Thackray Market Letter 2013 July

7/28/2019 Thackray Market Letter 2013 July

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Thackray Market Letter Know Your Buy & Sells a Month in Advance

Published the 10th Calendar Day of Every MonthVolume 7, Number 7, July 2013 Written by Brooke Thackray

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S&P 500 Technical Status

Up until mid-June, the S&P 500 was producing a bullish pattern of higher highs and higher lows. In mid-June it turned

down, broke through its 50 day moving average and established a pattern of lower highs and lower lows (bearish

pattern). Recently, it has risen back above its 50 day moving average and currently sits at 1652. If the initial earnings

releases are positive to the upside, look for the S&P 500 to challenge the 1669 record level set on May 21st of this

year. It is going to be difficult for the S&P 500 to get through this level. If it is able to break this level do not expect

the market to launch into a new long-term bull run. It is entirely possible that another couple of percentage points are

gained before the market turns back down again. If/when the S&P 500 turns down, investors should be looking for

it to enter back into downward trading range. The big number that everyone is watching is 1600 as a support level.

With so much focus on this number, investors should expect a sizeable tick downwards if the support level is violated.

Seasonal trends at this time do not support a strong bull run for the broad market. After mid-July, investors should

become more conservative by raising cash, and focus their long positions in seasonally strong sectors.

Market Update

Danger Zone Ahead

In my last newsletter I mentioned that the stock market

could have a short-term rally based upon the Indepen-

dence Day Trade and on the 18 Calendar Day Earnings

Months Effect Trade. So far theIndependence Day Trade

has helped boost the markets (the Independence Day

Trade finishes on Thursday July 11th). The next trade, the

Earnings Month Effect, typically helps to push the S&P

500 higher into the third week of July (see Thackrays

2013 Investors Guide, page 43 for details).

The bad news is that after these positive influences finish,the market tends to perform poorly into October. Histori-

cally, from July 19th to October 27th, from 1950 to 2012,

the S&P 500 has produced an average loss of 0.4%. In

addition, the month of August over the same number of

years has returned an average of 0.0% and September has

produced a average loss of 0.6% and has only been posi-

tive 44% of the time.

This is not the time period when seasonal investors should

be making large long bets on the market. Yes, it is possible

that Bernanke announces that the Fed has been misunder-

stood and backs off his tapering talk, helping to push the


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Horizons Seasonal Rotation ETF (HAC :TSX)

Portfolio Exposure as ofJune 30th, 2013

Symbol Holdings % of NAV

Canadian Dollar Exposed AssetsFixed Income & Currencies

HFR Horizons Active Floating Rate Bond ETF 8.6%

ZFM BMO Mid Federal Bond Index ETF 4.1%

United States Dollar Exposed AssetsEquities

XLP Consumer Staples Select Sector SPDR Fund 4.8%HXS.U Horizons S&P 500 Index ETF 2.8%

CF CF Industries Holdings Inc. 0.9%AGU Agrium Inc. 0.8%

Potash Corporation of Saskatchewan Inc. 0.8%MOS Mosaic Co/The 0.8%IYT iShares Transportation Average ETF -4.7%XLY Consumer Discretionary Select Sector SPDR Fund -4.8%

Fixed Income & CurrenciesSHY iShares Barclays 1-3 Year Treasury Bond Fund 9.6%

HUF.U Horizons Active US Floating Rate Bond ETF 1.1%

US Dollar Forwards (July 2013) - Currency Hedge ** 0.0%Cash, Cash Equivalents, Margin & Other 75.2%

Total ( NAV $102,704,358) 100.0%

** Actual exposure reflects gain / loss on currency hedge (Notional exposure equals 60.9% of current 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 sea-

sonal 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.

* Source: Bloomberg, HAC based upon NAV



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markets higher. Nevertheless, this is not something that

investors should be betting on, as the Fed will probably

oscillate back and forth on how much to taper. In addition,

backing off the taper talk will probably not provide huge

sustainable runs in the broad market.

Summer rally?

Very often the media writes

about the possibility of asummer rally in the stock

market. When this phenome-

non occurs, it usually fizzles

by mid-July. Yes, the mar-

ket can rally in August and

September, but large rallies

that take place during these

months tend to occur when

one of four conditions are in

place. It is safe to say that all

four of these conditions arenon-existent at this time.

1) the stock market is bounc-

ing off a bottom that has oc-

curred as a result of a major

correction

2) the economy is accelerat-

ing out of a major recession

3) earnings numbers are ac-

celerating substantially after

a very negative trend

4) the Federal Reserve sub-

stantially increases liquidity

in the economy

Tough Market Conditions Ahead - Who are yougoing to call - Not Bernanke

The last three summers have seen the stock market cor-

rect in the spring and then rally in the late summer, early

autumn. In all three years, the market was propelled up-

wards by Fed action or rumours of Fed action: in the late

summer of 2010 Bernanke hinted at QE2, in the summer

of 2011 Bernanke introduced Operation Twist, and in

the summer of 2012 Bernanke introduced QE3.

The problem is that this year the Fed is not planning on

coming to the rescue. In fact, they have their own plans

to quietly take away the punch bowl at the party. So the

big question is: what is going to drive the markets higher,

especially once we get past the bulk of the earnings sea-

son? Europe? Structurally, Europe is still a mess and the

delinquent countries are still not meeting any of their tar-

gets. Should we expect any large positive surprises out of

Europe, probably not. The real risk lies to the downside.

Europe has been out of the news for quite a few months.

If it manages to make the news, it will probably be nega-

tive. The only exception to this would be lowering their

interest rates further, or

increasing liquidity. Al-

though this is a possibil-

ity, it is not somethingthat you want to count on.

Earnings game

Stock market analysts are

an optimistic group. They

tend to believe that the

companies that they are

covering are going to per-

form reasonably well. As

a result, as earnings sea-

son approaches, analyststend to have high fore-

casts which they lower as

the earnings release dates

approach. This tends to

happen more often than

the opposite scenario

of analysts raising their

forecasts. It is better to

beat your target than miss

it!

This year, the secondquarter earnings are ex-

pected to increase by

3% over last year. But

according to NBC News, earnings were expected to in-

crease by 7% on April 1st and 9% at the beginning of the

year. Analysts keep lowering expectations. Not to be too

hard on the analysts, companies are also lowering guid-

ance. Eighty-seven of the one hundred and eleven S&P

companies that gave guidance for the second quarter, of-

fered negative guidance. As companies lower their ex-

pectations, analysts naturally respond by lowering their

guidance.

In other words, the target is set quite low for this quarters

earnings and companies should be able to once again beat

their targets. What will be important is the guidance that

goes along with the earnings. Positive guidance will help

to keep the markets moving upward and negative guid-

ance will cause the markets to correct.

Investors should also watch how the market responds. If

the earnings reports are on the bearish side, and the mar-

NEW Monthly Videos To complement my monthly

newsletter, I am releasing two monthly videos on the

first Monday of the month a market update video and

a sector update video. As my newsletter will be pub-

lished later in the month, I will sometimes address thevideo content. I am trying to keep the videos to three

minutes each, making them short but effective. There is

no doubt that the videos will evolve over time. I am

very excited about producing the videos and hope that

you find them useful. For the July videos, use the URL

below.

http://www.horizonsetfs.com/pub/en/etfs/?etf=HAC&tab=video

or, on YouTubeMarket:http://www.youtube.com/watch?v=2Cq7e4i8KWA

Sector: http://www.youtube.com/watch?v=2sRmyuXYqQI



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ket responds positively, this will be bullish. When bearish

news is interpreted bullishly, this is bullish for the mar-

kets. Conversely, if bullish reports are released and the

markets respond bearishly, this will mean that the markets

are in a bearish mood.

HAC Positions and Opportunities

Gold - Finally an entry point

I have been writing about gold for quite a while, even

though it has been out of its seasonal period. There has

been a lot of interest in this sector as it has kept plummet-

ing. On golds descent, many investors wondered when it

it was going to be a good time to buy.

We are now at the doorstep of the seasonal period for gold

bullion and gold stocks, which start their seasonal periods

on July 12th and July 27th respectively.

In my July video I discuss the potential buying opportu-

nity for the gold sector, mentioning that in the last threeyears gold has had a tailwind with quantitative easing

either being discussed or implemented in the summer

months. This year is different as there is a lack of a tail-

wind, and if anything, there is a headwind with the Feds

taper talks. I also mentioned that it is possible that the

gold seasonal trade may start late this year.

Does that mean that investors should stay away from gold

and gold stocks? No!

In the second quarter, gold fell 25%, its largest quarterly

drop in almost a century. Although, just because an in-

vestment has fallen a large amount, it does not necessar-ily make it an attractive buying opportunity. There have

been many investors hurt by trying to buy a bargain on

the way down. The situation with gold is different for

two reasons.

First, the price of gold has started to stabilize. After a late

June plunge, gold has bounced back and has become less

volatile. Although this is not a long period of stabiliza-

tion, it is a positive indication.

Second, there is a very limited seasonal window in which

to invest in gold and gold stocks. If there is one time of the

year that an investors focus should be on gold....it is now.

Given that the price of gold has compressed so much, it is

like a spring waiting to be released. If there is one time of

the year where this might happen...it is now.

A lot of the traditional technical analysis tools are not

useful in determining if gold is a good buying opportu-

nity given the current situation. There is a lack of support

levels, the price of gold is far below its 50 and 200 day

moving averages and well below its downward trendline.

The problem is that by the time gold shows any kind of

technical strength, it will have made a fairly large move

upwards. Yes it is possible for gold to move sideways for

a long time to resolve its technical situation, but this is

highly unlikely.

Gold will probably move one way or another later this

month when Bernanke addresses Congress with his semi-

annual testimony on July 17th-18th. If he talks tough and

ratchets up his talk on tapering, gold will fall. If he is

dovish and backs off somewhat on his tapering plans,

gold will rise. It is best not to try and guess these events,

because gold can move either way.

The bottom line is that gold has fallen a substantial

amount just before the start of its seasonal period. With

its price compressed, it is setup for positive performance

in the not-so-distant future. It is difficult to say if a posi-

tive move in gold will occur right at the beginning of the

seasonal period or later in the month, or even the begin-

ning of August.

Given this scenario, it is wise for seasonal investors to

start taking initial positions at the start of the seasonal

period and increase positions as outperformance develops

over the S&P 500.

Gold stocks -Should outperform in their seasonal period

In the June newsletter, I showed how undervalued gold

stocks were relative to gold bullion. The seasonal period

for gold stocks starts a bit later than gold bullion and ends

a bit sooner. Given the extreme undervaluation of gold

stocks relative to gold bullion, if the bullion starts to show

solid performance, expect gold stocks to perform even



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better. Gold stocks typically outperform gold bullion in

their seasonal time period, from July 27th to September

25th. At this point in time, gold stocks have not shown

strong outperformance relative to bullion, but investors

should be on their toes.

Last month I compared the price of gold bullion to XAU

(PHLX Gold/Silver Sector) to show their relative price.

Below is a chart of GLD (SPDR Gold Trust) divided byGDX (Market Vectors Gold Miners ETF). When the line

is rising, gold bullion is outperforming gold stocks and

vice versa. Currently, gold bullion has been outperform-

ing gold stocks, with the ratio at 5.18, which is close to an

all-time high. Gold stocks are poised to outperform as this

ratio is expected to correct in the seasonal period for gold

stocks, possibly reaching a target of 4.5 to 5.0.

Energy - Looking good technically

The seasonal period for energy stocks is two weeks away

(seasonal period lasts from July 24th to October 3rd). Oil

(WTIC) has been moving up recently, but the gains have

not translated to the energy stocks.

The good news is that both WTIC and the energy sector

have had positive technical developments, as both have

broken above their resistance lines. Investors should belooking to start taking initial positions in the sector when

the seasonal period starts later this month.

Oil (WTIC) has broken above its $100 resistance level.

Although it may pull back to $100, this level now acts as

support.

The Energy Select SPDR (XLE) has broken above its as-

cending triangle. Last month I made the same comment

as XLE was at approximately the same level. I also stated

that it was too early to enter the sector from a seasonal

perspective. We are currently on the doorstep of the trade

and the strong technicals justify starting to take positions

in this sector.

Biotech - Improved technicals

In last months newsletter I put forward the strong sea-

sonal statistics for the biotech trade, but qualified that thetime was still early for the trade and the technicals did

not support entering into the trade. Times have changed.

Almost right on seasonal cue, the biotech sector started

its strong absolute performance and strong relative per-

formance to the S&P 500. July tends to be a very strong

month for the biotech sector and as a result its perfor-

mance is expected to continue.



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Utilities

The utilities sector typically benefits from investors be-coming more conservative after mid-July. Its seasonal

period lasts from July 17th to October 3rd. This year, the

sector uncharacteristically outperformed the S&P 500

at the start of the new year, and then abruptly started to

underperform in April. Recently, it has consolidated and

broken its downtrend line. It is currently just below its

resistance level @$38 for XLU. If it is able to breach this

level, this sector will be set up to perform well over the

next two and a half months, into the beginning of October.

Fertilizer stocks - Outperformance right on cue

Based upon short-term technicals, in early June, HAC

entered into four small positions in the fertilizer sector.

Initially, the trades lagged the market, but the stocks all

started to outperform right at the beginning of their sea-

sonal periods in late June. The stocks are expected to con-

tinue to show positive performance.

Agrium

Potash



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CF Holdings

Mosaic

Last Minute Thoughts - Fed Playing Pump theBrakes

I remember when I was a child, my father would have

some fun with me by pumping the brakes on the car as

it approached a stop sign. He would hit the brakes, the

car would quickly slow and then he would release the

brakes, and the car would coast. Sometimes he would hit

the brakes hard three times in a row and sometimes he

would coast longer than expected. The fun seemed to be

in experiencing the unpredictable ride, not knowing if I

was going to coast or experience a hiccup ride. I knew

I was going to stop at some point but I was not sure of the

journey getting there. For the record, I inflicted the same

pump the brakes ride on my children.

The Federal Reserve is playing pump the brakes, apply-

ing the brakes by making statements that it is going to

be tapering their monthly bond purchases, and releasing

the brakes by making statements that suggest they are go-

ing to be less aggressive in their tapering than the market

expects. Expect this pumping action to go on indefinitely

until the stimulus is eventually removed. It is not a fun car

ride, but the Fed has little choice.

The Fed is often quoted as having two mandates: maxi-

mum employment and stable prices, but [I]n fact, the

Fed has a triple mandate. Section 2A of the Federal Re-

serve Act calls on the Fed to maintain growth of money

and credit consistent and I quotewith the economys

long-run potential to increase production, so as to pro-

mote effectively the goals of maximum employment, sta-

ble prices, and moderate long-term interest rates (John

C. Williams, President and CEO, Federal Reserve Bank

of San Francisco, Presentation to the Marian Miner Cook

Athenaeum, Feb. 13, 2012).

Many investors interpret the Feds third mandate as being

an orderly stock market. The logic behind this postulation

is based on the wealth effect that Bernanke has referred to

in the past. If the stock market performs poorly for an ex-

tended period of time, then people will not feel as wealthy

and therefore will not purchase as many goods, such as

homes, and therefore the economy will perform poorly.

Back in December, the Fed announced that it was going

to keep rates near zero until the unemployment rate fellbelow 6.5%. This stance lead the market to believe that

the Fed was going to be very accommodating until much

further down the road. Recently, on May 22nd, Bernanke

pumped the brakes of the economy by announcing that it

was going to start to taper its $85 billion monthly bond

purchases in the not so distant future. This change in

stance spooked the markets as they thought they had a

lot more time with easy money policies. The stock mar-

ket pulled back, gold fell and bonds took a dive. More

recently, Fed Reserve members have been helping to ease

off on the brakes by making statements that the Fed is still

expected to keep interest rates at the same level for quitesome time and has softened its tone on tapering.

Over the last few years, the Fed policy has been very

transparent as it wanted to increase liquidity in order to

stimulate the economy as quickly as possible. This time

it is different. The Fed will be a lot more opaque as it

tries to massage its balance sheet and the process will be

much slower. If the Fed overplays its tapering policy by

acting too fast, the market will correct sharply - some-



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thing that the Fed definitely does not want. Traditionally,

market corrections are more severe in a shorter period of

time compared with market rallies. As a result, investors

should expect erratic markets in the summer months. At

the current time, investors should transition into a more

conservative portfolio by raising cash, and focus their in-

vestments in sectors that perform well during the summer

months.

Disclaimer: Brooke Thackray is a research analyst for Horizons Management Inc. All of the views expressedherein 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 subscribers email addresses.

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Thackray Market Letter 2013 July