Thackray Market Letter

— Know Your Buy & Sells a Month in Advance —
Published the 10th Calendar Day of Every Month
Volume 7, Number 3, March 2013 Written by Brooke Thackray

Market Update Market Top? Not So Fast
It seems that every day more and more analysts are calling for a market top. This is especially true since the Dow Jones Industrial Average has recently reached all-time highs. The call for a top is primarily based upon the mis-

guided wisdom that the market has risen too far too fast and therefore must correct. This statement is fundamentally incorrect as the market can keep rallying. Investors should never sell just because the market has had a strong rally. If they do, more often than not, they will find themselves being left behind. According to the Relative Strength Index (RSI), the marCont....page 3

S&P 500 Technical Status
Currently, the S&P 500 is still in a bullish formation with higher highs and higher lows. Recently it bounced off the 50 day moving average and has risen above its top trend line. It is currently just below its all time high of 1565 set on October 9th 2007. This follows on the heels of the Dow Jones Industrial Average which recently broke its all time high. In the short-term the market can still move higher and investors should not sell their portfolio just because an all time high has been reached. The S&P 500 is still in good shape and is still NOT overbought, with the RSI below 70 and rising. There is a bit of a concern with declining volumes diverging from a rising stock market. When volumes fail to confirm a rising market there is less conviction in the rally, making the market susceptible to a pull-back. It is not a major concern, but something to keep an eye on. Investors should pay attention to the U.S. financial sector. It is currently slightly outperforming the S&P 500, which supports a positive outlook, but if it slips it will point to a weaker market ahead. Currently, investors would be wise to stay the course in the market and focus on outperforming seasonal sectors.

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Horizons Seasonal Rotation ETF (HAC :TSX) Portfolio Exposure as of February 28th, 2013 Symbol ZEB HFR Holdings Canadian Dollar Exposed Assets Equities BMO S&P/TSX Equal Weight Banks Index ETF Fixed Income & Currencies Horizons Active Floating Rate Bond ETF United States Dollar Exposed Assets SPY DVY XLI XLF IWM XRT XLY SMH XLE XOP OIH XLB Equities SPDR S&P 500 ETF Trust iShares DJ Select Dividend Index Fund Industrial Select Sector SPDR Fund Financial Select Sector SPDR Fund iShares Russell 2000 Index Fund SPDR S&P Retail ETF Consumer Discretionary Select Sector SPDR Fund Semiconductor Market Vectors ETF Trust Commodities & Energy Energy Select Sector SPDR Fund SPDR S&P Oil & Gas Exploration & Production ETF Market Vectors Oil Service ETF Materials Select Sector SPDR Fund Copper Future March 2013* Fixed Income & Currencies Horizons Active U.S. Floating Rate Bond ETF US Dollar Forwards (March 2013) - Currency Hedge ** Cash, Cash Equivalents, Margin & Other Total ( NAV $91,727,267) 16.7% 11.1% 10.3% 9.7% 9.6% 8.9% 3.5% 2.1% 5.2% 3.9% 2.9% 2.0% 0.0% 0.3% -0.2% 4.1% 100.0% % of NAV 6.9% 3.0%

HUF.U

* Actual exposure reflects gain / loss on future (Notional exposure equals 2.3% of current NAV) ** Actual exposure reflects gain / loss on currency hedge (Notional exposure equals 84.2% of current NAV)

* 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 - alphamountain.com

ket is NOT overbought as it is below 70 and rising. To set the record straight.....the term “overbought” is grossly overused. The fact that an investment is overbought is meaningless as any investment can stay overbought for a very long time. Investors should NOT try to time their buys and sells based upon whether an investment is overbought. There are some technical strategies that generate buy and sell signals based upon the RSI crossing certain levels, but that is another matter. In my last newsletter I raised the possibility of a “threepeat,” with the cyclical sectors underperforming in the spring time, for the third year in a row. The cyclical sectors tend to outperform at this time of the year and when they don’t, it is a sign of a market that is becoming more defensive. To be clear, as I stated in my last newsletter, this does NOT mean the market is set for a major correction. It does mean that investors should be more selective in choosing their seasonal sectors. This year, the deep cyclicals (commodity based) have had their troubles. In my last newsletter I described the metals and mining sector as a canary in the coal mine for the deep cyclical sectors. In February and March, the metals and mining sector “cracked” as it started to substantially underperform the S&P 500. Its underperformance points to possible further weakness in the deep cyclical (commodity) sectors. If the metals and mining sector is able to sustain a strong rally, this would be a very bullish scenario for the market. In very recent days the metals and mining sector has had a bounce, but investors should not get too excited as these bounces are common in a corrective action. Although it is possible that the metals and mining sector does put in a strong performance, the risk-reward relationship currently favours avoiding this sector. The poor performance of the metals and mining sector and the commodities is being largely driven by the extremely strong performance of the U.S. dollar. From a seasonal perspective, on average the U.S. dollar performs well until the end of March and then falters. If the U.S. dollar does correct on its seasonal que, it is possible that we could have a strong month in April for the deep cyclicals. This will be addressed in more detail in the next newsletter. Just as the metals and mining sector was used to forecast a weakening condition in the deep cyclicals, the U.S. financial sector can be used to help determine if the S&P 500 is in a topping process. As I have written before, generally when the U.S. financial sector is performing well, it indicates that the S&P 500 is on solid footing. If the sector cannot perform well during its seasonally strong period,

then this often indicates that the market is close to a topping process. After an early seasonal run, the sector is performing slightly better than the market. So far all is good. Investors should remember that the period of seasonal strength for the financial sector lasts until April 13th.

SECTOR UPDATE U.S. Dollar– Up, Up and Away
The U.S. dollar has been on a tear since the beginning of February. As Japan has aggressively devalued its currency and Europe is once again having its troubles, the U.S. dollar has once again become attractive.

Against a basket of world currencies, the USD has bounced off its support level just above 78 and broken through the resistance level (now support) of 82. The next resistance level is 84, at which the USD may stall. If the USD is turned back at 84 and falters, this could breathe life back into the commodity sector. From a seasonal basis the USD tends to stumble at the end of March. A weaker dollar would also help boost the S&P 500.

Gold – We are currently not in the golden period
Although HAC does not hold any gold bullion or gold stocks, and has not since a very profitable trade from July to September, I have been writing about gold because of the number of questions I have received on the subject.

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triangle pattern). I also stated that investors should consider exiting the position if silver fell below $30. HAC reduced its silver position earlier in the month and sold the remaining position when silver fell below $30.

Platinum - followed gold down

In my last newsletter, I stated that if gold fell through $1650, support on the base of a descending triangle, it would likely go to $1550. Shortly after my newsletter was distributed, gold broke $1650 and fell to $1550. I did not expect the process to be so quick, but that is the way of the market. Gold may have a bounce at these levels, but there is no seasonal justification to hold it. HAC does not hold gold bullion or gold stocks.

Silver – No Silver Lining

Platinum has been sucked down in the wake of gold’s fall in price. Despite a recent fall, its price is still above its starting point at the beginning of January. It is possible for it to bounce at these levels but it suffered in the last few weeks. HAC exited its platinum position in February.

Consumer Discretionary – Top Rated Seasonal Sector

Although gold and silver can very often trade together because they are precious metals, at times silver trades more based upon its industrial metal properties. In my last newsletter, I stated that silver’s trading patterns were being greatly influenced by gold and if gold broke down, silver would probably follow (it also had a descending — 4 — alphaMountain Investments - alphamountain.com

Last month I described the consumer discretionary sector as the top seasonal sector for both February and March, based upon frequency of outperforming the S&P 500. An overweight position in this sector at this time should be a core seasonal position. The sector has been outperforming the S&P 500 and is expected to continue its outperformance. HAC added to its consumer discretionary position in February.

Retail – Time to shop for this sector is running out
The retail sector is expected to continue performing well. Investors should remember that this trade ends on April 12th. HAC held a fairly large position in the retail sector in February.

Financials– showing the way

TJX
So far this trade has been disappointing this year, but there is still some time left. The end of the seasonal period for TJX is at the end of March. HAC did not enter the TJX seasonal trade this year. So far this trade has worked well. As I mentioned in my previous newsletter, the financial sector very often acts as a market indicator. As long as this sector is performing well the chances of the broad market performing poorly are reduced. HAC increased its holdings in XLF in February.

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Canadian Banks – mediocre and at risk of being a failed trade

3M– “Posting” strong gains
Recently, the Canadian bank sector has had mediocre performance. After a good bump before their earnings were released in February, the Canadian banking sector has been relatively flat. Recently, as the market has moved into a risk-on mode, investors have favoured higher beta sectors. Last month I called the Canadian banking sector a “safe-play.” This is still true as the sector provides value, particularly if the market returns to a “risk-off” mode. Nevertheless, the Canadian banking sector is struggling. Its up trend is still intact, but it is close to being broken. If BMO S&P/TSX Equal Weight Banks Index ETF (ZEB) breaks below $18.60, investors should seriously consider reducing/exiting the trade. HAC held a position in ZEB in the month of February.

Industrials
The industrial sector has been outperforming the S&P 500 since October. Recently, it has been performing at market. Nevertheless, it is still in its seasonal period and is a core part of the seasonal portfolio at this time. If the market continues higher, this sector should outperform. HAC held a position in XLF in the month of February. 3M typically starts its seasonal outperformance at the beginning of March. This year 3M started to outperform at the end of October. It paused mid-November until the beginning of January and outperformed until the end of February. Given its recent outperformance, it is possible that it pauses here until the end of March, before resuming its outperformance once again. The sweet spot for the 3M’s seasonal trade is the month of April.

GE– Powering higher?
GE has long been considered a bellwether stock for the broad stock market. Given GE’s diversity, there is no question that there is a relationship. The seasonal period — 6 — alphaMountain Investments - alphamountain.com

for GE starts March 5th and ends April 6th. From 1990 to 2012, GE has outperformed the S&P 500, 74% of the time and has produced an average return of 6.6%. At this time we can expect GE to once again outperform. If it does falter at this time, it will indicate a weakening market.

ing the S&P 500 until May 5th. It is important to note that the U.S. materials sector is vastly different compared with the Canadian materials sector. The U.S. sector is over 60% chemical companies, versus the Canadian sector which is over 60% gold mining companies. The analysis in this newsletter pertains to the U.S. materials sector. HAC held a nominal position in the month of February.

Dupont – Showing positive signs

Materials – Late start?

Dupont has a very distinct seasonal period starting January 28th and lasting to May 5th. The sweet spot for this trade starts at the beginning of March and lasts into midApril. On average Dupont starts to underperform the S&P 500 at the beginning of May. The underperformance lasts until the end of the year, which is a very long time. If you are going to own Dupont, now is the season.

Metals and Mining – False recovery?
Earlier in this newsletter and my last newsletter I mentioned that the metals and mining sector was acting as a canary in the coal-mine indicating the health of the market. Investors must note that it is totally possible to have the internal health of the market weakening and at the same time the index moving higher. It just raises the concern that the market is possibly leading to a correction and investors should be on their toes and be more selective in choosing their sectors.

After a successful first seasonal leg from the end of October to the beginning of January, the materials sector has started out of the gate slowly for its second leg. It is only since the last week of February that the sector has started to outperform. It is too early to determine if the trend is going to persist, but the trend is looking favourable. The materials sector has a strong track record of outperform-

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index was rising. It is totally possible that we see the same action this year, especially given that the metals and mining sector performed so poorly in February. So far a positive sign is that the oil stocks have been holding up well relative to the declining price of a barrel of oil. HAC, in January, started to accumulate positions in the oil services sector, oil exploration and production and the overall sector in Canada and the U.S.

U.S. energy sector better play than Canada– for now
As I discussed in my last newsletter, both the Canadian and U.S. energy sectors can perform well, but investing in the Canadian energy sector is making a bet on one of two scenarios: a strongly bullish outlook for the energy sector, or a rapid rise in natural gas prices. In mid-February the metals and mining sector cracked as it fell through a support line and started to significantly underperform the S&P 500. It is going to be interesting to see if the very recent bounce can be sustained. Although it is possible to get a bounce after a sector has “cracked,” the overall risk-reward relationship has changed and it is typically best to avoid the sector. HAC did not have a position in the metals and mining sector in February. During the summer seasonal period for energy, both the U.S. and Canadian sectors increased in value. Despite the increase, the Canadian sector was only able to perform at market. Over the last few months, it has been underperforming both the market and the U.S. energy sector.

Energy– Waiting for outperformance

The energy sector started its seasonal outperformance early this year, in January. Recently, it has pulled back as the “official” season started. Last year the energy sector did not perform well in its seasonal period as the deep cyclicals were performing poorly and the overall market

The discounted western Canadian oil, along with its higher production costs is in effect leveraged to higher oil prices. Higher oil prices provide a greater margin expansion for Canadian operations, compared with other nations that have lower production costs. As a result, if the Canadian energy sector does start to outperform the market and the U.S. energy sector, this will be bullish for the overall energy sector. This would be good news.

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LAST MINUTE THOUGHTS
In my last newsletter I brought up the issue of currency wars as more and more countries seem to be interested in stimulating their economy with lower currency values. Japan has been very aggressive in its actions to lower the value of its currency. Shortly after the release of my last newsletter the G8 leaders came out with statements that echoed each other, stating that they were not interested in currency wars…..what do you expect them to say? It is a reasonable expectation that countries will continue to look at currency devaluation as a tool to stimulate growth in their economies. Countries can only sit by for so long and watch other countries, such as Japan gain a competitive advantage by aggressively reducing the value of their currency. Expect more countries to take action in the future. The problem is that the U.S. will probably end up on the losing side in the race to the bottom. In other words, they will have trouble lowering their currency more than others. The reason is simple. They have taken such aggressive monetary action stimulating their economy there is not much more they can do. With a bottom basement Fed funds rate and successive quantitative easing programs, their remaining tools are limited. The Dow Jones has reached all-time highs and the economy is showing signs of improving. Unemployment is

down to 7.7% in the US after a strong jobs number of 236,000 was released on March 8th. Everything seems to be going “swimmingly” and investors are responding by coming back to the market. After a fractured result in the Italian election, with the comedian Bepe Grillo and his 5 Star Movement gaining a much larger percentage of the vote than expected, and the negative implications of a possible further election, the market only dipped briefly before moving higher. Grillo is advocating leaving the euro and returning to the lire. Despite the dire consequences of what is happening in Europe, the market has shrugged off the negativity and has moved higher. Bad news is being digested well and the market is moving higher. We are still in the favourable six month period and this is not the time to be running from the markets just because the market has had a strong rally. Guessing when the market might turn down in the favourable seasonal six month period is counterproductive. There is still opportunity in the market and investors should be concentrating their efforts in the sectors that are responding well.

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 alphamountain.com. Unsubscribe: If you wish to unsubscribe from the Thackray Market Letter please visit alphamountain.com. Contact: For further information send an email to brooke.thackray@alphamountain.com

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