You are on page 1of 7

Thackray Market Letter

— Know Your Buy & Sells a Month in Advance —
Published the 10th Calendar Day of Every Month
Volume 4, Number 12, December 2010 Written by Brooke Thackray

Brooke Thackray is a Research Analyst along with Don Vialoux for the Horizons AlphaPro Seasonal Rotation ETF that trades under the symbol HAC on the Toronto Stock Exchange. 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.

Happy First Birthday !
Now ! able Avail ajor lM At Al tores s Book

HAC Outperforms with Less Volatility*

1 year % Gain*
HAC 11% S&P 500 7.6% S&P/TSX 9.5%

Volatility*
HAC 10% S&P 500 13.7% S&P/TSX 18%

Thackray’s 2011 Investor’s Guide ♦ New Strategies ♦ Updated Charts and Tables ♦ 2009/2010 Strategy Performance Reports

* Gains and volatility are calculated for 1 year (since inception date of HAC Nov 19th) - Source: Bloomberg

Market Comments
HAC is over a year old. In the first year HAC has done well – outperforming the S&P 500 and the S&P/TSX Compos-

S&P 500 Technical Status
The S&P 500 has just recently broken out of its trading range. Although this is a positive development, investors should not get too excited. We are at the early stages of the breakout. Look for strong volume to confirm a continuing rally. Just prior to the breakout, the S&P 500 bounced off its 50 Day Moving Average. This is also a positive development. If the S&P 500 were too fall below its 50 DMA, then it is possible for a retracement to approximately 1120. We are currently in the favourable season for the stock market and as such, the market is expected to move higher over the next few months. Possible areas for a retracement are the middle of January and the month of February.

alphaMountain Investments - alphamountain.com

5% for the S&P/TSX Composite.0 10. In the end. it did benefit from long investments in sectors that typically outperform at this time of year (see past newsletters for details). This past summer. HAC gained 11%. Typically the best time to get back into the market is towards the end of October. versus 7. our entry point was approximately at the same level as the end of October. it has in the past and will in the future.Currency Hedge ** Cash and Equivalents & Other Total (NAV $33. HAC moved to an essentially fully invested position.6 5. rising into fall. Through the correction of the S&P 500 during spring and rally in autumn. the outperformance is impressive.3 14.4% of current NAV) 18. At that time the market was overbought and waiting on the launch of QEII. Up to this point in my writings I have not discussed performance. To recap the performance of HAC. — 2 — alphaMountain Investments . the market essentially up flat. During this time period HAC increased in value and outperformed the S&P 500. from the inception date of November 19th to the beginning of May. the fund outperformed the S&P 500 during the favourable season.Horizons AlphaPro Seasonal Rotation ETF (HAC :TSX) Portfolio Exposure as of November 30th. Where are We Now? Mid-November. That is not to say that HAC will not go up and down over time. Lower volatility translates into less gut wrenching declines.6% for the S&P 500 and 9.9 16. From a risk reward standpoint HAC decided to wait in the short-term.9 5. This rally was mainly driven by the expectation of QEII. The market bounced at the beginning of July and put in an atypical performance. At the current time.3 9. and side stepped the severe market correction during May and June. but even more impressive is the lack of volatility. Yes. looking for an entry position.0 6. 2010 Symbol Holdings % of NAV United States Dollar Exposure Long SPY SPDR S&P 500 XLK Technology Select Sector SPDR Fund SMH Semiconductor HOLDRs MOO Market Vectors Agribusiness ETF XLI Industrial Select Sector SPDR XLY Consumer Discretionary Select Sector SPDR Fund IWM iShares Russell 2000 Index XME SPDR S&P Metals & Mining Canaddian Dollar Exposure Long ZEB BMO S&P/TSX Equal Weight Banks Index ETF Canadian Dollar Futures (December 2010) . For the last year from November 19th 2009 (HAC inception date) to November 19th 2010.076) ** Actual exposure reflects gain / loss on hedge (Notional exposure equals 79.alphamountain.0 5. HAC started to step into the market and towards the end of November.0 % ite. Investors pushed up the markets on the positive expectation of increased liquidity. it is expected the market will provide positive results over the next few months and HAC has positioned itself to capture the potential gains.3 -0. Although HAC did not participate with broad market exposure.0 10. as investment regulations do not allow performance figures to be reported for any fund under one year old. but one of the goals of HAC is to avoid market declines that occur during the unfavourable season for stocks. HAC was able to provide positive value by largely missing the major decline. Investors do not like to see the value of their portfolio erode.5 100.116. HAC accomplished this outperformance with substantially less volatility than the S&P 500 or the S&P/ TSX Composite.com .

With the technology sector correcting in November. in strong markets holding over the entire period can produce extra returns.com . which has now turned into support. November and into January. Although the sector can run for a long time in a strong bull market. See Thackray’s 2011 Investor’s Guide for details. This is a new strategy for the Thackray’s 2011 Investor’s Guide. Last year HAC was able to outperform the S&P 500 during the favourable season by overweighting the seasonally strong sectors. the sector is expected to perform at market until the end of the month. XLK retraced back to the 50 Day Moving Average and bounced back through the resistance point. Investors have the option of holding the position from the end of October to the beginning of May. In 2011 the CES takes place from January 6th to 9th. Like the technology sector. but with more beta. The technology sector has been performing well and has recently had a breakout (as represented by the Technology Select Sector SPDR Fund (XLK). Technology The technology sector typically outperforms at this time of year (mid-October to mid-January) as companies spend money on computer equipment before yearend to clean out their budget. we are still in the favourable six months of the year. In addition February has on average been the second worst month of the year (S&P 500 since 1950). It would be wise for investors to consider reducing exposure to the technology sector at this time. Investors also push up the technology sector as they anticipate increased electronics shopping around the Christmas season and anticipate positive product announcements at the Consumer Electronics Show in January. The best times for this sector occurs in October. the sector often rolls over earlier in January at the same time as the Consumer Electronics Show. The major equity holdings for each sector are discussed below. Although January is the fourth best month of the year (S&P 500 since 1950). setting up — 3 — alphaMountain Investments . In markets that are not displaying signs of strength. investors should consider exiting the trade in January. the middle weeks in January can be soft. The portfolio for HAC at the end of November is listed on the second page of this report. Despite these weaker tendencies. depending on technical indicators. The industrial sector typically outperforms from the October 28th to December 31st and then from January 23rd to May 5th. Industrials — New Strategy in Thackray’s 2011 Investor’s Guide. Both of these timing strategies have been profitable in the past. The month of December can be mildly positive for technology stocks. Semiconductor The semiconductor sector has a very similar seasonal trend to the technology sector. The industrial sector has been outperforming the S&P 500. on average the seasonal period for technology has lasted until January 17th (1990-2010). for a good start to January.alphamountain. It is the goal of HAC to do the same again this year. Although the few middle weeks in January have been historically “soft” or flat.It is possible that the market may encounter soft spots in the middle weeks of January and the month of February.

Investors pushed up the sector in anticipation of strong earnings. Canadian Banks — New Strategy in Thackray’s 2011 Investor’s Guide.alphamountain. Given the disappointing earnings recently. typically it is best to invest over the entire period. The agriculture sector typically does well from August until the end of the year. as a result. for the average longer-term investor.The sector was responding well in November before the earnings announcements started late in the month.1% and the strategy has been successful 95% of the time. The sector is currently showing signs of fading. The compound growth of being in the market from October 28th to December 31st and then from January 23rd to May 5th. HAC invested in the sector early this year (beginning of July) as the sector was showing strong positive technical indicators. is 13. helping to buoy the sector. uses S&P GIC data for the Industrial sector) illustrates the past success of the Industrial seasonal strategy. The Canadian bank sector typically does well from the mid-October to the end of the year and from January 23rd to April 13th. it is likely that the sector will underperform in January. — 4 — alphaMountain Investments . Agriculture The above table (from Thackray’s 2011 Investor’s Guide.com . investors should consider taking profits at the end of the year and look to reenter the sector in late January for the second part of the seasonal period that lasts until mid-April. from the end of October to the beginning of May. The sector typically does well from January 23rd to April 13th. The last major bank to report was the Bank of Montreal which came out with positive earnings. The sector weakened when the banks starting announcing poor earnings. or by the end of the year. Overall. Investors should consider exiting the trade on technical weakness.

So far this year. Investing in the sector from November 19th to January 6 and then from January 23rd to May 5th.5%. Investors are generally faster to sell small companies than large ones. Small Caps The small cap sector has a strong tendency to outperform from December 19th to March 7th (Russell 2000 from 1979/80 to 2009/10). but nevertheless small companies are outperforming. The sector has a track record of producing strong results at this time of year. although it can take a breather from its positive performance from January 6th to the 22nd. investors are seeing signs that the economy is starting to ramp up from depressed levels. recently started its strong seasonal period and had a breakout of its trading range. and as such investors should consider taking a position in late January. Small companies are outperforming large companies for two reasons. — 5 — alphaMountain Investments . Although holding over the entire period from November to May has produced strong positive results and has Small caps tend to outperform until the first week in March. Metals and Mining The metals and mining sector. represented by XME. mainly Europe.Consumer Discretionary The consumer discretionary sector typically does well from October 28th to April 23rd. The rational for the sector to perform well starting in midDecember is that the sector often sells off in early December as investors tend to take small cap losses in order to offset any gains with their large cap stocks. and has been positive 76% of the time (see Thackray’s 2011 Investor’s Guide for details). Second. Investors at this time are happy to avoid the overseas markets. The S&P 500 gets a large percentage of its earnings from overseas operations. From this point the sector can have a strong run up until April 23rd. The sector can have a bit of a flat spot in January.alphamountain. Trends look favourable for this sector to once again outperform until March. generally small companies outperform large companies. When the economy is improving off a bottom. HAC invested in the sector towards the end of November.com . This has the effect of temporarily driving the prices down of the small caps and making them a good bargain.S. benefitting small companies domiciled in the U. The sector has just put in a new recent high and is outperforming the S&P 500. shorter term traders should consider using technical indicators to determine if they should temporarily exit the sector for the middle weeks of January. In this time period the Russell 2000 has beaten the S&P 500 more than 2/3 of the time and has produced on average an extra 3. has produced an average gain of 16. First. investors have not been generating tax losses with small caps. been a good longer-term strategy for the average investor.2% from 1990 to 2010. small company stocks have less global exposure.

it has paid to believe in Santa.5% and for the Nasdaq 0. The rally is typically described as the time period towards the end of the year when the market tends to outperform. Historically.Santa Claus Rally Santa Claus Arrives Early and Stays Late At Christmas time every year the media likes to write about the Santa Claus rally.0% from 1950/51 to 2009/10 and the Nasdaq 3. There is no guarantee that Santa will once again arrive with the present of solid profits.alphamountain. Unfortunately. Compared with the dates that are typically bantered around in the media at this time of the year. Just remember that in the past.6% – substantially less than the results for the Santa Claus Rally.0% from 1971/72 to 2009/10. Historically. The average of any randomly selected fifteen day period for the S&P 500 has been 0. investing just for the short period at the end of the year has cost investors profits. this strategy has investors in the market for a longer period of time Santa arrives early and leaves late. The returns for the average fifteen day period for the Santa Claus Rally are substantially better than the average returns of any other fifteen day period over the same number of years listed above. The best way to play the rally has been to invest in the market from December 15th to January 6th. ---------------------------- Wishing investors all the best and many profitable seasonal returns in the markets — 6 — alphaMountain Investments .com . most investors believe that the rally only exists for the last few days of the year. the Nasdaq has also added a bit of extra “juice” at this time of year. The S&P 500 has produced an average gain of 2.

While the writer of this newsletter has used his best efforts in preparing this publication. city and country.com .alphamountain.com with SUBSCRIBE in the subject line.com — 7 — alphaMountain Investments . Subscribe to the Thackray Market Letter: To subscribe send an email to subscribe@alphamountain.com.. Unsubscribe: If you wish to unsubscribe from the Thackray Market Letter send an email with UNSUBSCRIBE in the subject line to: unsubscribe@alphamountain.Disclaimer: Brooke Thackray is a research analyst for JovInvestment Management Inc.thackray@alphamountain. The information presented is for educational purposes and is not investment advice. although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by JovInvestment Management Inc. HAC buys and sells of securties 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. no warranty with respect to the accuracy or completeness is given. Contact: For further information send an email to brooke. All of the views expressed herein are the personal views of the author and are not necessarily the views of JovInvestment Management Inc. Also state your first and last name. Historical results do not guarantee future results Mailing List Policy: We do not give or rent out subscriber’s email addresses.