them. In addition the German courts announce their decision on the legality of Germany’s financial help to the EU. Legal experts have generally taken the stance that the courts will be supportive of the current programs, but with some modifications — but it is the courts after all, and no one really knows the outcome. There is tough talk about how the countries receiving assistance will have to commit to austerity programs in order to receive support. The reality of the situation is that the current receiving countries have not met their austerity targets and are asking for extensions or more lenient terms. Greece is currently asking that their austerity timeline be bumped from two to four years. More than likely, they will be back later asking for another extension to six years. There is no red-line for the imposed austerity programs and all of the profligate countries know it. It is all a negotiation game. Investing in an environment where political actions can easily drive the market one way or another is very difficult at best. So far, front running possible announcements has paid off, but as the programs become less effective in boosting he market and the increase in value gets baked into the price earlier and earlier, at some point front running will not pay off. It is difficult to say when this time will occur: it could be six months, or a year, or even later, but it will come. The FMOC meets this week and a large portion of investors is expecting the Fed to announce another stimulus package. Another stimulus package is probably forthcoming in the near future, but it is difficult to determine if it is going to be this week, or after the election in November. There is no question that the economy has been sluggish in the US, but it has not been disastrous. Bernanke has held off on another QE package, knowing that if he announces too soon, investor expectations of following

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packages will occur much quicker next time the economy slows down. Despite my negative comments on the European and US situation, the market can move independently from political events in the short and medium term. In other words investors should remain focused on other factors to make their investment choices, such as, seasonal trends, earnings and the economy.

prove to be opportune, but the market often provides a good opportunity for increasing equities during October. Investors should be actively looking for entry points. Last year the beginning of October presented itself to be an opportune time for market entry, as the market started to rally on October 3rd. In the first week of October HAC started to commit more money to the markets. The market went on to reach a short-term peak on October 28th, before correcting in November and then rallying once again. It is difficult to develop a strategy for the best entry point during the month of October. Nevertheless, seasonal investors should have a bias to increasing equity exposure in October. The beginning of October could present an attractive entry point if the market corrects severely during the rest of September, setting up for a bounce in October. If the market muddles through into October it will be more vulnerable to a pullback in the middle of October (19th to 27th), when the market often has large downdrafts. Although technical analysis can help fine tune the entry dates, investors should be disposed to enter the market before the end of the month.

Market Outlook
The market has had a rare summer time rally, based mostly on the fact that the economy in Europe and the US is bad enough that stimulus would be forthcoming. As I have mentioned before, the market rises often enough into the middle of July, but less often from that point forward. The S&P 500 has just broken above its high of 1422 set in early April. Investors should remember that we still have not finished working our way through the most negative month of the year and risks to the downside remain. Later this week, September 13th, the Federal Reserve could move the markets by either announcing, or not announcing, another stimulus program. If it does not announce a stimulus program then investors will probably have to wait until after the US election. Also, on September 12th, the German courts are expected to pass judgment on the constitutionality of Germany’s assistance to EMU through the European Stability Mechanism (ESM). The point is that there are two very large variables that could move the markets either way. Given that we are still in the weak seasonal month of September, caution is urged. Even though the market has moved up from its lows in June, the time to enter into a more aggressive market position will soon be at hand. Despite October having the reputation as being a weak month, since 1950 it has produced an average return of 0.6%% and has been positive 59% of the time. Nevertheless, it does deserve the reputation as the most volatile month. Volatility can provide opportunities. There are three possible buying zones in October. First, the beginning of October (start of the 18 day Earnings expectation cycle, Thackray’s 2012 Investor’s Guide, see page 43). Second, October 9th (actual buy date at close of market October 8th), is also another rally point as the market can often surge if it has corrected coming into this time period. Also, technology stocks tend to start their outperformance at this time. Third, October 28th (actual buy date at close of market October 27th), is the classic long-term buy date kicking of the favourable six month seasonal cycle. There is no guarantee that any of these three dates will

HAC Positions and Opportunities Gold
In the beginning of August, HAC doubled its holdings of gold related equities, making this sector the largest position. Gold became particularly attractive once it broke out of the descending triangle pattern. This occurred at an opportune time, as the metal was entering its typically strong seasonal period. Gold equities have been outperforming the bullion, which often happens at this time of the year. Gold equities as represented by GDX have broken out of a double bottom pattern, which is bullish. Although gold and gold equities can have a reasonably strong performance in November and December, October can be a difficult time for gold. From 1984 to 2011 gold has only been positive 46% of the time in October and has produced an average loss of 0.7%. Investors should be paying attention to signs that gold and gold equities are weakening later in the month of September and be prepared to reduce/exit gold positions if the sector starts to weaken.

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Although silver has its strongest seasonal period from January to March, it also has a seasonally strong period in September. Investors should beware that like gold, it also does not typically perform well in October. The technical setup for silver is very similar to gold, as it has also broken out of a descending triangle.

The energy sector typically has started to show signs of weakening as it has recently been underperforming the S&P 500. Although the sector’s seasonal period extends to the beginning of October, the energy sector during the month of September has mediocre performance. Investors should be looking for opportunities to lighten up in this sector.

XEG.TO has been showing signs of weakness and underperforming the market as it gets closer to the end of — 5 — alphaMountain Investments -

its seasonal period. It is currently just above its support line. Investors should consider exiting the position if it breaks through the support line and demonstrates continued weakness relative to the market.

Consumer Staples
The consumer staples sector is typically a solid performer relative to the market during the summer months. Although this summer the sector has produced a positive result, the sector has been underperforming the S&P 500 since July. Given the strength of the S&P 500, this is not entirely unexpected. In the summer months it would be expected that consumer staples would outperform the market when the market is either negative or slightly positive. This summer has not provided either one of these scenarios. The consumer staples sector is a good defensive hold at this time because it is a good seasonal sector in September and one of the strongest sectors in October.

Agriculture stocks started a strong run in late June, particularly the subsector, fertilizer stocks. After a strong bounce the agriculture sector has been showing relative weakness to the market. This has been concerning because the sector can get hit hard if the market takes a tumble. Given that the sector can take a pause in September before starting to outperform once again at the end of the month, from a risk management perspective HAC decided to reduce exposure to the sector.

Although PotashCorp performed well at the start of its seasonal trend, recently it has been faltering. It has been underperforming the market as the market has been rising. As a result, HAC sold its PotashCorp position in August. HAC is looking to re-enter the position in October when PotashCorp often has a second leg of outperformance.

Procter and Gamble
Last month I presented Procter and Gamble as a good seasonal opportunity at this time of the year (see TML, August 2012). In August, PG had a break-out above its April high. This is bullish for PG, making it an attractive position into mid-November.

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Bonds (US Government 7-10yr)
Although this position has performed well since the beginning of its seasonal period in May, recently it has faltered. The long-term trend is still intact, but investors should remember that the seasonal period for this position finishes at the end of September. At this time investors should consider reducing/exiting the position.

Natural Gas
Last month I posted a graph on natural gas stating that investors should look to enter a position at the beginning of September if the technicals were supportive. At this time it is best if an investment decision is deferred, as the price of spot natural gas is pushing against the bottom of its trading channel. If it breaks this channel, the price could erode substantially. Investors should wait for better market conditions and a bounce of the bottom of the trading channel before considering a entry position.

Metals and Mining (SHORT)
This trade has not worked well for HAC as it was shorted before the seasonal sweet spot which occurs in September. The sector has recently risen as investors have being playing the stimulus trade. In addition, the sector performed strongly when China announced a stimulus package last week. XME currently sits just below resistance and if the market persists in being bullish with strong momentum this sector will continue rise. Investors should consider exiting the short trade if XME breaks through the resistance level.

Transportation (SHORT)
This sector continues to look appealing as a short position as it has a weak seasonal profile at this time and currently has a weak technical profile. It is underperforming the S&P 500 and is close to resistance within its trading channel.

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It is not that investors necessarily believe that the rescue packages are extremely beneficial, but rather that they believe that they can take advantage of other investors believing in their effectiveness. In other words, their goal is to take advantage of a stock market run leading up to the stimulus. The problem is that there seems to be fewer and fewer investors actually buying into the concept of the rescue packages having a positive long-term effect and that more and more investors are gaming the system. The result is an increase in probability that the market will eventually correct severely. The Draghi boost to the stock markets in the last month created a rally in August that may have difficulty continuing. Once we get past the Fed announcement and the German court decision this week, there is going to be little to move the markets over the next few weeks. Yes, it is possible that strong economic numbers over the next few weeks could cause the stock market to respond positively, but otherwise the market will probably soften in absence of any potential stimulus. At the current time, the downside risks to the market are larger than the upside risks. Investors should be patient and look for entry positions in October.

It seems that every time that I write my newsletter, the markets have either just announced another rescue/stimulus package or are on the verge of making another announcement. Maybe the timing will not be so apropos in the future, but there will be more packages on the way. So many investors want the economic results to be bad enough to justify monetary intervention. How ironic. If the economic numbers are below expectations this is seen as a good thing: as long as the numbers are not so bad that the economy is a basket-case beyond the state of repair.

Disclaimer: Brooke Thackray is a research analyst for Horizons Management Inc. All of the views expressed herein are the personal views of the author and are not necessarily the views of Horizons Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc. HAC buys and sells of securities listed in this newsletter are meant to highlight investment strategies for educational purposes only. The list of buys and sells does not include all the transactions undertaken by the fund. While the writer of this newsletter has used his best efforts in preparing this publication, no warranty with respect to the accuracy or completeness is given. The information presented is for educational purposes and is not investment advice. Historical results do not guarantee future results Mailing List Policy: We do not give or rent out subscriber’s email addresses. Subscribe to the Thackray Market Letter: To subscribe please visit Unsubscribe: If you wish to unsubscribe from the Thackray Market Letter please visit Contact: For further information send an email to

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