Thackray Market Letter 2012 May

7/31/2019 Thackray Market Letter 2012 May

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Thackray Market Let ter Know Your Buy & Sells a Month in Advance

Published the 10th Calendar Day of Every MonthVolume 6, Number 5, May 2012 Written by Brooke Thackray

alphaMountain Investments - alphamountain.com

S&P 500 Technical Status

In the November Thackray Market Letter, when the S&P 500 was trading at 1230, I wrote that it is likely that we

[S&P 500] will reach the 1370 level during the favourable season. If we do see 1370, it will difficult for the market to

make it past this level. Ironically, the market currently sits @ 1370 after breaching 1400 in the last month.

The outlook for the S&P 500 is bearish for the next 5-6 months. Not only is this the time when equities seldom per-

form well, but the technical picture is not strong. The S&P 500 has broken its upward trendline after briefly breaking

through 1400. It has broken its 50DMA and currently sits just over 1350, a major support line (a lot of analysts are

using 1357 as a major support line, but 1350 represents the lower threshold).

The market has been losing its breadth as fewer and fewer sectors have been propelling the market upwards. The sec-

tors driving the market have been technology, financials and consumer discretionary. Money is starting to rotate out

of these sectors and into the defensive sectors. The market is getting weaker and the risk-reward relationship favours

a correction over the next few months.

The target for the S&P 500 over the next 5-6 months is 1250. It is possible that we move lower, but we would have

to have either major problems in Europe, China or the U.S. If Bernanke launches another stimulus package after

Operation Twist finishes, this would help support the market, but the positive effect would be less than the previous

stimulative packages. Overall, the current outlook is bearish and investors should act accordingly.

Market Update

Surprise.European countries are slowing down as more

countries enter into a recession: eleven countries are now

officially in a recession (WSJ May 1, 2012). Actually, it

is not a surprise at all. Europe was already slowing down

before austerity measures were put in place and now with

government cutbacks economic contraction is taking

place. Even the EU has even been surprised at the depth

of the slowdowns underway (they tend to have a very pos-

itive outlook). The situation in Europe is looking bleak.

To complicate the situation further, Europeans are voting

against the fiscal rescue packages and the resulting aus-

terity measures. France has elected a socialist President

who is promising to examine how the Euro-zone is deal-

ing with the debt crisis. Greece has changed the political

landscape with its election that has created big gains for

the Coalition of the Radical Left at the expense of the

mainstream New Democracy and Pasok parties, whichCont....page 3


2/9alphaMountain Investments - alphamountain.com

2

Horizons AlphaPro Seasonal Rotation ETF (HAC :TSX)

Portfolio Exposure as ofApril 30th, 2012

Symbol Holdings % of NAV

Canadian Dollar Exposed Assets

Equities

WN George Weston Ltd 2.1%

Fixed Income & CurrenciesHFR Horizons Floating Rate Bond ETF 9.6%

Canadian Dollar Future May 2012* 0.0%

United States Dollar Exposed Assets

Equities

XLP Consumer Staples Select Sector SPDR Fund 10.0%

DVY iShares Dow Jones Select Dividend Index Fund 5.2%

IYR iShares Dow Jones US Real Estate Index Fund 5.1%

INTC Intel Corp 2.0%

WM Waste Management Inc 1.1%

RSG Republic Services Inc 0.5%

AMD Advanced Micro Devices Inc -2.0%

XHB SPDR S&P Homebuilders ETF -5.3%XLY Consumer Discretionary Select Sector SPDR Fund -10.1%

Fixed Income & Currencies

HUF.U Horizons U.S. Floating Rate Bond ETF 1.1%

Commodities & Energy

GLD SPDR Gold Shares ETF 2.0%

GDX Market Vectors Gold Miners ETF 1.0%

SIL Global X Silver Miners ETF -1.0%

SLV iShares Silver Trust -2.0%

US Dollar Forwards (May 2012) - Currency Hedge ** 0.0%

Cash, Cash Equivalents, T-Bills, Margin & Other 80.8%

Total ( NAV $89,273,375) 100.0%

* Represents gain/loss on future (Notional exposure equals 5.0% of current NAV)

** Actual exposure reflects gain / loss on currency hedge (Notional exposure equals 68.1% of current NAV)

Performance Comments:

For the month of March HAC produced a loss of 1.4%.

This compares to the S&P 500 which had a loss of 0.7%

and the TSX Composite which had a loss of 0.8%.

Source: Bloomberg, HAC performance based upon Net Asset Value

Brooke Thackray is a Research Analyst along with Don Vialoux and Jon Vialoux for the Horizons 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.



3

had both agreed to major spending cuts in order to stabi-

lize the countrys finances.

Holding the European countries together in the current

state of mandated austerity measures for money is sim-

ply not going to work over the long-term. The contract

between the countries that are giving the funds and the

countries that are receiving the funds will not be able to

stand the test of time. Solving the debt crisis will take a

long time, one way or another. Either the giving coun-

tries will stop giving money, or the receiving countries

will no longer put up with imposed austerity measures

necessary to receive the funds.

The current politicians of the receiving and giving coun-

tries have shown a strong resolve to take action as they did

not want to be seen standing on the sidelines and watch-

ing the EU crumble. The politicians have taken the stance

that it is better to be doing something, rather than nothing.

The citizens of both the giving and receiving countries do

not share the same political resolve of their leaders.

The social fabric of the receiving countries is disintegrat-

ing: job losses, government cutbacks, pay cuts, pension

reductions are contracting economies faster than even

the EU had expected. Unemployment is skyrocketing in

European nations, particularly with the youth. The most

notable country with high youth unemployment is Spain

with an eye-popping rate sitting just under 50%. The situ-

ation looks dire and populations across Europe are look-

ing for someone to blame. They are just starting to turn

on their political leaders. Rising opposition to austerity

measures will bring forward more and more politicians

that are willing to run on a platform that removes theircountries out of the austerity contract.

Historically, social changes are often brought about dur-

ing periods when the masses have too much idle time. The

Romans knew of this danger. As a result, they developed

the gladiator sport of sacrificing people for the purpose

of entertaining their unemployed so they would not rebel

against their emperor.

There is a significant danger that the populations of the

suffering European countries will rebel. Up until now,

we have seen some mass demonstrations in Greece and

marches in some of the other peripheral countries. With

a huge number of unemployed youth scattered through-

out the region, the potential for mass unrest is high. This

could be the Summer of Discontent.

The case against austerity is going to keep building as

people become fed up with the price they have to pay.

Rightly, or wrongly, they will vote for politicians that say

there is a better solution. Watch out for this to become a

growing trend as more and more emotional stories tear at

the heart strings of the people. According to the Health

Ministry in Greece, there has been an increase in the

number 40% increase in suicides in the first quarter of

this year, compared to last year.

Most people are genuinely good and are willing to help

others in need, but there comes a point when enough is

enough. The West Germans paid huge amounts of resourc-

es to help reintegrate East Germany. This was a costly

venture, but there was no choice as the East Germans were

family. Later they paid into the European Union in order

to create the Euro and support poorer countries as they

joined the EU. Recently, they have been the main source

of funding for the ECB in their rescue packages. Germans

and other giving countries have been very generous in

their support for the peripheral countries. They knew that

something had to be done and were willing to help out.

But it is inevitable that frustration will build over time

as the giving countries continue to give more and more

money with no progress to be shown. More than likely

the ECB will be back a few more times, begging for morerescue package money. At some point, the giving coun-

tries are going rationalize that they are throwing good

money after bad, and look for alternative solutions to the

current EU structure. It is just a matter of time.

I have been writing about seasonal trends in the market

since the mid-1990s. My first book launched in 1999

(Time In Time Out, Outsmart the Market Using Calen-

dar Investment Strategies ISBN 978-1890412937). In

the 1990s investors and analysts were only interested in

technology stocks and crazy metrics like the number of

eyeballs viewing web sites. Times have changed as in-vestors have questioned the validity of a buy, hold and

close your eyes investment strategy. This year, there is a

huge number of articles and special features in the media

discussing the rational or effectiveness of a Sell in May

and Go Away strategy. There is no doubt that the discus-

sion is a result of the large drops that have occurred in

the stock markets over the last two years. I appreciate the

seasonal focus in the media, but unfortunately most of the

analysis does not measure the true risk/reward of using

a seasonal strategy in the stock market. In addition, the

analysis is void of strategies for the market or sectors of

the market that have seasonally positive trends over thesummer months.

Most of the Sell in May analysis that is floated in the

media involves a cursory look at either the average rate

of return or the frequency of positive returns from May to

October. Based upon extensive research, I use the dates

from May 6th to October 27th as the unfavourable sea-

son. During this period from 1950 to 2011, the S&P 500

has produced an average geometric loss of 0.7% and has



4

been positive 61% of the time. The extent of the true risk/

reward relationship is hidden below average numbers.

From 1950 to 2012 the favourable season (Oct 28 to May

5th) has produced an average geometric gain of 7.7% and

has been positive 81% of the time.

When assessing an investment strategy, investors should

always be cognizant of possible maximum returns and

drawdowns. The biggest fear of being out of the market

during the unfavourable season is that investors will fore-

go outsized returns, or in other words, miss out on a large

rally. Using a 10% threshold, it is clear that the favourable

season that just finished has a much higher likelihood of

providing large returns.

From 1950 to 2012 the favourable season has produced

gains greater than 10%, 42% of the time. This compares

to the unfavourable season which has only been able to

muster up gains greater than 10%, 13% of the time.

Yes, there are the rare times where a large return is madein the summer months. In 2009, the S&P 500 produced a

17.7% gain. But investors should remember that the mar-

ket had collapsed into March of that year and was putting

in a v-shaped bottom as it bounced off a disaster scenario.

With increasing talk of QEII during the summer months

of 2009 the market shot upwards. Currently, the S&P 500

is reaching for the 2007 highs: we are definitely not in the

same situation.

On the other hand, it is important to examine the frequen-

cy of large losses. Using the S&P 500 and establishing

threshold of losses greater than 10%, it is once again clearthat the best time to invest in the markets is the favour-

able six month period. From 1950 to 2012 the favourable

season has only had losses of greater than 10%, 3% of the

time. This compares to the unfavourable season that has

losses 11% of the time.

In comparing the favourable and unfavourable seasons

of the market, it is clear that the favourable season has

provided larger gains and smaller losses than the unfa-

vourable season. If an investor had to choose just one six

month period to invest in, the answer is obvious. From

a seasonal perspective, investors should tend to increasethe beta in their portfolios during the favourable six

month period and reduce it during the other six months.

One way of doing this is to raise cash. Investors should

also consider investing in seasonally strong sectors that

tend to outperform during the unfavourable season.

Most media commentators only mention the seasonal ten-

dencies for the broad market such as the S&P 500. They

neglect to comment on possible seasonal tendencies for

sectors of the market. Despite the stock market typically

not being the best place to make large returns in the sum-

mertime, there are seasonal sector opportunities. A lot

of the returns that are generated in the summer months

can be explained by the sectors of the market that tend

to do well in the summer, versus the broad stock market.

It makes sense to avoid the sectors that typically have a

negative performance, and focus on sectors that tend to

be rewarding. I will cover some of the possible trades

later in this newsletter and in future newsletters.



5

What is Going on in the Market

Last month I discussed the phenomenon of the cyclical

sectors underperforming when they typically should be

outperforming and what this meant for the market. There

has been an interesting development in the market. Cy-

clicals are still underperforming, but instead of the mon-

ey flowing into the technology sector, it is now flowing

into the defensive sectors. Technology stocks are startingto show signs of underperforming. As I mentioned last

month, when the leading sector, technology, starts to un-

derperform it will indicate that the market is topping out

and losing its strength.

Oil

Given the amount of press that the recent slide in oil pric-

es is generating, I feel that it is important that I comment

on the sector, even though HAC does not hold any direct

oil investments. A lot of analysts are taking the position

that oil has been beaten up so badly and that it is over-sold, representing a good buying opportunity. Although

it is possible that oil prices will move up over the next

two months, the average seasonal trend is not supportive

of this position. The next seasonally strong period for oil

and oil stocks takes place in late July. Seasonal investors

should not be looking to invest in this sector at this time,

but rather looking to see if there is an attractive entry

point later in June or July.

Natural Gas

Another sector of the market that investors question me

about is the natural gas sector. HAC does not hold any

direct natural gas investments. After dropping below $2/

Mbtu the price of natural gas has had a technical rebound

and investors are questioning if this is a trend that is sus-

tainable. Although it is difficult to tell if the sector has

bottomed out and there are some positive indications that

supply is dropping, seasonally June, July and August tend

to be weaker months for natural gas (see Thackrays 2012

Investors Guide, page 101). The best time to enter this

sector on a seasonal basis is at the beginning of Septem-

ber.

Gold and gold stocks

Gold has corrected substantially from September and in-

vestors are wondering if they should be buying a gold bul-

lion ETF, or an ETF of gold stocks. Seasonally, gold bul-

lion and gold stocks start their seasonally strong period

July 12th and July 27th, respectively. Although gold bul-

lion can increase slightly until late-May, investors look-

ing to enter a long only position in gold should consider

waiting until later in June or July. For full disclosure,

HAC holds long positions in a gold bullion ETF and a

gold stock ETF, but these positions are paired with a short

positions in a silver bullion ETF and a silver stock ETF.

Silver tends to be negative at this time of the year making

gold and silver ideal investments in a pair trade. See next

section of newsletter for details.

HAC Positions and Opportunities

HAC has now moved into a very conservative position

and holds a very large position in cash. At the end of April

HAC held a net 10% equity exposure to the stock mar-

ket. Although this is an extremely conservative position,

HAC plans on increasing equity exposure for shorter term

seasonal trades and in sector trades that are typically posi-

tive during the summer months. As we have done in the

past, we may increase our exposure substantially for short

periods of time. In the past we have also increased equi-

ties to take advantage of the positive seasonal tend before

earnings season. Although I cannot say if we will performthis trade again, it is a trade we will consider.

At this time of the year HAC tends to use more pair trades

than in the heart of the favourable or unfavourable peri-

ods. In the transition period between the favourable to un-

favourable seasons, it is more important to hedge against

the market moving against the expected direction, as a

definite trend is not typically established.

The pair trades should not be looked at as isolated compo-

nents. The success of the trade is dependent on the mag-

nitude of the spread between the two investments, not on

whether both are increasing or decreasing.

Long Gold and Short Silver

HAC has entered into a pair trade with a silver bullion

ETF, iShares Silver Trust (SLV), and a gold bullion ETF,

SPDR Gold Shares ETF (GLD).

From a seasonal perspective, gold has a small seasonal in-

crease in May before a minor correction in June and then

a seasonal rally in July. This alone is not a strong enough

justification to enter a just a long gold trade in May. At

this point gold is best used as a hedge for a short positionin silver which has a strong negative May tendency.

Gold and silver make a good pair trade because they have

a similar cost basis (mining), but their demand dynam-

ics are different. Both are considered to be precious met-

als and respond to variables that influence the price of

precious metals, such as geopolitical tension, inflation

and low real interest rates. The difference is that silver is

much more of an industrial metal. As cyclical stocks often



6

fade at the beginning of May, silver tends to fade as gold

remains relatively stable.

Some investors may ask: why not just short silver? In

fact, HAC may do exactly that, sell the long position in

gold and leave the short position in silver. This position

will be more appealing when gold does not have a slightly

upward seasonal bias, just not at the end of April.

Long Intel and Short AMD

I wrote about this trade last month as a potential seasonal

trade, including statistics (for more information please

see Thackrays 2012 Investors Guide, page 31). In April

HAC took a position in this trade and so far the trade is

working well. Investors should remember that the pair

trade ends on July 29th and should be looking to exit the

trade before this date, depending on technical conditions

at the time.

Investors do have a choice to just short AMD a la carte,

but taking a long position in Intel when it has a slightly

positive bias, hedges out some of the risk.

Long Consumer Staples Select Sector SPDR (XLP)Short Consumer Discretionary Select Sector SPDR(XLY)

I have written about this trade in the past many times.

Just rotating back and forth between the staples sector for

the unfavourable months and the discretionary sector for

the favourable months has substantially outperformed a

buy and hold strategy in either sector or the S&P 500 (see

Thackrays 2012 Investors Guide, page 45).

Shorting the discretionary sector during the unfavourable

season in combination with a long position in the staplessector can provide some extra returns during the unfa-

vourable months. Last year HAC successfully used this

strategy to outperform the S&P 500. We actively covered

the short position during times when market had a pro-

pensity to perform well. We expect to do the same this

year.

Memorial Day Trade



7

The stock market tends to do well two days before Memo-

rial Day until five days into June. During this time period,

from 1971 to 2011 this time period has produced an aver-

age gain of 1.1% and has been positive 66% of the time.

Although the trade has worked well over the long-term, in

more recent years the trade has only worked approximate-

ly 50% of the time. It is too early to tell if the Memorial

Day Trade is a candidate for this year and investors should

look for supporting technical and fundamental conditions.

Long iShares Dow Jones US Real Estate Fund (IYR)Short SPDR S&P Homebuilders ETF (XHB)

At this time of the year, REITs tend to outperform the

broad market because of their income generating proper-

ties, pun intended. They also have a history of outperform-

ing the homebuilding sector, which typically decreases at

this time. The homebuilding sector is very cyclical and

tends suffer a lot more than the REIT sector in a correct-

ing stock market at this time of the year. This makes a

long position in a broad REIT ETF a good pair with ashort position in the homebuilding sector.

Government Bonds

U.S. Government Bonds tend to do well from the begin-

ning of May until the end of the year (Canadian govern-

ment bonds have a similar tendency). In the last two years

this has proven to be a very profitable trade. Bonds have

moved up in price earlier this year as fixed income inves-

tors have anticipated a pull back in the stock market.

In the U.S. investors can purchase government ETFs thatrepresent different points on the yield curve. The main

ETFs representing varying points along the curve are Bar-

clays 20+ Year Treasury Bond Fund (TLT), Barclays 7-10

Year Treasury Bond Fund (IEF) and Barclays 1-3 Year

Treasury Bond Fund (SHY).

Although sophisticated bond investors can take advan-

tage of the changing shape of the curve, in general the

longer maturity dates represent more risk and payoff. At

this time the bond market is not setup for a stellar en-

try, which would be a bounce from an oversold position,

which in turn would make the longer term maturity ETFsmore attractive. As a result, seasonal investors might be

wise to allocate to the short and mid parts of the curve

with SHY and IEF respectively.

Canadian investors should consider the DEX All Govern-

ment Bond Index Fund (XGB) which has an average ma-



8

turity of 9.8 years, for a seasonal trade in bonds.

The bond trade still has a long way to go and seasonal

investors should consider this trade as part of their portfo-

lio allocation. From a seasonal perspective bonds tend to

rally once again in August. Although this might be com-

plicated by the U.S. election, investors should consider

this date to perhaps add more to a position. I will discuss

this more in future newsletters.

Final Thoughts

Although the situation is bad in Europe, unless it gets

worse than last summer it might not have a huge nega-

tive impact on the stock market. Obviously, the slowing

European economy will have an impact on the global

economy, but investors have become saturated with Eu-

ropean concerns and are starting to trivialize the possible

outcomes. Consequently, even if Greece does exit from

the Euro, investors will probably rationalize why it is best

for all and recommend that we should just move on. IfSpain or Italy defaults, then this will be a different situa-

tion. The point is that negative European events are going

to have less and less of an impact on the stock markets,

unless it gets really ugly which is a definite possibility.

The EU may very quickly start to take a different approach

to its crisis. Do not expect the EU to coddle the new anti-

austerity governments in France and Greece. In fact, now

that the possibility of a Greece exit has increased, the EU

will probably step up the process to get them out. The

rational is that they do not want a big country like Spain

or Italy to be in trouble at the same time Greece is exiting.

The Spanish or Italians might jump on the bandwagon

and demand to exit if too many austerity programs are

mandated.

At the risk of sounding disingenuous, probably the best

scenario for the EU would be to force Greece out of the

Euro quickly and let the other countries watch the initial

pain that Greece would go through. Even though Greece

may be better off in the long-term, in the short-term there

is going to be pain. This would serve as a lesson to any

other countries that are thinking errantly, and are con-

sidering an exit strategy.

The S&P 500 has had a fairly good earnings season, with

68% of the companies to date beating expectations, com-

pared to an average of 62% over the last ten years. Mind

you, the earnings forecasts were reduced by a significant

amount as we approached earnings season. Perhaps this is

why when companies missed their expectations they cor-

rected significantly. Overall, it is difficult not to be at least

slightly impressed with the earnings numbers.

Now that the earnings season is largely done, the focus

will once again be on the economy. Recently, the eco-

nomic numbers have been lumpy- some good numbers

and some bad numbers. Despite the lumpiness the overall

trend has been negative. Currently, there is more down-

side risk in the economy than upside. It is going to be

difficult for American companies to keep growing when

Europe and China is slowing. Although there is a debate

about the Chinas growth, nevertheless there is no ques-tion that China is not in stellar shape.

With most major markets around the world performing

poorly, America is standing alone in its strong stock mar-

ket performance. Nevertheless there are some troubling

signs. For starters, the economy is not growing at a rate

that is typical of a recovering economy. Most post-re-

cession recoveries produce some very strong GDP num-

bers; in the neighbourhood of 5%. This is nowhere to be

found (in 2011 GDP growth was 1.6%) and more recently,

growth expectations have been lowered as the U.S. pro-

duced an anemic GDP growth rate of 2.2%. In addition,the unemployment rate typically falls at a faster rate than

it is today. Last week the unemployment rate fell from

8.2% to 8.1%, not because of a growing economy, but as

a result of people dropping off unemployment insurance.

Although American companies have been putting in some

strong earnings results, the trend is at risk of faltering in

the future. Earnings growth has come from companies cut-

ting costs and not because of hiring. At some point there is

going to be very little room left to cut as the low hanging

fruit has already been harvested. Currently profit margins

are approximately 50% higher than normal, which is notsustainable over the long-term. What happens when we

get margin compression in the future? Stocks that seem

to be fairly valued will be more expensive, putting down-

ward pressure on the markets.

What do I expect the market action to look like over the

summer? I do believe that investors should be conserva-

tive over the next six months. Despite negative influences

affecting the market, positive influences still exist and ral-

lies will occur. Other than a possibility of a Republican

President (this is not a political statement), there is very

little to drive the market signifi

cantly higher. Bernankemay coming riding to the rescue on another QE horse, es-

pecially after Operation Twist expires in mid-June. Nev-

ertheless, I do believe that he will try to hold off as long

as he can and at least wait for the stock market to correct

before taking action.

The risk-reward relationship favours a defensive stance

in the markets. Prudent seasonal investors will raise cash

and focus on seasonally strong sectors in the summer.



9

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 inthis 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 subscribers email addresses.

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Documents

Thackray Market Letter 2012 May