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 alphaMountain Investments - alphamountain.com 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. — 2 — alphaMountain Investments - alphamountain.com 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. — 3 — alphaMountain Investments - alphamountain.com 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. — 4 — alphaMountain Investments - alphamountain.com 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 — 5 — alphaMountain Investments - alphamountain.com 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. — 6 — alphaMountain Investments - alphamountain.com 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 Mailing List Policy: We do not give or rent out subscriber’s email addresses. Subscribe to the Thackray Market Letter: To subscribe please visit alphamountain.com. Unsubscribe: If you wish to unsubscribe from the Thackray Market Letter please visit alphamountain.com. Contact: For further information send an email to brooke.thackray@alphamountain.com — 7 — alphaMountain Investments - alphamountain.com