Thackray Newsletter

Know Your Buy & Sells a Month in Advance

Published the 10th Calendar Day of Every Month
Volume 10, Number 11, November 2016

Market Update
Donald Trump - President Elect

Written by Brooke Thackray

Does polling work anymore? Denitely not as well as it

did in yesteryear. Brexit Redux.
Asymmetrical risk strikes again. The stock market priced
in a Clinton win and even if she won, the stock market
would probably not have moved up very much. On the
ip side, there was a lot more downside risk if Trump
won. Granted the odds were not 50/50, but the stock market did not reect the possibility of a Trump win.
What should we expect now. As I am writing this piece,
the S&P 500 are limit down and the stock market is expected to open much lower.
How long will the negative trend last? No one knows for
sure, but typically the market stabilizes two or three days
after the initial unexpected shock. Brexit took two days
and then the stock market rallied strongly.
Do not assume that the stock market will follow the same
bounce path as it did in the Brexit scenario. Brexit was

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Horizons Seasonal Rotation ETF (HAC :TSX)

Portfolio Exposure as of October 31st 2016
Symbol

Holdings
Canadian Dollar Exposed Assets

% of NAV

HXF

Equities
Horizons S&P/TSX Capped Financials Index

15.0%

HUN

Commodities
Horizons NYMEX Natural Gas ETF

2.8%

United States Dollar Exposed Assets

HXS
XLI
XLK
IYT
COW
XLY

Equities
Horizons S&P 500 Index ETF
Industrial Select Sector SPDR Fund
Technology Select Sector SPDR Fund
iShares Transportation Average ETF
iShares Global Agriculture Index ETF
Consumer Discretionary Select Sector SPDR Fund

31.6%
10.1%
9.9%
5.3%
5.1%
4.9%

Cash, Cash Equivalents, Margin & Other

15.4%

Total ( NAV $182,620,469)

100.0%

The objective of HAC is long-term capital appreciation in all market cycles by tactically allocating its exposure
amongst equities, xed 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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Cont from pg. 1

S&P 500 Technical Status
At the end of the trading day on Tuesday November 9th, the S&P 500 had rallied over the last two days and
wiped out the loss from the previous week. After the election results, the S&P 500 futures are trading limit
down (approximately 2050). At this point, it is dicult to determine at what level the S&P 500 will stabilize.
In the short-term, the S&P 500 will likely trade in the range of 2000/2050 to 2132.

totally dierent. In the case of Brexit, investors realized

very quickly that it was possible that no concrete action,
seceding from EU, would take place for two years. To
the average investor two years seems like an innity and
they quickly jumped back into the stock market. A Trump
presidency does not provide the same opportunity. Investors will be wondering what Trump will do. This will take
some time to gure out, especially since the inauguration
does not happen until January.
The stock market will probably drop and then stabilize,
not rally- at least not right away.
It will be interesting to see if the media tries to redeem itself for its very bias coverage of the election run-up. After
a day or two, they will probably ease up on Trump and
investment reporters will probably put forward the message that a Trump presidency will not be so bad. They will

put forward the message that the Republicans will control

him and he will have to change his plans. In the end, a
Trump presidency is not the end of the world.
If investors start to believe that Trump will not be able to
carry out a lot of extreme policies, the stock market will
start to settle down. And very shortly, the investment media will start to focus on sectors of the stock market that
will benet from a Trump presidency, such as:
defense
utilities (coal)
energy
infrastructure stocks
healthcare (no Hillary Clinton to attack sector)
....and of course, concrete stocks....concrete is needed
to build the wall

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Inflation talk is expected to pick up...especially

now that Trump has been elected President and
spending will commence soon
There has been a lot of talk recently about the chances of
ination picking up. At the beginning of the year ination
expectations started to rise and then subsided. Recently,
ination expectations have been picking up once again
as investors have been expecting either Trump or Clinton
to spend a lot of money on infrastructure to try and help
stimulate the economy, which would ultimately cause ination.
There are a number of reasons why ination expectations
may increase in the future, including rising wages (already
starting to happen), large increases in oil prices (probably
not going to happen), increasing commodity prices (need
to see more economic growth before a sustained trend, increasing velocity of money, or turnover (hasnt happened
so far... see FRED graph Velocity of M2 Money Stock).
There is currently not a sustained risk factor for higher ination. The Federal Reserve has been printing money for
years. Japan has been printing money for decades. Both
countries have not been able to get their ination rates to
where they want.
Sidebar: One day ination will probably start to uptick
dramatically. When? The answer is largely dependent
on when interest rates start to increase. Part of the reason that the velocity of money is so low is that interest
rates are low forcing investors into liquid money rather
than interest baring securities. If interest rates start to
increase, this will actually help increase the ination
rate by increasing the velocity of money, which will increase the money supply, which will increase ination.
Umh! I know that a lot of you are running back to your
economics textbooks and looking up the relationship
between interest rates and ination, knowing that higher interest rates are used to mitigate ination. Generally I agree, but in this world of zero-bound interest rate
policies it really is an upside down world. This is just
another example of how articially low interest rates
can have negative consequences. For more information
on What Does Money Velocity Tell Us about Low Ination in the U.S.?, please see Federal Reserve article
(https://www.stlouisfed.org/on-the-economy/2014/september/what-does-money-velocity-tell-us-about-lowination-in-the-us).

So why get concerned about ination, if the possible causation factors are not displaying imminent signals that
ination is about to get out of hand? Although actual economic numbers make a dierence, expectations are also
very important.
If the fears of rising ination rates rise once again it
would be expected that sectors that have outperformed
in the past during a similar situation would have a higher
probability of performing well.
Seasonal investing rst. The rst premise for seasonal investing is that seasonal investing is the rst and primary
screen, or selection mechanism in deciding what sector
or investment to make. Technical indicators can also be
used to help, if and when an investment should be made.
If a sector is underperforming, why invest in the sector?
Lastly, fundamental factors can help with the allocation
of acceptable seasonal sectors. Technicals are more important than fundamentals, as the markets expectation to
the fundamentals is presented in the price action of an investment. In a way, fundamentals set up the base case for
allocation and then technicals determine the action within
the seasonal period. Seasonal trends are always the most
important factor in making a decision.
On a seasonal basis, positive economic and ination expectations tend to be highest in Q1 of the year. Last year,
after being beaten up in Q4, the commodity and cyclical
sectors outperformed in Q1, partly because they represented good value and partly because investors bought
into the reation trade. It is possible that we could see
the same phenomenon this year, with the commodity and

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cyclical sectors being the top performers once again. The

fact that it happened last year, does not mean it will happen again this year, but if the conditions are similar the
probability of the same outcome increases.
I have included a diagram that illustrates some of the seasonal periods for sectors that tend to perform well over
the next few months, and categorized them in two categories, the rst one being sectors that are expected to outperform in a higher ination environment and the second
category being sectors that are expected to outperform in
a lower ination environment. All of the sectors in the
diagram are seasonally valid and expected to outperform
the broad market, but if expectations for ination increases, then sectors that tend to perform better in this environment are preferred. Although, ination expectations
are part of a fundamental allocation decision, it should be
technicals that help determine if certain sectors should be
overweighted or underweighted.
My classication of sectors on the ination/deation list,
reects the general consensus of others whom have written on this subject. Nevertheless, there will be some differences compared to other lists.

What the HAC is Going On?

In my last newsletter I stated that this year was dierent
compared to the last few years, which have had corrections in August and September, leading to opportunities to
enter the stock market early in October. This year, I advocated patience as the stock market was at high market valuations as October started. HAC held o on increasing its
equities in a substantial manner for most of October. Up
until the last week of October, HAC was approximately
15% invested in equities. By the end of the month, HAC
increased its allocation to equities up to 85%.
So far, HAC has made a conscious decision to overweight
the industrial sector with investments in the industrial
sector and its transportation sub-sector. The sector has
been performing well and its outperformance is expected
to continue.
So far, HAC has also decided to underweight the consumer discretionary sector, avoid the retail sector and the
homebuilders sector. Typically, at this time of the year,
HAC would be invested in both the retail sector and the
homebuilders sector. At this time, both of these sectors

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are underperforming.
At the end of October, HAC was long the U.S. dollar as
November is typically one of the weakest months of the
year for the Canadian dollar.

Seasonal Opportunities
Industrials Building a base
The industrials sector typically performs well from October 28th to December 31st. In recent months, since outperforming in February, the industrials sector has been
in a consolidation pattern, outperforming the S&P 500
when it has been positive and underperforming when it
has been negative. Since the end of October, the industrial
sector has been outperforming the S&P 500. If the stock
market continues to move higher, the industrial sector is
expected to outperform.

My Call: The industrial sector will outperform the

S&P 500 at least until year-end.

Transportation Rolling higher

The transportation sectors current seasonal period nishes on November 13th. Currently, the sector is strongly
outperforming the S&P 500. It is possible that sector
could continue to run past its seasonal period. In this case,
using a trailing stop could be appropriate. If the sector
starts to fade, a possible strategy upon exit could be to
roll into the industrial sector, which is the parent sector
for transportation.

One of the less followed metrics by investors, that I use

as a supplementary indicator to the industrial sector, is the
Chemical Activity Barometer (www.americanchemistry.
com). The barometer is considered a leading indicator as
it measures chemical activity, which is a precursor to industrial activity. Recently, there has been a divergence,
with chemical activity increasing and industrial production lagging. As the CAB is a leading indicator, the expectation is that most of the time, the divergence would be
resolved by industrial activity moving in the direction of
the CAB (bringing the lines closer together). If this is the
case, industrial production is expected to increase, which
will help boost the industrial sector.

My Call: The transportation sector will outperform

the S&P 500 past its seasonal end date, finishing
its run by the end of November/beginning of December.

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Canadian Banks Finishing early

Canadian banks have been performing well, but get ready
for their outperformance to end early as the banks start
to release their earnings towards the end of the month.
The early release banks this time around are the Bank
of Nova Scotia which is set to release their earnings on
November 29th and TD Bank on December 1st.

Although the Canadian banking sectors seasonal period

does not end until the end of December, the sector can
stall once the banks start to release their Q4 earnings. Particularly, if the banks have had a strong run from Q3 when
they have exceeded their earnings expectations, which
they did this year.
My Call: Canadian banks will continue to perform
well, but will end their outperformance towards the
end of November as the banks start to release their
earnings.

Technology Outperforming but set to cool soon

*N.B. I have slightly altered my seasonal dates for the
technology sector in my book this year, to properly account for the technologys performance slump from December 6th to December 14th. This short period has been
removed from the technologys seasonal period.

lier (in early December). After a small reprieve in the rst

part of December, the sector picks in the second half of
December and into mid-January.

This year, the technology sector has been outperforming

the S&P 500 over the last few months. Given the sectors
outperformance, it is possible that the sector could once
again pause at the beginning of December. If the sector
continues to outperform the S&P 500, it is possible that
its momentum could carry it into January. For this type of
situation, trailing stops are often a good tool to determine
the appropriate action.
My Call: The technology sector will probably have
slight outperformance up until the beginning of December and will then start to fade.

Metals & Mining Poised to perform well

The metals and mining sector tends to outperform the
S&P 500 starting in mid-November and continues its
outperformance until the end of the year. Since the late
summer, the sector has underperformed the S&P 500,
but is recently showing signs of stabilizing. It is also in a
consolidation pattern ahead of its seasonal period, which
tends to be a positive setup leading into a seasonal period.

From December 6th to December 14th, in the period from

1989 to 2015, the technology sector has produced an average loss of 2.2% and has only been positive 22% of
the time. The technology sector starts its seasonal period
(October 9th) earlier than most other sectors of the stock
market which start their seasonal period on October 28th.
As a result of the technology sector starting is seasonal
run earlier than other sectors, it often starts to fade ear 7
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the best seasonal period for the retail sector starts in late
January. Continued underpeformance at this time would
set the sector up well for this seasonal period.
My Call: The retail sector will probably perform at
market over the next few weeks.

Materials Consolidating and poised to perform

My Call: The metals and mining sector will probably break out of its consolidation pattern and start
to outperform the S&P 500, continuing its outperformance until the end of the year.

Retail Not happening so far and probably too late

The materials sector tends to start its outperformance at
the end of October. So far, the sector is performing well
relative to the S&P 500.
My Call: The materials sector will continue to perform well until the end of the year and into the beginning of the next year.

Consumer Discretionary Still underperforming

The consumer discretionary sector has been underperforming the S&P 500 since the beginning of the year. So
far, the sector has not broken its downward trendline relative to the S&P 500.

Like last year, the autumn retail trade has not been working as retail results have been weaker than expected. Maybe its the election? Sports venues are blaming the lack of
attendance on people being more interested in watching
the election....so why not retail? Seriously, the trend probably indicates a deeper problem, but unless the sector can
start to show stronger relative performance, why invest in
the sector. Particularly, because the trade is so short and
only has a couple of weeks left. The good news is that
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rate in December, which is having a dampening eect on

the homebuilders sector.
My Call: The homebuilders sector will probably
underperform until January and then start to outperform for the last part of its seasonal period.

Natural Gas Damn.global warming.

My Call: The consumer discretionary sector will

probably underperform the S&P 500 until January,
despite it being in its seasonal period. It is possible
that the sector could start to outperform before the
end of the year.

Homebuilders Not for a while

Natural gas has been declining in price because the warm
weather on the Northeast coast of the U.S. Warmer weather has reduced demand for natural gas which means that
more natural gas is being injected into storage. We are just
getting to the inection point where, on average, natural
gas is withdrawn for heating. Natural gas is very volatile.
In the spring, natural gas corrected in the rst part of its
seasonal period and then rallied strongly in the second
half of its seasonal period. So far, natural gas has followed
a similar pattern and has recently corrected. It is possible
that we could see a strong rally in the second half of the
seasonal period once cold weather settles in and investors
readjust their expectations. The seasonal period for natural gas ends December 21st.
My Call: Natural gas will probably consolidate at
slightly higher levels than where its stands today.
The homebuilders sector typically starts to outperform the
S&P 500 in late October. So far, the sector has continued
its underperformance that started in the late summer. Last
year, the sector underperformed in its seasonal period as
investors punished the sector on the expectation that the
Federal Reserve would raise its interest rate in December. Exactly the same condition exists today. Investors are
largely expecting the Federal Reserve to raise its interest

CAD/USD Losing strength

On average, since 1971, November has been one of the
worst months of the year for the Canadian dollar. This
has partly been the result of the energy sector typically
not performing well at this time of the year. It is possible
that if the OPEC deal to control oil production actually
gets traction, then the energy sector could perform well,
which would in turn help to support the Canadian dollar.

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This does not necessarily mean that the Canadian dollar

will perform well, but it is something to watch. Technically, the Canadian dollar has been breaking down out of
a descending bearish triangle and has support at $0.72.

My Call: The Canadian dollar will probably drift

lower until mid-December, when typically rallies
into year-end.

Brookes Rant Politicians call spending investments.

A long time ago, people bought death insurance. It was
named such because you were insuring against death.
The problem is that it is hard to sell something with such
strong negative connotations. People just turn o. The
personal insurance industry corrected this situation
by renaming the product life insurance. People were
much more willing to talk about and buy life insurance.
Today, politicians shy away from the word tax, once
again because of its negative connotations. They prefer
to use the term revenue generation. They also do not like
to say that they are spending taxpayer dollars, so they
use the word investment instead. It sounds so much better, and the public is much more likely to buy into a government that is making investments rather than spending
tax payer dollars. I could easily produce a long list of
politicians that have routinely misused the word investments. The point is not to admonish the politicians that
purposely deceive the public, but rather to bring attention to the fact that all of the government spending
that is being planned in North America and Europe is not
quite what it seems.

to dierent groups of people. Increasing payments to

dierent groups in need, may be the right thing to do no
matter the economic consequences. Those decisions are
separate and need to be debated and implemented. My
rant questions governments statements that calls any
and all of their spending; investments. According to a
lot of governments, beautifying a local park is classied
as infrastructure investment. Although it may be desirable, it denitely is not an investment because it does not
increase productivity. The ultimate measure of whether
spending is an investment, is whether it increases productivity.
So why the rant on the word investment? Investors
have to be weary of false promises from politicians.
They must realize that unless the government is increasing productivity with their spending, they are adding
to the national debt. Currently, governments have very
high debt levels. One day this will be a concern. Nobody
seems concerned right now, but one day the national
debt will be a big problem..when interest rates start to
increase to more normal levels.
Short-term, an increase in government spending could
help the economy by creating temporary jobs and
increasing overall spending, helping to stimulate the
economy. Longer term, unless there is an increase in productivity, then the main contribution from government
spending will be adding to the debt.
A lot of politicians will invoke their right to increase
spending by quoting the great economist Keynes, whom
believed that the government should help smooth the
economy by increasing spending in tough times and decreasing spending in periods of expansion. Most politicians quoting Keynes in order to increase government
spending are being dishonest and just looking for a way
to justify their spending. They have no interest in ever
cutting back on spending when the economy is expanding. They are only interested in spending, spending and
more spending.

Almost any spending can somehow be classied as an

investment, including spending on social welfare programs, or raising government salaries. Society needs
to make choices about how much should be allocated
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Disclaimer: Comments, charts and opinions oered in this report are produced by www.alphamountain.
com and are for information purposes only. They should not be considered as advice to purchase or to sell
mentioned securities. Any information oered in this report is believed to be accurate, but is not guaranteed.
Brooke Thackray is a Research Analyst with Horizons ETFs Management (Canada) Inc. (Horizons ETFs).
All of the views expressed herein are the personal views of Brooke Thackray and are not necessarily the views
of Horizons ETFs, or AlphaPro Management Inc., although any of the opinions or recommendations found
herein may be reected in positions or transactions in the various client portfolios managed by Horizons ETFs,
including the Horizons Seasonal Rotation ETF. Comments, opinions and views expressed are of a general
nature and should not be considered as advice to purchase or to sell mentioned securities. Horizons ETFs has
a direct interest in the management and performance fees of the Horizons Seasonal Rotation ETF (the ETF),
and may, at any given time, have a direct or indirect interest in the ETF or its holdings. Commissions, trailing
commissions, management fees and expenses all may be associated with an investment in the ETF which is
managed by AlphaPro Management Inc. The ETF is not guaranteed, its values change frequently and past performance may not be repeated. The ETF may have exposure to leveraged investment techniques that magnify
gains and losses and which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the ETFs prospectus. The prospectus contains
important detailed information about the ETF. Please read the prospectus before investing.
While the writer of this newsletter has used his best eorts 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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