Thackray Market Letter
— Know Your Buy & Sells a Month in Advance —
Published the 10th Calendar Day of Every Month
Volume 7, Number 11, November 2013
Written by Brooke Thackray
Coming Soon !
The Thackray’s 2014 Investor’s Guide
will be available for ordering on December 10th (next newsletter). It includes new
seasonal strategies for Emerging Markets,
Disney, Boeing, Harley Davidson.....and
many more.
Market Update
The S&P 500 has risen in September and October and is
now in an overbought condition. The higher the market
goes, the more the pundits call for a correction. They are
right, there will be a correction, but it is hard to tell when
it is going to occur. It could be in a few weeks or a few
S&P 500 Technical Status
The market is currently in new territory with the S&P 500 reaching all time highs. It is currently in an overbought
condition and has become stretched to the upside. If a correction were to happen, the downside target is 1700. If this
level were breached, there is strong support at 1650. Despite the market being overbought, it does not mean that a
correction will take place. Don’t bet on a correction. Technically speaking, the trend of higher highs and higher lows
is still in place, and until this is broken, the price pattern of the S&P 500 is still considered bullish. In addition, conditions are favourable for the stock market to continue higher. Both the U.S. and the Chinese economies are showing
healthy growth, favourable liquidity is still in the system and we are currently in the favourable six month period.
An ETF for all seasons
The Horizons Seasonal Rotation ETF (HAC)
Visit: HorizonsETFs.com for more information
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Horizons Seasonal Rotation ETF (HAC :TSX)
Portfolio Exposure as of October 31st, 2013
Symbol
HXT
ZEB
Holdings
Canadian Dollar Exposed Assets
Equities
Horizons S&P/TSX 60™ Index ETF
BMO S&P/TSX Equal Weight Banks Index ETF
QQQ
XRT
IYT
XLI
XLB
XLY
MOO
XHB
ADM
MON
DE
UNG
USA
United States Dollar Exposed Assets
Equities
Powershares QQQ Trust
SPDR S&P Retail ETF
iShares Transportation Average ETF
Industrial Select Sector SPDR Fund
Materials Select Sector SPDR Fund
Consumer Discretionary Select Sector SPDR Fund
Market Vectors Agribusiness ETF
SPDR S&P Homebuilders ETF
Archer-Daniels-Midland Co
Monsanto Co
Deere & Co
United States Natural Gas Fund
United States Oil Fund LP
HUF.U
Fixed Income & Currencies
Horizons Active US Floating Rate Bond ETF
2.1%
US Dollar Forwards (November 2013) - Currency Hedge **
0.1%
Cash, Cash Equivalents, Margin & Other
Total ( NAV $119,745,025)
% of NAV
24.2%
5.0%
8.8%
5.1%
5.0%
4.9%
4.9%
4.9%
4.9%
4.8%
2.1%
1.9%
1.9%
1.8%
-1.7%
19.4%
100.0%
** Actual exposure reflects gain / loss on currency hedge (Notional exposure equals 63.1% 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.
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months. Maybe it is this week. The point is: just because
the market is overbought it does not mean there is going
to be a correction. It is true that in overbought markets,
investors should be more cautious, but to stay out of the
markets is risky. Last year the S&P 500 suffered a correction starting in late October and bottoming on November
15th, From October 26th (buy date for seasonal period),
the total amount of the drop was 4%. Sure, we all wish
that we could step out of the market every time the S&P
500 was going to decrease by 4%, but that is not very realistic. First, nobody picks the bottom. Second, even if an
investor could pick the bottom, a lot of the potential gains
are lost in the process of confirming an uptrend.
It is possible that in the six month favourable season for
stocks that we could have a large correction, classified as
10% or greater. In past newsletters I have written about
the probability of 10% corrections over the entire favorable six month period from October 28th to May 5th, versus the other six months of the year. Although there may
be corrections of 10% or greater within the favourable
six month period, there have only been two times that the
S&P 500 has lost more than 10% since 1950. This compares to eight times over the other six months. In other
words, the favourable six month period has produced
fewer big losses.
It doesn’t matter what discipline you use in making investment decisions, there will be times when you feel that
the market is overbought or oversold, but your discipline
calls for different action than the way you feel. The term
discipline implies following a set of rules or mandates.
The point is that when your emotions are pointing you in
one direction and your discipline is pointing you in another direction– letting your emotions rule is a sure way
to disaster over the long- term. There are times where you
may not like the “smell” of the situation, but you have
to “plug your nose” and follow the right course of action. Even though the market may be overbought, if your
investment discipline calls for you to be invested it is important for you to follow your discipline.
Very often the RSI (a momentum indicator that compares the magnitude of gains to losses) is used to measure
whether the S&P 500 is in an overbought condition. When
the RSI is 70 or above, the general consensus is that the
market is prone to a correction, but it does not mean that
there is going to be a correction. A good example of an
overbought market moving higher, occurred earlier this
year when the RSI for the S&P 500 touched 70 in midJanuary. The S&P 500 continued higher all the way until
May before starting to correct. It could be the same this
time, or different, the main point is that investors should
not make wholesale portfolio adjustments based upon the
RSI alone.
What the HAC is Going On
For most of October, HAC was in a very conservative
position holding mostly cash. HAC did have some long
positions in the portfolio, such as, ETFs in transportation,
Canadian banks, agriculture and homebuilders, but these
were mainly offset against a short position in an ETF for
the Dow Jones (DIA). The S&P 500 performed very well
for most of October and as a result HAC lost some ground
during the middle part of the month. HAC did transition
to being almost being fully invested at month end.
Sector Opportunities
At this time of the year there are a lot of sectors that start
their seasonal periods, presenting a lot of choice. It is best
to focus on the sectors that are currently outperforming
the S&P 500. Investors should also be monitoring their
sector investments, and if they break down, the positions
should be reduced or exited, and rotated into the market
or sectors that are outperforming. Although seasonally
strong sectors have a higher historical probability of performing well, it does not mean that the sectors will outperform every time.
Canadian Banks
Banking Good Returns
The seasonal period for the sector starts on October 10th
and ends on December 31st. There is also a second seasonal leg where Canadian banks tend to perform well
from January 23rd to April 13th. Many investors will decide to bridge these two seasonal periods, but it should be
noted that Canadian banks can underperform from January 1st to January 22nd. A good strategy is to maintain the
position in the sector if it has strong momentum.
This year Canadian banks have been performing well
since August when they came out with strong earnings.
They have also been outperforming the TSX Composite
and the S&P 500 since the beginning of their seasonal
period. A lot of the “extra” performance is coming from
the expectation that the banks might start splitting their
stock. Canadian banks have traditionally avoided having
their stock price in the $100 range and have split their
stock when it has reached “excessive” heights. Canadian
banks prefer their stock price in the $30-$50 range, making it accessible for average investors. Canadians love to
invest in possible stock splits as they get to double their
shares. Despite fairly consistent research that states there
is no measurable benefit from investing in stocks before
they split, Canadians still like play the stock split game.
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Currently TD Bank is close to $100 and there is a lot of
speculation that the bank might split their stock, which is
causing a lot of excitement amongst investors that if TD
Bank splits their stock, the other banks will follow suit in
a matter of time. This is causing a lot of excitement in the
sector.
Investors should be cautious towards the end of November with the Canadian banking sector. The banks are set
to release their earnings in the first week of December,
and it is possible that investors will start to pull back on
the sector, just as the banks are about to release their earnings. Very often a stock or sector will peak just before the
expected event that has caused the run-up in price. Once
the news is out, there is not much to drive the stock or sector higher. Also, Canadian banks have become somewhat
“Americanized” and as a result may not feel the burning
need to split their stock. American banks are much more
willing to let their prices run higher as it is mainly institutions that own them. If TD Bank does not split its stock,
investors may sell the position in frustration and bring the
price of the banks down.
Consumer Discretionary
Still Going Strong
The consumer discretionary sector typically performs
well from late October to mid-April. Last year the sector performed extremely well in this time period. At the
end of the seasonal period it just kept outperforming. The
sector tends to perform well in a strong macro trend of
an improving economy. Over the last year the economy
has been mending and as a result consumer discretionary has been outperforming. A word of caution: when the
economy does start to show signs of slowing down this
sector might start to underperform.
Currently the consumer discretionary sector is in a solid
uptrend on an absolute basis and is outperforming the
S&P 500. At some time this trend will be broken, but the
consumer discretionary sector is still in its seasonal period and performing well– seasonal investors should go
with this trend until it breaks.
Although Canadian banks can perform well until the end
of the year, they can peak at the beginning of December,
and as a result, investors should consider exiting the positions if the banks start to underperform.
Currently the Canadian bank sector is overbought and
still climbing.
Retail
A short time left to shop
The retail sector has two periods of seasonal strength, one
starting a month before Black Friday and the other from
late January in mid-April. The current trend that ends
shortly is based on investors entering into retail stocks in
the weeks leading up to Black Friday. Investors like to be
invested in this sector at the end of November to benefit
from any positive news announcements. Seasonal investors enter into the sector before the average investors, and
exit when the most interest in the sector is generated towards the end of November.
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average gain of 6.0% and has been positive 83% of time.
The second seasonal leg for the industrial sector occurs
from January 23rd to May 5th. This period has also produced an average gain of 6% and been positive 83% of
the time. It is possible for investors to bridge the gap between the two seasonal periods if the sector has strong
momentum, but this bridging period is typically negative
and investors should consider moving to a market position at this time.
Currently the industrials sector is in a solid uptrend and
has been outperforming the S&P 500 since April. Nevertheless, there is no indication that the sector is about to
turn down.
Agriculture
Getting set to Grow
Investors should note that there is only a short time left in
this trade and a lot of retail companies report earnings this
week, which will add volatility to the sector.
After a solid finish to its seasonal trend in 2012, the agriculture sector corrected sharply and underperformed the
S&P 500 starting in January 2013. At the beginning of
August 2013, the start the agriculture seasonal trade, agriculture bounced sharply upwards and broke its downtrend. Recently, the sector has been trying to “sort out its
direction,” but once it gets going agriculture has the seasonal tailwind to put in a solid performance until the end
of the year.
Industrials
Building on a solid uptrend
Remember, look for an exit point towards the end of December or early in the New Year, depending on when the
sector starts to underperform the S&P 500.
Currently the trade is setup well. The retail sector (using
the retail ETF (XRT), is at the mid-point in its trading
channel and it is performing at market. It is typically a
positive condition when a sector enters its seasonal trade
performing equal to the S&P 500.
The industrials sector has a strong record of outperformance compared with the S&P 500 at this time of year.
From October 28th to December 31st, for the years,
1989/90 to 2012/13, the industrial sector has produced an
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Technology
The technology sector typically performs well from October 9th until January 17th. Recently, after bouncing off
an early October low, the sector has broken above its trading channel. It is performing at market, but it is showing
initial signs of starting to outperform the market. Technically, the sector is in good shape.
Small Caps
Wait for the Christmas Specials
Investors should note that the information technology sector typically does not perform well relative to the S&P 500
in the month of December (in the middle of its seasonal
trade). In the month of December, from 1990 to 2012, the
technology sector has produced an average loss of 0.1%
and has only beaten the S&P 500, 35% of the time.
The small company sector of the stock market typically
performs well from December 19th to March 7th. From
1979/80 to 2012/13 the sector has produced an average
gain of 5.6% and has been positive 76% of the time, during its seasonally strong period. The trade has been positive the last four years in a row. In the 2012/13 seasonal
period for small cap stocks, the Russell 2000 produced a
gain of 10.3%, which was 3% better than the S&P 500.
Depending on the strength of the sector at the time, investors should consider reducing or exiting their position at
the end of November, and re-establishing it in January.
Homebuilders
Time to Build
The homebuilders sector typically performs well in October to the beginning of February. After a strong run from
October 2012 to April 2013, the sector has been consolidating. After outperforming the S&P 500 in September
2013, the homebuilders sector underperformed in October. Nevertheless, it still has not broken down at this
time. The breakdown point on an absolute basis is $28.
The sector is close to underperforming the S&P 500, but
is not there yet.
Investors should be looking to reduce/exit the position if
further deterioration were to occur.
After a brief period of underperformance in April 2013,
the small cap sector outperformed the S&P 500, until the
beginning of October. It has since underperformed the
S&P 500 and is at the bottom end of its trading channel.
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At this point, investors should be waiting until mid-December when the seasonal period for small caps starts,
before entering into a position. The first half of December
can be a weaker period for small caps and given the current underperformance, waiting would be prudent.
Last Minute Thoughts
Overall, the world economy seems to be on the mend.
The Chinese economy is showing slow steady signs of
growth. The U.S. Economy is healing and is producing
good economic numbers for both employment and GDP.
The only problem right now is that if the economy continues to show good economic growth, there will be increased discussion of the Fed starting to taper its quantitative easing program. Investors are currently hoping for a
goldilocks scenario– they want positive economic numbers, but not too strong.
What is going to be important is judging the investor reaction to economic numbers. If investors constantly push
the markets higher by interpreting bearish economic numbers from a positive perspective, this will be a very bullish sign for the market. On the other hand, if they start to
push the market lower on strong economic numbers, this
will be bearish for the market. When investors interpret
bullish news, bearishly, it is bearish for the market. And
when investors interpret bearish news, bullishly, it is bullish for the market.
is small. With Yellen taking over the Fed reins soon, it is
unlikely that Bernanke is going to start to taper. This is
particularly so, as Yellen is considered to be even more
dovish than Bernanke. If Bernanke were to start tapering,
he would be putting Yellen in an awkward spot, especially
if she wanted to maintain the status quo. Even when Yellen takes the reins, it is doubtful that she would immediately reduce the tapering. If she were to do this, she would
be sending a deliberate hawkish message to the market.
Overall, the market has moved up, but conditions are still
favourable for the market to move higher. There will be
corrections along the way, but until something fundamentally changes, the likelihood of a major correction is
small. For the market to correct strongly either the earnings would have to fall below expectations, or the economic numbers would have to start deteriorating or Europe would have to start falling apart again.
We are currently past the bulk of the earnings season, so
earnings will probably only have a small impact at this
point. The economic numbers have been surprising on the
upside. Lastly, Europe has been out of the media focus as
they muddle through their austerity plan with some relatively minor troubles, which will probably increase in the
future. Right now, fundamental conditions are positive for
the overbought and overstretched markets and it is possible that markets could remain that way for quite some
time.
There may be talk of tapering by the Fed governors, but
the likelihood of it happening in the next couple of months
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
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Contact: For further information send an email to brooke.thackray@alphamountain.com
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