Thackray Market Letter 2013 March

7/29/2019 Thackray Market Letter 2013 March

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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 3, March 2013 Written by Brooke Thackray

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S&P 500 Technical Status

Currently, the S&P 500 is still in a bullish formation with higher highs and higher lows. Recently it bounced off the50 day moving average and has risen above its top trend line. It is currently just below its all time high of 1565 seton October 9th 2007. This follows on the heels of the Dow Jones Industrial Average which recently broke its all timehigh. In the short-term the market can still move higher and investors should not sell their portfolio just because anall time high has been reached.

The S&P 500 is still in good shape and is still NOT overbought, with the RSI below 70 and rising. There is a bit of aconcern with declining volumes diverging from a rising stock market. When volumes fail to confirm a rising marketthere is less conviction in the rally, making the market susceptible to a pull-back. It is not a major concern, but some-thing to keep an eye on. Investors should pay attention to the U.S.financial sector. It is currently slightly outperform-ing the S&P 500, which supports a positive outlook, but if it slips it will point to a weaker market ahead. Currently,investors would be wise to stay the course in the market and focus on outperforming seasonal sectors.

Market Update

Market Top? Not So Fast

It seems that every day more and more analysts are call-ing for a market top. This is especially true since the Dow

Jones Industrial Average has recently reached all-timehighs. The call for a top is primarily based upon the mis-

guided wisdom that the market has risen too far too fastand therefore must correct. This statement is fundamen-tally incorrect as the market can keep rallying. Investorsshould never sell just because the market has had a strongrally. If they do, more often than not, they will find them-selves being left behind.

According to the Relative Strength Index (RSI), the mar-

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Horizons Seasonal Rotation ETF (HAC :TSX)Portfolio Exposure as ofFebruary 28th, 2013

Symbol Holdings % of NAV

Canadian Dollar Exposed AssetsEquities

ZEB BMO S&P/TSX Equal Weight Banks Index ETF 6.9%

Fixed Income & CurrenciesHFR Horizons Active Floating Rate Bond ETF 3.0%

United States Dollar Exposed Assets

EquitiesSPY SPDR S&P 500 ETF Trust 16.7%DVY iShares DJ Select Dividend Index Fund 11.1%XLI Industrial Select Sector SPDR Fund 10.3%XLF Financial Select Sector SPDR Fund 9.7%IWM iShares Russell 2000 Index Fund 9.6%XRT SPDR S&P Retail ETF 8.9%XLY Consumer Discretionary Select Sector SPDR Fund 3.5%SMH Semiconductor Market Vectors ETF Trust 2.1%

Commodities & EnergyXLE Energy Select Sector SPDR Fund 5.2%XOP SPDR S&P Oil & Gas Exploration & Production ETF 3.9%

OIH Market Vectors Oil Service ETF 2.9%XLB Materials Select Sector SPDR Fund 2.0%

Copper Future March 2013* 0.0%

Fixed Income & CurrenciesHUF.U Horizons Active U.S. Floating Rate Bond ETF 0.3%

US Dollar Forwards (March 2013) - Currency Hedge ** -0.2%

Cash, Cash Equivalents, Margin & Other 4.1%

Total ( NAV $91,727,267) 100.0%

* Actual exposure reflects gain / loss on future (Notional exposure equals 2.3% of current NAV)** Actual exposure reflects gain / loss on currency hedge (Notional exposure equals 84.2% of current NAV)

The objective of HAC is long-term capital appreciation in all market cycles by tactically allocating its exposureamongst 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 ofseasonal investing by describing many of the trades and strategies in HAC.

* Source: Bloomberg, HAC based upon NAV



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ket is NOT overbought as it is below 70 and rising. Toset the record straight.....the term overbought is grosslyoverused. The fact that an investment is overbought ismeaningless as any investment can stay overbought fora very long time. Investors should NOT try to time theirbuys and sells based upon whether an investment is over-bought. There are some technical strategies that generatebuy and sell signals based upon the RSI crossing certain

levels, but that is another matter.

In my last newsletter I raised the possibility of a three-peat, with the cyclical sectors underperforming in thespring time, for the third year in a row. The cyclical sec-tors tend to outperform at this time of the year and whenthey dont, it is a sign of a market that is becoming moredefensive. To be clear, as I stated in my last newsletter,this does NOT mean the market is set for a major correc-tion. It does mean that investors should be more selectivein choosing their seasonal sectors.

This year, the deep cyclicals (commodity based) have had

their troubles. In my last newsletter I described the met-als and mining sector as a canary in the coal mine for thedeep cyclical sectors. In February and March, the metalsand mining sector cracked as it started to substantiallyunderperform the S&P 500. Its underperformance pointsto possible further weakness in the deep cyclical (com-modity) sectors. If the metals and mining sector is ableto sustain a strong rally, this would be a very bullish sce-nario for the market.

In very recent days the metals and mining sector has hada bounce, but investors should not get too excited as these

bounces are common in a corrective action. Although itis possible that the metals and mining sector does put ina strong performance, the risk-reward relationship cur-rently favours avoiding this sector.

The poor performance of the metals and mining sectorand the commodities is being largely driven by the ex-tremely strong performance of the U.S. dollar. From aseasonal perspective, on average the U.S. dollar performswell until the end of March and then falters. If the U.S.dollar does correct on its seasonal que, it is possible thatwe could have a strong month in April for the deep cy-

clicals. This will be addressed in more detail in the nextnewsletter.

Just as the metals and mining sector was used to forecast aweakening condition in the deep cyclicals, the U.S. finan-cial sector can be used to help determine if the S&P 500is in a topping process. As I have written before, gener-ally when the U.S. financial sector is performing well, itindicates that the S&P 500 is on solid footing. If the sectorcannot perform well during its seasonally strong period,

then this often indicates that the market is close to a top-ping process.

After an early seasonal run, the sector is performingslightly better than the market. So far all is good. Inves-tors should remember that the period of seasonal strengthfor thefinancial sector lasts until April 13th.

SECTOR UPDATEU.S. Dollar Up, Up and Away

The U.S. dollar has been on a tear since the beginningof February. As Japan has aggressively devalued its cur-rency and Europe is once again having its troubles, theU.S. dollar has once again become attractive.

Against a basket of world currencies, the USD hasbounced off its support level just above 78 and brokenthrough the resistance level (now support) of 82. The nextresistance level is 84, at which the USD may stall. If theUSD is turned back at 84 and falters, this could breathelife back into the commodity sector. From a seasonalbasis the USD tends to stumble at the end of March. Aweaker dollar would also help boost the S&P 500.

Gold We are currently not in the golden period

Although HAC does not hold any gold bullion or goldstocks, and has not since a very profitable trade from Julyto September, I have been writing about gold because ofthe number of questions I have received on the subject.



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In my last newsletter, I stated that if gold fell through

$1650, support on the base of a descending triangle, itwould likely go to $1550. Shortly after my newsletter wasdistributed, gold broke $1650 and fell to $1550. I did notexpect the process to be so quick, but that is the way of themarket. Gold may have a bounce at these levels, but thereis no seasonal justification to hold it.

HAC does not hold gold bullion or gold stocks.

Silver No Silver Lining

Although gold and silver can very often trade togetherbecause they are precious metals, at times silver tradesmore based upon its industrial metal properties. In mylast newsletter, I stated that silvers trading patterns werebeing greatly influenced by gold and if gold broke down,silver would probably follow (it also had a descending

triangle pattern). I also stated that investors shouldconsider exiting the position if silver fell below $30.

HAC reduced its silver position earlier in the month andsold the remaining position when silver fell below $30.

Platinum - followed gold down

Platinum has been sucked down in the wake of golds fallin price. Despite a recent fall, its price is still above itsstarting point at the beginning of January. It is possiblefor it to bounce at these levels but it suffered in the lastfew weeks. HAC exited its platinum position in February.

Consumer Discretionary Top RatedSeasonal Sector



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Last month I described the consumer discretionary sectoras the top seasonal sector for both February and March,based upon frequency of outperforming the S&P 500. Anoverweight position in this sector at this time should be acore seasonal position. The sector has been outperformingthe S&P 500 and is expected to continue its outperfor-mance.

HAC added to its consumer discretionary position in Feb-ruary.

Retail Time to shop for this sector is running out

The retail sector is expected to continue performing well.Investors should remember that this trade ends on April12th. HAC held a fairly large position in the retail sectorin February.

TJ X

So far this trade has been disappointing this year, butthere is still some time left. The end of the seasonalperiod for TJX is at the end of March.

HAC did not enter the TJX seasonal trade this year.

Financials showing the way

So far this trade has worked well. As I mentioned in myprevious newsletter, thefinancial sector very often acts asa market indicator. As long as this sector is performingwell the chances of the broad market performing poorlyare reduced.

HAC increased its holdings in XLF in February.


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for GE starts March 5th and ends April 6th. From 1990 to2012, GE has outperformed the S&P 500, 74% of the timeand has produced an average return of 6.6%. At this timewe can expect GE to once again outperform. If it doesfalter at this time, it will indicate a weakening market.

Materials Late start?

After a successful first seasonal leg from the end of Oc-tober to the beginning of J anuary, the materials sector hasstarted out of the gate slowly for its second leg. It is onlysince the last week of February that the sector has startedto outperform. It is too early to determine if the trend isgoing to persist, but the trend is looking favourable. Thematerials sector has a strong track record of outperform-

ing the S&P 500 until May 5th. It is important to note thatthe U.S. materials sector is vastly different compared withthe Canadian materials sector. The U.S. sector is over60% chemical companies, versus the Canadian sectorwhich is over 60% gold mining companies. The analysisin this newsletter pertains to the U.S. materials sector.

HAC held a nominal position in the month of February.

Dupont Showing positive signs

Dupont has a very distinct seasonal period starting Janu-ary 28th and lasting to May 5th. The sweet spot for this

trade starts at the beginning of March and lasts into mid-April. On average Dupont starts to underperform the S&P500 at the beginning of May. The underperformance lastsuntil the end of the year, which is a very long time. If youare going to own Dupont, now is the season.

Metals and Mining False recovery?

Earlier in this newsletter and my last newsletter I men-tioned that the metals and mining sector was acting as

a canary in the coal-mine indicating the health of themarket. Investors must note that it is totally possible tohave the internal health of the market weakening and atthe same time the index moving higher. It just raises theconcern that the market is possibly leading to a correc-tion and investors should be on their toes and be moreselective in choosing their sectors.



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In mid-February the metals and mining sector cracked as

it fell through a support line and started to significantlyunderperform the S&P 500. It is going to be interesting to

see if the very recent bounce can be sustained. Althoughit is possible to get a bounce after a sector has cracked,the overall risk-reward relationship has changed and it istypically best to avoid the sector.

HAC did not have a position in the metals and miningsector in February.

Energy Waiting for outperformance

The energy sector started its seasonal outperformanceearly this year, in January. Recently, it has pulled back asthe official season started. Last year the energy sectordid not perform well in its seasonal period as the deepcyclicals were performing poorly and the overall market

index was rising. It is totally possible that we see thesame action this year, especially given that the metalsand mining sector performed so poorly in February. Sofar a positive sign is that the oil stocks have been holdingup well relative to the declining price of a barrel of oil.

HAC, in January, started to accumulate positions in theoil services sector, oil exploration and production and the

overall sector in Canada and the U.S.U.S. energy sector better playthan Canada for now

As I discussed in my last newsletter, both the Canadianand U.S. energy sectors can perform well, but investing inthe Canadian energy sector is making a bet on one of twoscenarios: a strongly bullish outlook for the energy sector,or a rapid rise in natural gas prices.

During the summer seasonal period for energy, both theU.S. and Canadian sectors increased in value. Despite the

increase, the Canadian sector was only able to perform atmarket. Over the last few months, it has been underper-forming both the market and the U.S. energy sector.

The discounted western Canadian oil, along with itshigher production costs is in effect leveraged to higher

oil prices. Higher oil prices provide a greater margin ex-pansion for Canadian operations, compared with othernations that have lower production costs. As a result, ifthe Canadian energy sector does start to outperform themarket and the U.S. energy sector, this will be bullish forthe overall energy sector. This would be good news.


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LAST MINUTE THOUGHTS

In my last newsletter I brought up the issue of currencywars as more and more countries seem to be interestedin stimulating their economy with lower currency values.

Japan has been very aggressive in its actions to lower thevalue of its currency. Shortly after the release of my lastnewsletter the G8 leaders came out with statements that

echoed each other, stating that they were not interested incurrency wars..what do you expect them to say? It isa reasonable expectation that countries will continue tolook at currency devaluation as a tool to stimulate growthin their economies. Countries can only sit by for so longand watch other countries, such as Japan gain a competi-tive advantage by aggressively reducing the value of theircurrency. Expect more countries to take action in the fu-ture. The problem is that the U.S. will probably end up onthe losing side in the race to the bottom. In other words,they will have trouble lowering their currency more thanothers. The reason is simple. They have taken such ag-gressive monetary action stimulating their economy thereis not much more they can do. With a bottom basementFed funds rate and successive quantitative easing pro-grams, their remaining tools are limited.

The Dow Jones has reached all-time highs and the econ-omy is showing signs of improving. Unemployment is

down to 7.7% in the US after a strong jobs number of236,000 was released on March 8th. Everything seems tobe going swimmingly and investors are responding bycoming back to the market. After a fractured result in theItalian election, with the comedian Bepe Grillo and his 5Star Movement gaining a much larger percentage of thevote than expected, and the negative implications of a pos-sible further election, the market only dipped briefly be-

fore moving higher. Grillo is advocating leaving the euroand returning to the lire. Despite the dire consequences ofwhat is happening in Europe, the market has shrugged offthe negativity and has moved higher. Bad news is beingdigested well and the market is moving higher.

We are still in the favourable six month period and thisis not the time to be running from the markets just be-cause the market has had a strong rally. Guessing whenthe market might turn down in the favourable seasonal sixmonth period is counterproductive. There is still opportu-nity in the market and investors should be concentrating

their efforts in the sectors that are responding well.

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 variousclient 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 andsells 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 withrespect to the accuracy or completeness is given. The information presented is for educational purposes and isnot 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 March

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