Thackray Newsletter

— Know Your Buy & Sells a Month in Advance —

Published the 10th Calendar Day of Every Month
Volume 12, Number 8, August 2018 Written by Brooke Thackray

Market Update
Is the US stock market an island in a slowing
global economy?
As of August 6th, 2018, 83% of the S&P 500 companies
have reported their earnings so far this quarter (Thom-
son Reuters, August 6th, 2018). The results have been
strong with 24% growth on a year-over-year basis and
79% of the companies beating their expectations. US
earnings season is largely finished and now investor
attention is turning more towards the economy, which
feels like it is doing well with a low unemployment rate
S&P 500 Technical Status
Technically, from a price action standpoint, the S&P 500 is sound. Nevertheless, there are some concerning techni-
cal developments that could make the S&P 500 more vulnerable to a sideways market, or even a negative market.
Currently, the S&P 500 is at the top of its trading range. Earlier this year, the S&P 500 broke above its trading range,
but only to retreat once again back in March. With earnings season mostly in the rear view mirror, there is a lack of
a catalyst to move the stock market substantially higher. The upside is probably limited to working along the top of
the range, but a more likely scenario is for the S&P 500 to move towards the bottom of the trading range. The RSI
is close to being overbought and could turn down shortly. Given that August and September are on average the two
weakest months of the year for the S&P 500 since 1950, caution is advised.

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 Horizons Seasonal Rotation ETF (HAC : TSX)
Portfolio Exposure as of July 31st, 2018
Symbol

Holdings % of NAV
Canadian Dollar Exposed Assets
Income
HFR Horizons Active Floating Rate Bond ETF 19.0%
HBB Horizons Cdn Select Universe Bond ETF 5.9%

Equities
XST iShares S&P/TSX Capped Consumer Staples Index ETF 5.1%
Commodities
HUG Horizons Gold EFT 9.5%

United States Dollar Exposed Assets

Income
HUF Horizons Active US Floating Rate Bond (USD) ETF 9.6%
HTB Horizons US 7-10 Year Treasury Bond ET 5.8%

Equities
HXS Horizons S&P 500® Index ETF 11.3%
DIA SPDR Dow Jones Industrial Average ETF Trust 5.0%
IWM iShares Russell 2000 ETF -4.8%

US Dollar Forwards (July 2018) - Currency Hedge ** 0.4%

Cash, Cash Equivalents, Margin & Other 33.1%

Total ( NAV $213,695,258) 100.0%

** Reflects gain / loss on currency hedge (Notional exposure equals 46.6% 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.

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of 3.9% and GDP growth of 4.1% on a year-over-year
basis.
The feeling is deceiving as worldwide growth has start-
ed to wane. Stock markets around the world are gen-
erally not performing as well as the US stock market,
including emerging markets, Europe, China and Japan.
The world has been narrowing with fewer stock markets
performing well.
Below are the graphs of some major stock markets, in-
cluding relative performance compared to the S&P 500.
All of the graphs use hedged ETFs to remove the cur-
rency effect of the US dollar outperforming most world
currencies in 2018.

In the US, stock market breadth has been declining.

Only a handful of technology stocks accounted for all of
the gains of the S&P 500 in the first half of 2018.
There is no question that the US stock market has had
some large boosters, such as tax reform and buy-backs
from corporations pushing their stock prices higher. Can
the US trend of outperformance continue? Of course,
but it is going to get harder over time.
If foreign economies are slowing, the US economy at
some point will be affected by a decrease in demand.
The current trade wars are not helping the situation.
Stock markets in the emerging markets, including China

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have already been negatively impacted. The trade war could set up gold to perform in the sweet spot of its sea-
impact has not been felt in the US stock market, as many sonal period.
investors believe that the impact will be minimal and the
situation is under control with a solution just around the
corner.
The US economy and stock market are not an island.
Eventually, either the rest of the world will once again in-
crease their growth rates with corresponding stock mar-
ket improvements, or the US economy and stock market
will weaken. Given that the world economy is showing
signs of slowing, the odds are probably that the US stock
market will pull back in the not so distant future.

What the HAC is going on?

Towards the end of June, HAC increased its equity posi-
tions substantially in order to take advantage of the sea-
sonal trend of the stock market performing well in the first
eighteen calendar days of July heading into earnings sea-
son. As the 18 Calendar Day Earnings Month Effect trade
finished, HAC reduced its equity positions and increased
My Call: Gold will probably find support at its current
its bond positions. The increased allocation to equities for
level and perform well until the end of September.
most of July proved to be profitable for HAC.

Seasonal Opportunities Energy – Still consolidating

Gold– Down but not out ! The main seasonal period for the energy sector is from
The seasonal period for gold bullion started on July 12th. February 25th to May 9th. The energy sector also has a
Before its seasonal period gold bullion was not perform- secondary seasonal period from July 27th until October
ing well and also in the first part of its seasonal period. 3rd. This seasonal period is not as robust as the February
to May seasonal period and tends to work better if the
In the first part of the year gold bullion was trading at ap- energy sector has collapsed into July. This year the trade
proximately $1350 an oz. Recently it has been trading just was not very attractive as the energy sector has been con-
above $1200. The $1200 level is a support level for gold solidating since April close to its January high.
bullion and if it were to break below this level, gold could
potentially suffer further pain sliding to approximately
$1150.
Gold has been in a negative trend largely as the result
of the US dollar gaining strength. It is interesting to note
that as the US dollar has been flat compared to a basket
of worldwide currencies since June, gold has continued
its trend lower. Gold has been following the moves of
the Chinese yuan and as China has let its currency fall to
counter US tariffs, gold has moved lower.
Although China wants a lower valued currency to miti-
gate the effects of the US tariffs, it is not in its best inter-
est to let its currency to continue to fall at a rapid rate. As
China puts the brakes on its currency’s free fall, look for
gold to strengthen.
The sweet spot for the gold bullion seasonal period is
September and if gold strengthens in the near future, this

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Oil supply disruptions have been taking place, at the same
time geopolitical tensions have been increasing. Oil has
failed to move substantially higher in a favorable envi-
ronment. The energy sector trade at this time continues to
have only limited appeal.
Biotech– Starting to fade after its seasonal sweet
spot has finished
The biotech sector has a strong seasonal period from June
23rd until September 13th. The seasonal sweet spot for
the biotech trade is the month of July. From 1992 to 2016,
the biotech sector has produced an average gain of 6.8%,
has been positive 80% of the time and outperformed the
S&P 500 84% of the time. This year, the sector once again
performed well in July, but has since reached the top of its
trading channel. Given that the biotech sector is outside of
its seasonal sweet spot caution is advised for the remain-
der of the seasonal period.

My Call: The health care sector will probably continue

to outperform S&P 500 for the remainder of its seasonal
period.
Consumer Staples– Relative performance flat
against S&P 500
After a long period of underperforming the S&P 500, the
consumer staples sector started to show some strength in
June relative to the S&P 500. Investors have started to
become more conservative and are favoring the defensive
sectors.

My Call: The biotech sector will probably perform at

market for the rest of its seasonal period.

Health care– Outperforming the S&P 500

Health care has a seasonal period from August 15th to Oc-
tober 18th. As the stock market became more defensive in
May, the health care sector started to outperform the S&P
500. If it breaks above its January high level, and stays
above this level for a few days the sector will be more at-
tractive. It should be noted that if the stock market were
to correct over the next two months, it would be expected My Call: The consumer staples sector will probably
that the health care sector would follow suit. Overall, on outperform the S&P 500 until the end of September.
a technical and seasonal basis, the health care sector is
setup to perform well relative to the S&P 500.

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US Government bonds– After a pause, looking to
move higher
US government bonds started to perform well in mid-
May. The seasonal period for US government bonds is
from May 6th to October 3rd. In mid-July, the sector
pulled back, but has recently found support and is start-
ing to show some strength once again. For the iShares
7-10 year Government Bond ETF (IEF), resistance is just
overhead at $102.50. If IEF is able to break above this
level, this would be a positive development and IEF could
potentially move much higher.

My Call: Canadian bonds will probably perform well in

August and September as investors start to reduce their
expectations for strong economic growth in the future.

Utilities– Opportunity ahead?

The utilities sector has had a volatile year in 2018 as in-
vestors adjusted to changing expectations for increasing
interest rates. Overall, the utilities sector has been per-
forming at market. Resistance is just above the current
price. The seasonal period for the utilities sector is from
My Call: US government bonds will probably move July 17th to October 3rd. It is reasonable to expect that
higher in August and September and outperform the the sector should perform relatively well compared to the
S&P 500. S&P 500 if the S&P 500 has mediocre performance and
expectations for rising rates become tempered.
Canadian bonds– Oversold bounce could be ahead
Canadian bonds have a seasonal period from May 6th to
October 3rd. Canadian bonds rallied sharply in the sec-
ond half of May and into June, since that time, they have
pulled back and have become oversold.
Given that the seasonal sweet spot for Canadian bonds
is in August and September and Canadian bonds are cur-
rently oversold, potentially the sector could be a good op-
portunity over the next two months.

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 My Call: The utilities sector will probably outperform
the S&P 500 in August and September as investors fa-
vor more defensive sectors and bond proxies.

Natural Gas– Starting seasonal strength early?

Natural gas has two seasonal periods, one in the spring
and one in the autumn (September 6th to December 21st).
The spot price of natural gas rose in the spring seasonal
period from mid-March to mid-June. Shortly afterwards,
natural gas corrected, but in late July, natural gas started
to rise once again.

My Call: The US dollar will probably continue to trade

sideways relative to the Euro over the next two months.

Yen vs. the US dollar

The Japanese yen started to slide relative to the US dol-
lar in April. The Japanese yen has a seasonal tendency of
outperforming the US dollar in August and September. It
is currently poised to break out of its trading channel just
as its seasonal period is starting.

My Call: Natural gas will probably setup well for a rally

in its seasonal period from September 6th to December
21st.

Currencies
US dollar vs. Euro– looking for direction
Although the US dollar is at the top of its trading range
relative to the Euro, it is still in its consolidation box that
it started back in May. At this time there is not a strong
seasonal trend to favor either the US dollar or the Euro.

My Call: The yen will probably outperform the US dol-

lar in August and September.

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US dollar vs. Canadian dollar
The Canadian dollar has lost ground to the US dollar
since the beginning of February. Recently, the Canadian
dollar has been rising against the US dollar. On a seasonal
basis, the Canadian dollar tends to outperform the US dol-
lar from August 20th to September 25th. This seasonal
period is considered to be a secondary seasonal period as
it is not as strong as the seasonal period of strength for the
Canadian dollar in April. Nevertheless, it is still a trend
that should be respected.
In the old days, before Twitter, the protocol was to halt
your stock from trading and then make a material an-
nouncement. Let the information disseminate and then
open the stock for trading once everyone has the same
information. I am writing this rant shortly after the Musk
tweet, and I am sure that there are going to be a number
of people accusing Musk of manipulating Tesla’s stock
price, or making fraudulent statements. I will leave the
legal stuff for the regulators to figure out, but this could
end up being a large distraction for Musk.
It seems like Elon Musk is a kid who just can’t keep a
secret, it is too much fun telling all of your friends.
I cannot understand the valuation of Tesla, an electric
vehicle (EV) company (I know there are more compo-
nents). Within the next three years a flood of electric cars
are coming to market and as a result EVs are going to be
a commodity. Tesla does not appear to have a unique de-
fensible competitive advantage. As a result, I expect Tesla
to lose market share in a growing market over the next
few years. Nevertheless, I wish Tesla success. The more
successful Tesla becomes, the better off the EV market
will be and that is a good thing. For every ones sake, Elon
Musk have your tweets vetted.

My Call: The Canadian dollar will probably moderately

outperform the US dollar over the next month. Shortly
afterwards, the seasonal winds shift to favor the US dol-
lar in October.

Brooke’s Rant
Stop tweeting policy !
You may think that this rant is about a politician, but it
is not. It is about a CEO tweeting major announcements
concerning the possible future direction of a company.
I am not a lawyer and standards have changed over the
years. It seems that CEO’s have the right to blast out
whatever they want in a tweet, including any material in-
formation that may affect the price of their stock.
On Tuesday August 7th, Elon Musk tweeted that Tesla
was thinking of going private at $420 a share. Really. I
thought that you had know that you were going private
with a great deal of certainty before making an announce-
ment. And that you were supposed to avoid making for-
ward looking material statements on a “maybe.”

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Disclaimer: Comments, charts and opinions offered 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 offered 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 (Canada), although any of the opinions or recommendations found herein may be reflected
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, manage-
ment fees and expenses all may be associated with an investment in the ETF which is managed by Horizons
ETFs Management (Canada) Inc. The ETF is not guaranteed, its values change frequently and past perfor-
mance 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 invest-
ment 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 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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