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Thackray Newsletter

Know Your Buy & Sells a Month in Advance

Published the 10th Calendar Day of Every Month
Volume 10, Number 09, September 2016

Written by Brooke Thackray

is bound to have an impact on the stock market.

Market Update
Nuke test and loss lips sink the market
What rattled the stock markets on Friday? Was it North
Koreas nuclear test or the Federal Reserve Bank of Boston President Eric Rosengren statement that a reasonable
case can be made for tightening interest rates? In the end,
the nuclear test put investors in a foul mood, but it was
the Federal Reserves hawkish comments that tipped the
market into a decline. In addition, Rosengrens statement,
the Federal Reserves most dovish governor, Lael Brainard, will be making a previously unannounced speech
Monday at The Chicago Council on Global Aairs. When
such a dovish governor makes an unannounced speech, it

As for North Koreas inuence on the stock market, it had

tested the nuclear device before the stock market opened
causing a slight decline in prices. It was really only after
the Federal Reserves comments that the market started to
correct sharply. Although the nuclear test may have some
long-term consequences, such an action in the short term
is usually followed by a rebound. If investors do not think
that the event is going to have a fairly immediate impact
on the stock market they quickly put it aside.
What took place on Friday was an asymmetrical risk
adjustment. Asymmetrical risk can be dened as a disconnect between the potential gain and loss, where one
is greater than the other. I have previously written about

S&P 500 Technical Status

On Friday September 9th, the S&P 500 closed just below the support level of 2132. If it stays below this level for a
few days, it will set a bearish tone for the stock market. The last part of September, starting on September 20th, has
historically been one of the worst times for the stock market. If the S&P 500 corrects, an opportunity may exit to
start entering the stock market earlier in October, if the S&P 500 continues close to all-time highs, then it might be
best to wait until late October.

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Horizons Seasonal Rotation ETF (HAC :TSX)

Portfolio Exposure as of August 31st 2016


Canadian Dollar Exposed Assets
Horizons CDN Select Universe Bond ETF
Horizons Active Floating Rate Bond ETF

% of NAV




Horizons COMEX Gold ETF


United States Dollar Exposed Assets



Horizons US 7-10 Year Treasury Bond ETF



Consumer Staples Select Sector SPDR Fund


US Dollar Forwards (September 2016) - Currency Hedge **


Cash, Cash Equivalents, Margin & Other


Total ( NAV $181,752,127)


** Reects gain / loss on currency hedge (Notional exposure equals 33.0% of current NAV)

The objective of HAC is long-term capital appreciation in all market cycles by tactically allocating its exposure
amongst equities, xed 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.
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asymmetrical risk as it applied to Brexit. Heading into the

Brexit vote, the polls were suggesting a 50-50 possibility
of Britain seceding from the European Union. But almost
everybody was acting collectively as if there is no chance
Britain would leave. In this scenario, a disproportionate
amount of risk existed on the downside versus the upside. If Britain had elected to stay in the European Union
it would have been very small rally in the stock market
as that scenario was expected in the nancial markets.
When Britain decided to leave the European Union the
stock market corrected sharply. Investor expectation did
not match the risk that was established in the polls and
investors got caught on the wrong side of the trade.
Ironically, I was going to write about asymmetrical risk
in the newsletter before Fridays event. Leading into Friday there was a huge expectation that the US Federal Reserve would not raise its rate later this month or even in
December and this expectation had already been priced
into the market. In this scenario, there is very little gain
to be made if the US Federal Reserve supports its dovish
stance. There is more to be lost if the Federal Reserve
starts to become hawkish and that is exactly what happened on Friday.
There is a dierence between the Brexit outcome and the
increased possibility of the US Federal Reserve raising
rates. In the Brexit situation investors quickly realized
that after the vote, there would not be any action taken to
leave the EU for up to two years. This is a lifetime in the
investing world. Investors quickly bid up stocks past the
pre-Brexit levels. One US Federal Reserve governor making a hawkish statement does not set the direction for all
governors. US Federal Reserve governors cross talk each
other all the time. Some are hawkish and some are dovish,
and sometimes they change their minds. Sometimes you
wonder if this is just the strategy of obfuscation.
The danger in this situation is if there is continued conrmation of a hawkish tone, the market will correct. The
rally over the last few years has existed in an anemic economic growth environment and weak corporate earnings.
It has been nancially engineered by the Federal Reserve
lowering interest rates. As a result, if the US Federal Reserve starts to get serious about raising rates the stock
market will suer.
Watch out. A lot of market pundits will say that when the
US Federal Reserve starts to raise interest rates it is a sign
that the US economy is growing and that is a good thing.
Not so. This time is dierent. Typically, the US Federal
Reserve has to raise interest rates because economy is
overheating and needs to be slowed down. This is hardly
the situation today. The reason why interest rates have to

be raised over time is that they are articially low and

distorting the economy.
In my blame it on Stanley rant at the end of this newsletter, I describe how the expectation of low rates cannot be
used to help propel the market and indenitely higher.
Im not saying the US Federal Reserve is going to raise
rates. In fact, they may continue to play word games for
quite some time. Most of the Western world have a very
loose monetary bias and have low or negative rates. It
is dicult for the US Federal Reserve to raise rates in
this environment. In fact, maybe the market bounces until
the next federal reserve governor makes a hawkish statement. What has been removed out of the market is a bit
of complacency with investors acting as if the Federal
Reserve will never raise rates. I can tell you this, that the
FOMC meeting on the 20th to the 21st of this month will
be closely watched.

What the HAC is going on?

It seems like HAC has been standing still, all the while
the stock market has been gyrating up and down.
In the past few weeks we have been selling. First we sold
our biotech position that performed very well for us since
it was picked up in late June. It started to lose strength
relative to the S&P 500 and it hit our STOP, so HAC
exited. It was as simple as that. We were also in the one
month window before the end of the seasonal period,
helping to justify the decision. The closer it is to the end
of the seasonal period, the less leeway a position is typically given.
Last Friday we exited our position in consumer staples,
as its STOP was also hit. Recently, the position was starting to lag the market. It was interesting to see the sector
went down more than the S&P 500 on a big down day.
Despite this sector being defensive, investors have bid the
sector up and it has become expensive. Just because it is
a defensive sector does not mean that it cannot correct
sharply. Investors should note that the consumer staples
sector has typically been the best performing sector in the
month of October. There still may be an opportunity for
this sector, but for now it is o the table.
U.S. government bonds have been pulling back as investors are starting to get a bit more concerned that the U.S.
Federal Reserve may raise interest rates. U.S. government
bonds typically perform well until the beginning of October. It is possible that bonds may nish their seasonal period early, and investors should be prepared to exit early.

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tober 3rd) given the recent weakness.

Seasonal Opportunities
Consumer Staples - broken trend line hit STOP
and HAC out
The consumers staples sector is typically a good hold
during the summer months due to its defensive nature.
The problem is that anything in the market that is paying
a higher yield has been bid up, including the consumer
staples sector. In other words, the consumer staples sector
is expensive. The current P/E for XLP is 21.5 according
to State Street Advisors. This is expensive for the sector.
Sometimes being expensive is okay, but being expensive
makes it susceptible to a correction. On Friday September
9th, the stock market corrected sharply and the consumer
staples sector went down more than the S&P 500. Its defensive characteristics did not help. HAC was stopped out
on its position. It is possible that the sector could revive
itself relative to the stock market as historically, since
1990, the sector has on average been the best performing
major sector in the stock market in October.

My Call: U.S. Government bonds will not perform

well over the next few months as speculation increases over the possibility of the U.S. Federal Reserve increasing interest rates.

Gold - losing its shine

HAC missed most of the gold run that took place earlier in the year because it largely happened out of season.
Seasonal investing is a great risk-adjusted strategy, but
it does not catch every run. HAC did participate in the
silver run in January and February, so it did benet indirectly from the multi-month run in precious metals.
Recently, HAC made a conscious decision to favor gold
bullion over gold miners (HAC does not hold a gold miner
investment). As I mentioned in my last newsletter, there
is a lot of speculative money in the gold miners sector and
if the stock market corrects look for this sector to get hit.
Gold bullion is starting to shows signs of weakness. It
has not broken down at this point, but we are close to the
end of the seasonal period for both gold miners and gold

My Call: The sector will probably perform at market in September. When the market regains its footing, the consumer staples sector will probably moderately outperform the S&P 500.

Typically, September is the best month for gold bullion

and gold miners, but commodities tend to be volatile even
in their seasonal periods and investors should be prepared
to exit the sector on further weakness.

U.S. Government bonds- loosing strength

U.S. government bonds tend to perform well in the summer months. They started o their seasonal period breaking out of a bullish ascending triangle. More recently,
they have been forming descending bearish triangle and
are currently at support. Investors should be prepared to
exit the sector before the end of the seasonal period (Oc 4
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CAUTION: On average, October has been the weakest month of the year for gold bullion and gold miners since 1984. Historically, a lot of the weakness was
generated by central banks selling large blocks at this
time of year, because of the yearly allotments by the
Central Bank Gold Agreement ending in September.
The negative October trend has still persisted at times
when central banks have collectively not been active
sellers. For more information on the Central Bank Gold
Currently, $1300 is support for gold. From a seasonal perspective, it is sometimes better to exit a position before
support is touched, if the timing is such that the end of the
seasonal period is close and the following period tends to
be negative.

date of the six month favorable period for stocksOctober 28th.

We have to go back to 2012 to see a rally into October.
In that year, it paid to wait until late October to enter the
market compared to getting in early.
The following shopping list is made up of sectors of the
stock market that start their seasonal period earlier than
October 28th and under the right circumstances are the
preferred sectors to enter early.

Natural Gas - Showing strength - seasonal period

starts September 6th
Despite above average inventory levels of natural gas,
natural gas has been rising in price. Warmer weather has
increased the use of natural gas to produce electricity (see
graph below).

My Call: Gold bullion will probably start to fade

before the end of its seasonal period. It will probably respond to increasing negative pressure as
speculation increases that the U.S. Federal Reserve
will increase interest rates.

Shopping List
Seasonal Strategy Shopping List
The seasonal strategy for the shopping list is largely dependent on what takes place in the stock market between
now and the beginning of October. As mentioned on the
rst page of this newsletter, the last few years we have
seen corrections in September that have lead to good opportunities to enter the stock market earlier than the start
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Natural gas is performing well. At this point, a break

above $3.00 MMbtu. It is possible that natural gas will
have a pull-back on cooler weather.
My Call: Natural gas will probably break above its
resistance point @ $3.00 MMbtu and perform positively over its seasonal period

Canadian banks - already performing well - seasonal period starts October 10th
For so long Canadian banks had to ght the headwinds
of a possible real estate correction (still might happen),
a large correction in the energy sector hurting their balance sheets, and short sellers mainly in the U.S. Well, the
banks produced very strong earnings in August which has
helped the sector to perform well.
The earnings bump squeezed the short-sellers.
Defn: Short selling is the act of borrowing securities from another investor and selling the securities
with the expectation of buying them at a lower price
in the future.
There is still a sizeable short position against Canadian
banks, which should help support the banks if they move
up in price.
Recently, the energy sector has been performing relatively well which has helped the banks. At todays oil prices,
there probably is not a lot of loan loss risk. If we get down
to $30 West Texas...that is a dierent story.

Homebuilders- building a base - seasonal period

starts October 28th, but can start early
The homebuilders sector has recently been performing at market. It has been in a consolidation phase after
rst outperforming the S&P 500 in its seasonal period in
2014/2015 and continuing to outperform until September
of 2015. At that point, it corrected and underperformed
the S&P 500. The recent consolidation is a good setup
for the sector to perform well in its seasonal period that
starts October 10th. If investor expectations continue to
adjust to the possibility that the U.S. Federal may resume
increasing interest rates, the sector could be impinged and
not perform as well as expected.

CAUTION: If Canadian banks continue to outperform

the stock market coming into Q4 earnings releases, it is
often best to exit the sector just as the rst bank releases
its earnings in the last week in November / rst week
in December.
In 2013 and 2014, banks rallied and outperformed the
markets many months before their Q4 earnings release in
November or early December. By the time the banks came
to release their earnings, investors had crowded the sector
and their expectations were too high. Anything short of
exceptional was not going to cut the grade. Despite having good Q4 earnings in 2013 and 2014, the sector faded
in December. Caveat emptor.

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My Call: The homebuilders sector will continue to

consolidate relative to the S&P 500 and will probably
start to outperform once investors perceive that the U.S.
Federal Reserve has committed to a dovish posture.

Agriculture - moooving into a good setup

The agriculture sector tends to perform well from August
to the end of December, but the real sweet pot to the trade
starts late September/early October. The sector has been
outperforming recently after a long period of consolidation, which is a good sign.

My Call: The transportation sector will probably

outperform in its seasonal period which starts on
October 10th.

Technology - Looking good technically - seasonal

period starts October 9th
The technology sector has been performing very well
relative to the S&P 500. On an absolute basis, it broke
through resistance in July. The technology sector starts its
seasonal period on October 9th.
My Call: The agriculture sector will probably start
its seasonal run either in September or October. If
there is a strong correction in the market, this sector will be a preferred sector on the bounce.

Transportation - Looking good technically - seasonal period starts October 10th

The transportation sector started to underperform in April
compared to the S&P 500. It has only recently broken its
down trend line. This is a positive development. In addition, the sector has once again moved close to resistance.
Overall, the trade is setting up well for its seasonal period.

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My Call: The technology sector will probably perform well in its seasonal period. Investors should
be cautioned that the sector often underperforms
starting at the beginning of December. Given its recent early seasonal run, investors should anticipate
this possibility.

Brookes Rant
Blame it on Stanley

the S&P 500 hits 2200, or 2300? You may be cynical and
say that 2300 is over-the-top because of TINA, but investors have been using the TINA excuse for a few years
now as stock markets have climbed higher. The economy
has been at and earnings have been going down and the
stock market has been going up. The rationale: TINA.
Eventually the excuse will not work. TINA will no longer
be able to drive the market higher. Just as the neighborhood Stanleyexcuse was outed, the TINA excuse will
also be outed.

When I was a young lad I had a friend named Stanley. He

was generally well liked by other guys his age, but he was
not liked by their parents. Stanley was a trouble maker
and he dressed the part. Parents did not like how Stanley acted or looked. He was actually a fairly good guy,
but his buddies in the neighborhood realized that Stanleys negative status with their parents could be used to
their advantage. Anytime a hockey net went missing, or
something was broken in the yard or anything that could
be blamed on someone else; Stanley was blamed. This
suited the kids ne and even the parents. The neighborhood parents would state, thank goodness it wasnt
their kid that caused the problem.and would then once
again lay down the conditionjust dont let Stanley into
the house. Parents talk. Eventually they gured out that
Stanley could not possibly be responsible for everything
for which he was being held accountable, especially after
he moved to a dierent neighborhood.
Today, investors and pundits keep pointing to ZIRP (zero
interest rate policy), or very low rates, and keep saying
that the stock market is fairly valued and has to keep going up as There Is No Alternative (TINA). There is no
question that low rates make a favorable environment for
the stock market, but that does not mean that the market
will be supported forever. You cannot use the same excuse
as the market climbs higher. When do you stop saying that
the S&P 500 should still rise because of TINA? Is it when

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Disclaimer: Comments, charts and opinions oered in this report are produced by www.alphamountain.
com and are for information purposes only. They should not be considered as advice to purchase or to sell
mentioned securities. Any information oered in this report is believed to be accurate, but is not guaranteed.
Brooke Thackray is a Research Analyst with Horizons ETFs Management (Canada) Inc. (Horizons ETFs).
All of the views expressed herein are the personal views of Brooke Thackray and are not necessarily the views
of Horizons ETFs, or AlphaPro Management Inc., although any of the opinions or recommendations found
herein may be reected in positions or transactions in the various client portfolios managed by Horizons ETFs,
including the Horizons Seasonal Rotation ETF. Comments, opinions and views expressed are of a general
nature and should not be considered as advice to purchase or to sell mentioned securities. Horizons ETFs has
a direct interest in the management and performance fees of the Horizons Seasonal Rotation ETF (the ETF),
and may, at any given time, have a direct or indirect interest in the ETF or its holdings. Commissions, trailing
commissions, management fees and expenses all may be associated with an investment in the ETF which is
managed by AlphaPro Management Inc. The ETF is not guaranteed, its values change frequently and past performance may not be repeated. The ETF may have exposure to leveraged investment techniques that magnify
gains and losses and which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the ETFs prospectus. The prospectus contains
important detailed information about the ETF. Please read the prospectus before investing.
While the writer of this newsletter has used his best eorts 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
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