THACKRAY SEASONAL TRADE

April 12, 2016

Authored by: Brooke Thackray

Stock Markets are in for a Rough Summer (May 6 - Oct 27) !

Introduc on
Priced For Perfec on When Perfec on Does Not Exist
The above statement is not a metaphysical discussion on the existence of perfec on,
but rather a descrip on of the current state of the stock market.

...condi ons in the stock

market at this me make it
suscep ble to a correc on

The current bull market is 85 months old and is becoming extended. Recently, investors have been lulled into complacency as the S&P 500 has been trading in a band
from approximately 1820 to 2135 that was established back in 2014. A lot of investors
cannot remember a mul -year sideways stock market. A couple of round trips to the
bo om of the trading band and back to the top have le investors with the overwhelming feeling that everything will work out. A er all, the S&P 500 is close to its
all- me highs. The general belief is that the stock market will resolve its current consolida on phase by rallying substan ally above its old highs... and that it is important
to just be in the market.
It all sounds a bit Pollyannaish. There are mes when a buy-hold-and-close-your-eyes
approach works well...but not now. A buy and hold approach works well when the
stock market is substan ally underpriced and the economic and earnings backdrop
has a strong growth trajectory. We do not have the necessary condi ons to support a
strong rally above the all- me high for the S&P 500. The macro economic fundamentals and earnings are not suppor ve for a strong rally. Currently, the stock market is
priced for perfec on.

...Janet Yellens op ons are

limited...maybe she rides in
on a pony?

Investors have been condi oned to believe that the U.S. Federal Reserve will have
their backs. Who can blame them? For many years, if the economy started to turn
down and the stock market corrected, the U.S. Federal Reserve would step in with
s mula ve monetary policy to help prop up the stock market.

Stock Markets are in for a Cold Summer

The situa on has changed, as the U.S. Federal Reserve is running out of tools to prop
up the economy and the stock market. At this point, if the economy starts to slow and
the stock market starts to have a severe correc on, Janet Yellen, chairperson for the
U.S. Federal Reserve is not going to ride in on a white stallion to save day. Janet Yellens op ons are limited...maybe she rides in on a pony?
At mes, the stock market can con nue to move higher, even without strong prospects. The historical odds are that in the six month unfavorable period for stocks from
May 6th to October 27th, stocks are less likely to perform well compared to the other
six months, the six month favorable period for stocks. Large gains in the six month unfavorable period for stocks are not common and typically require a strong catalyst. In
addi on, the six month unfavorable period for stocks has on average suered larger
losses than the other six months of the year.
The condi ons in the stock market at this me make it suscep ble to a correc on as
the stock market is overvalued, has li le poten al for addi onal support from central
banks, corporate earnings that are fading, and a looming period of weak seasonality.
Inves ng in an overvalued stock market that lacks support can s ll be frui ul, as the
market can con nue to move up on strong momentum for a long period of me. The
potent cocktail of less than desirable ingredients measuring the stock markets valua on has one kicker that pushes the probability of a correc on to the pping point
- a weak six month seasonal period from May 6th to October 27th.
If there is one me of the year that makes sense for investors to lower the risk in their
por olios, it is the approaching six month unfavorable period for stocks. This is especially per nent this year as there is a lack of catalysts to propel the market higher. A
six month period of reduced risk is not a forever alloca on. It may be a rough summer
for the stock market ahead, but there is shelter elsewhere. All is not lost, as there are
investments that tend to perform well in the six month unfavorable period, including
certain sectors of stock and xed income market.

Current Bull Market is Extended

The length of a bull market does not tell an investor if a stock market is going to corExhibit 1: S&P 500 Bull Markets (20%+) % Gains and Length (months) 1929 - 2015

April 11, 2015

Stock Markets are in for a Cold Summer

Historically, since 1929, S&P
500 bull markets have averaged 31 months and have
produced an average gain of
107%.

rect in the next month or two. A bull market can keep going a lot longer than investors an cipate. Despite the lack of immediate predic ve power, the length of a bull
market can s ll provide a sense of whether the stock market is suscep ble to fading
in strength.
Historically, since 1929, S&P 500 bull markets have averaged 31 months and have produced an average gain of 107%. The current bull market that started with the bo om
on March 9, 2009 has so far been running for eighty-ve months and has produced a
gain of 205%. Both measurements have approximately doubled the long-term averages. The only three bull markets that have produced greater gains are the 1949 to
1956, 1982 to 1987 and the 1987 to 2000 bull markets.
Although the current bull market stands out against the average since 1929, the
results are not quite so stellar when compared to the average bull market since 1949,
but s ll above average. Post WWII, on average, bull markets have lasted longer and
produced greater returns. There are a host of reasons of why this phenomenon may
have occurred, including: the rapid rise of U.S. industry, technological advancements,
the advent of the do-it-yourself investor and Federal Reserve suppor ve ac ons for
the stock market. Even compared to the more recent bull markets since 1949, the
current bull market has become extended and is suscep ble to a correc on.
Exhibit 2: S&P 500 Bull Market (20%+) Performance Since 1929

Even compared to the more

recent bull markets since
1949, the current bull market
has grown long in the tooth
and is suscep ble to a correcon.

Length Avg. (months)

% Gain Avg.

1929 to 2016
31.8
107%

1929 to 1948
9.6
64%

1949 to 2015 Current Bull Mkt

55.8
85
154%
205%

Source Data: Bloomberg

Stock market valua on stretched on the upside

There are many ways to slice and dice the value of the stock market. Valua on models can produce results that can vary signicantly, with some models poin ng to an

undervalued market and others an overvalued market. Everyone has their favorite
models. At this me, I am having trouble nding any models that point to the stock
market being undervalued. Most investors would agree that either the stock market
is either fairly valued or it is overvalued. And in the la er group, most investors would
agree that the stock market is on the rich side.
Stock market valua on metrics should not be used for short-term market ming:
April 11, 2015

Stock Markets are in for a Cold Summer

some stock market measurements can be undervalued/overvalued for years. Nevertheless, the indicators do have value in indica ng that the market is suscep ble
to a rally/correc on, especially at the extremes. When the indicators are at extreme
overvalued levels, they imply that returns over the long-term are either going to be
miniscule compared to past averages, or even nega ve. They do not provide informaon on when the markets may turn down, just that long-term expecta ons should be
reduced.
...according to the Bue
indicator, the stock market is
extremely overvalued and is
suscep ble to a correc on

Pre-1990s, the price to earnings ra o (P/E) was a favorite indicator of many investors
to determine if the stock market was undervalued/overvalued. Investors measured
the trailing twelve month price of the S&P 500 to its earnings and compared it to the
long-term average. In the late 1990s investors became frustrated with this measurement as the P/E resided for an extended period of me, at a much higher value than
its long-term average. At the end of September 2015, the trailing twelve month P/E
ra o was 21.4 (Exhibit 3), which is above the long-term average of 15.6 (since 1880).
Wall Street has managed to convince investors that the forecasted twelve month
P/E is more relevant than the historical earnings. A er all, it was Wall Streets job to
forecast the earnings, so they should know (sarcasm intended). Even the forecasted
twelve month forward P/E has lost favor as investors have been unable to envision its
usefulness and do not fully trust the abili es of Wall Street analysts to forecast based
upon informa on from the companies they are covering.
More recently, the Shiller Cyclical Adjusted Price to Earnings ra o (CAPE) has a racted
a en on. The ra o uses smoothed real per share earnings over a ten year period and
helps to adjust for cyclical eects. It is an indicator that helps to value the likelihood
of stock markets returns over the long-term. The higher the ra o, the more likely that
the next ten year returns in the stock market will be lower and vice versa. The ra o
does not predict impending stock market crashes, but in the past, high P/E values
have coincided with major stock market correc ons.

...one indicator that is registering extreme over op mism

is the level of real investor
debt margin

Professor Shiller made his mark with the investment community a er he wrote a
book published in March 2000, tled: Irra onal Exuberance. The book hit the bookstores just as stock markets were peaking. The tle of the book was an echo of irra onal exuberance statement that the Federal Reserve chairman Alan Greenspan
made in late 1996, as he commented on the valua on of the stock markets at the
me. Coincidentally, Professor Shiller has just released the third edi on of his book
(revised and expanded) in January 2015, claiming that stock markets in the U.S. and
other countries are overvalued once again, just not to the same degree as the me
when his rst edi on was released. In addi on, Shiller has also been credited with
correctly predic ng that house prices were too high before the 2007 crash.
A er a string of Shiller correct major predic ons, investors have been paying more
a en on to the recent high values of the Shiller P/E ra o. Looking at the data since
1880, the Shiller P/E is currently close to an all- me high and is above its 1 standard
devia on range. Accordingly, the indicator is poin ng to an overvalued stock market.
Many investors respect Warren Buet for his successful common sense approach to
inves ng. In 2001, Warren Bue revealed his favorite stock market valua on indicator as the stock market capitaliza on to GDP ra o. If the ra o is signicantly below
the long-term average, then it reects that the stock market is cheap to buy and vice
versa. At the macro level, it makes sense that the U.S. stock market should not have a
substan ally high value rela ve to GDP (value of all of the goods and services produced in the U.S.). As of October 2015, the indicator was registering 1.2, represen ng
a stock market valua on of 120% of the economy (Exhibit 5). Since 1970, this is the
highest level other than the year 2000. In other words, according to the Bue indicator, the stock market is extremely overvalued and is suscep ble to a correc on.

April 11, 2015

Stock Markets are in for a Cold Summer

In the end it is hard to argue

that prot margins can be sustained at the current historic
levels over the long-term.

So why are investors s ll in the game pushing the stock market up when they realize that the stock market is not a bargain? It mainly comes down to fear the fear of
missing out. The music is s ll playing and there is s ll some dancing to be done. With
interest rates around the world at record lows and o en at nega ve rates, investors
feel they have no alterna ve but to invest in the stock market. This group think has
produced stock markets that have reached giddy levels and the party goes on.
It is important to note that stock market valua on metrics used above should not be
used as market ming tools. They are broad trend indicators that can stay overvalued
or undervalued for a long me, much longer than what most investors would expect.
Nevertheless, they do have value by indica ng if the stock market us suscep ble to a
correc on or rally. When the valua on metric is stretched to the extreme upside, the
stock market is suscep ble to a correc on.
There are dierent ways to measure investor enthusiasm for the stock markets, but
one indicator that is registering extreme over op mism is the level of real investor
debt margin. Exhibit 6 shows the posi ve rela onship of real margin debt to real S&P
500 levels from 1985. The real margin debt level is at an extremely high level. Low
interest rates can explain part of this phenomenon, as investors can borrow money
cheaply to invest, but it does not account in total for the extreme level.

The problem is that if investors are already borrowing heavily to invest, where are
addi onal funds going to come from for inves ng? It is true, that the average person
is not ac vely inves ng in the stock markets like they were in the late 1990s, but
they may not be coming into the stock market this me around. The stock market has
bought some me, with corpora ons buying their stock back at higher than average
levels. Companies with extra cash have not been using it for expansion, but instead
having been buying back their own stock. This can keep going on for a while, but it is
hard to keep a stock market supported on this ac on.
One of the reasons that corpora ons have been able to buy back their own stock has
been the extremely high prot margins that U.S. corpora ons have been earning. Exhibit 6 shows that prot margins are at a high level, well above the 1 standard deviaon range. Although, it is possible that the high prot margins are some what derived
from structural changes, there is no ques on that the ra o is at elevated levels.
Expanding prot margins have been able to support an expanding P/E ra o. Many investors argue that prot margins tend to regress to their mean over me. When and
if prot margins regress to their mean, the eects would nega vely impact the P/E
ra o and consequently stock prices.
April 11, 2015

Stock Markets are in for a Cold Summer

In the end it is hard to argue that prot margins can be sustained at the current historic levels over the long-term. A lot of the prot margin growth has been driven by
aggressive cost cu ng, something that is not sustainable over the long-term.

Corporate Earnings Star ng to Fade?

Corporate earnings have been strong in the most recent bull market, quarter a er
quarter. Companies have slashed their costs and increased their prot margins to
record levels (Exhibit 7) and have maintained a pa ern of earnings expansion. For the
rst me since 2009, Q1 earnings for 2016 are expected to contract 7.1% (Thomson
Reuters April 4). If earnings con nue to contract, this will not be a good backdrop for
a rising stock market.

The best investors can hope

for is for the Federal Reserve
to con nue to push out its
interest rate increase.

With U.S. corporate prot margins above their standard devia on range, they are
poised to correct and move back to their long-term average. There is no reason for
U.S. corpora ons to make substan al prot margins above their average over the
long-term. Nothing has changed over the last few years for this to be jus ed. In fact,
over me, it would be expected that compe on would bring down prot margins
to adjust for the proper risk adjusted returns for owners of businesses. The very high
levels of prot margins are temporary and have been largely driven by cost cu ng,
share buy-backs and low interest rates.

Not Much Help from Central Banks

Bull markets are o en driven by some fundamental factor of improvement, such as
the 1990s bull run which was driven by improvements in technology and increasing
produc vity. The most recent bull market has been powered by the Federal Reserve
s mula ng the economy through loose monetary policy. In December 2015, the
Federal Reserve raised its discount rate for the rst me in over nine years. Although
one increase of 0.25 basis points may not have a large impact on the economy, it does
signal a new direc on for the Federal Reserve.
In the current bull run, when the stock markets corrected severely, the Federal Reserve stepped into rescue the economy/stock markets, par cularly in the summers of
2011 and 2012. In both of these years the Federal Reserve stepped in with, or rumors
of quan ta ve easing programs.
Now that Federal Reserve is on a ghtening bias, it is in a very dicult spot and its
future ac ons have become a lot more limited. It will be very dicult for the Federal
Reserve to start increasing rates and then shortly a er, reverse course and start decreasing rates. The best investors can hope for is for the Federal Reserve to con nue
to push out the dates of raising the discount rate to higher levels. The days of the
Federal Reserve stepping in to save the day are fading...and fast.
In more recent years, the ECBs monetary policies have had an impact on providing
support for stock market rallies. Mario Dhragi, the president of the European Central
Bank, has released a series of quan ta ve easing ini a ves and will probably connue with the same ac ons in the future with any signs of weakness in the Eurozone.
The problem is that the European monetary s mulus is suering the same fate as the
U.S. monetary policy....succumbing to the law of diminishing returns. Each new round
of quan ta ve easing is producing less and less of an eect on the economy and the
stock market. Draghi is stock market dependent. Recently, on December 3, 2015,
Draghi disappointed investors with a monetary s mulus program. When the stock
market went down a er the programs release, Draghi felt compelled to address the
press the next day and spin a bullish viewpoint along the lines that the Eurozone will
do whatever it takes to support the economy.
The last two central banks that have the power to move the stock markets reside in
April 11, 2015

Stock Markets are in for a Cold Summer

Exhibit 8:
S&P 500 Unfavorable vs.
Favorable Period
Performance (1950-2014)

1950/51
1951/52
1952/53
1953/54
1954/55
1955/56
1956/57
1957/58
1958/59
1959/60
1960/61
1961/62
1962/63
1963/64
1964/65
1965/66
1966/67
1967/68
1968/69
1969/70
1970/71
1971/72
1972/73
1973/74
1974/75
1975/76
1976/77
1977/78
1978/79
1979/80
1980/81
1981/82
1982/83
1983/84
1984/85
1985/86
1986/87
1987/88
1988/89
1989/90
1990/91
1991/92
1992/93
1993/94
1994/95
1995/96
1996/97
1997/98
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15

Unfavorable
Period
May 6 to
Oct 27

Favorable
Period
Oct 28 to
May 5

8.5 %
0.2
1.8
-3.1
13.2
11.4
-4.6
-12.4
15.1
-0.6
-2.3
2.7
-17.7
5.7
5.1
3.1
-8.8
0.6
5.6
-6.2
5.8
-9.6
3.7
0.3
-23.2
-0.4
0.9
-7.8
-2.0
-0.1
20.2
-8.5
15.0
0.3
3.9
4.1
0.4
-21.0
7.1
8.9
-10.0
0.9
0.4
4.5
3.2
11.5
9.2
5.6
-4.5
-3.8
-3.7
-12.8
-16.4
11.3
0.3
0.5
3.9
2.0
-39.7
17.7
1.4
-3.8
3.1
9.0
4.1

15.2 %
3.7
3.9
16.6
18.1
15.1
0.2
7.9
14.5
-4.5
24.1
-3.1
28.4
9.3
5.5
-5.0
17.7
3.9
0.2
-19.7
24.9
13.7
0.3
-18.0
28.5
12.4
-1.6
4.5
6.4
5.8
1.9
-1.4
21.4
-3.5
8.9
26.8
23.7
11.0
10.9
1.0
25.0
8.5
6.2
-2.8
11.6
10.7
18.5
27.2
26.5
10.5
-8.2
-2.8
3.2
8.8
4.2
12.5
9.3
-8.3
6.5
9.6
12.9
6.6
14.3
7.1
6.5

April 11, 2015

Oct28May5>
May6Oct27
YES
YES
YES
YES
YES
YES
YES
YES

YES
YES
YES
YES
YES
YES

YES
YES

YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES

Japan and China. Japan has been constantly been implemen ng itera ons of loose
monetary policy. Japan has no choice but to keep releasing more and more monetary
s mulus to support its failing Abenomics policies. At this point, if it reversed course,
the results would be disastrous for Japan. Although they have had a posi ve impact
on the stock markets around the world, the marginal eect of the Japans latest iteraons have been decreasing and somewhat ephemeral.
Unlike Japan, China is not wanton to introduce monetary s mulus unless it is absolutely needed. Nevertheless, Chinas eorts are also suering from the law of diminishing returns. China has been trying to engineer a so landing for the economy (for
quite some me). The ride has been bumpier than expected. At this point, the jury is
s ll out. It is easily possible for China to collapse once again.
Not only are the foreign central banks monetary policies having less and less of an effect on their own cons tuents, but the policies are also producing diminishing returns
in the North American stock. Overall, investors should not expect foreign s mula ve
monetary policy to contribute signicantly to a sustainable market rally.

Diminishing returns to Federal Reserve jawboning increasing interest rates.

Part of the recent rally in the stock market has been driven by the possibility of the
Federal Reserve delaying its discount rate increases. Originally, in December, when
the U.S. and world growth was expected to be more robust, the Federal Reserve was
indica ng four rate increases in 2016. As the Federal Reserve backed down from this
posi on because of slower world growth, the stock market rallied, an cipa ng the
Federal Reserves rate rise schedule to be more conserva ve. Over me, investors
have started to perceive the risk of slower growth as becoming more relevant compared to the benet of pushing out possible rate increases.
It seems that on a daily basis, investors are receiving mixed messages on the possibility of the Federal Reserve increasing interest rates. One governor pushes the hawkish
case and the next governor pushes the dovish case. Over me investors are inclined
to tune out the noise and the discussion has less of an impact on the stock market.

Stock Markets Vulnerable in Six Month Unfavorable Season

May 6th to October 27th
In recent years, Sell in May has become a hot topic, par cularly in 2011 and 2012
when the S&P 500 corrected sharply in the summer months. A lot of investment gurus do not really understand the signicance of the six month unfavorable period for
stocks that lasts from May 6th to October 27th.
In past presenta ons, I have shown the average seasonal performance of the S&P
500 (Exhibit 9), and asked the audience their thoughts on inves ng in the favorable
seasonal period (shaded grey) and the unfavorable seasonal period. A large por on
of the audience o en responds that the unfavorable season has on average produced
a at return and so why not just hold the market during this me and benet from
the next strong seasonal period.
This is not the best way to look at this seasonal trend as it does not reect the true
risk/reward rela onship between the favorable six month period for stocks from
October 28th to May 5th compared to the unfavorable six months. It is not a matter of whether the stock market is posi ve on average in the unfavorable six month
period (since 1950, the S&P 500 has been posi ve 63% of the me in the unfavorable
period), but rather how much risk is incurred during this period.

Stock Markets are in for a Cold Summer

Exhibit 9: S&P 500 Avg. % Cumula ve Yearly Gain

...the favorable period on

average produces more gains,
bigger gains more o en,
fewer losses and fewer large
losses

In the same presenta on, I would then go on and show the table in the side bar,
Exhibit 9, (from Thackrays 2016 Investors Guide, page 57) and ask: if you could only
choose one six month period in which to invest, which period would you choose? I
would then give the audience a few minutes to analyze the data and discuss the results amongst themselves. The answer is almost unanimous, as they would choose to
invest in the six month favorable period.
The audiences viewpoint on inves ng during the year changed when they had to
make a decision between two alterna ves. They were forced to include risk into their
analysis. Average buy and hold investors do not have to make the decision about
being in or out of the stock market. They are already in the stock market and ra onalize why they should stay invested. The bias results with investors fearing that they
will miss out on large returns if they exit the stock market during the unfavorable six
month period.

...as we transi on into the six

month unfavorable season
for stocks, the likelihood of a
strong rally will fade

So what did the six month seasonal numbers from Exhibit 8 reveal? The most obvious
metric is that the favorable seasonal period outperforms the unfavorable seasonal
period more than half the me; in fact 71% of the me (number of YESs in far right
hand column). Not as easily seen, but important are the other metrics:
The unfavorable seasonal period produces an average geometric loss of 0.6%,
compared to the average geometric gain of 7.8% in the favorable period (Exhibit
10).
The frequency of losses equal to or greater than 10% is substan ally higher in
the unfavorable period versus the favorable period, 10.8% and 3.1% respec vely
(Exhibit 11).
The frequency of gains equal to or greater than 10% is substan ally less in the
unfavorable period versus the favorable period, 12.3% and 41.5% respec vely
(Exhibit 12).
In the end, it is easy to see why the audience of the presenta ons would choose the
six month favorable period over the six month unfavorable period in which to invest,
as the favorable period on average produces more gains, bigger gains more o en,
fewer losses and fewer large losses.

April 11, 2015

Stock Markets are in for a Cold Summer

Technically, the S&P 500 is sound, but it is stretched to the Upside

At the me of wri ng this report, the 200 day moving average for the S&P 500 is
2015. A lot of traders track the movement of the S&P 500 rela ve to the 200 day
moving average and if the S&P 500 falls below the 200 day moving average, there is
a good chance that the 2000 level will be tested. If the S&P 500 breaks below 2000,
especially on heavy volume, the stock market will have turned and will have a bearish bias. In the six month unfavorable season for stocks, it is en rely possible that the
S&P 500 will once again test the lower bound of its trading range in the 1820 area.
Breaking below this level would be extremely bearish for the S&P 500. Currently,
there is an ar cial cap on the S&P 500 at approximately 2135 (top end of the trading
range). Given that this level has not been broken, but it has been tested numerous
mes, it is going to be dicult for the S&P 500 to have a strong sustained breakout. In
other words, the upside poten al in the stock market is a lot less than the downside
poten al. Investors should start to consider becoming more conserva ve.
Exhibit 13: S&P 500 Technical Price Ac on

Prac cal strategies for the unfavorable six month period

The stock market can rally in the unfavorable six month period, par cularly in a strong
bull market. Seasonal investors should adjust their por olios to reect the increased
risk to reward ra o at this me. At this me of the year, seasonal investors should be
looking to follow the Seasonal 3 Rs.

(1) Reduce Equi es

It is fairly standard in the investment industry to operate a por olio with an InvestApril 11, 2015

Stock Markets are in for a Cold Summer

There are other sectors of the

market that tend to perform
well in the six month unfavorable period for stocks

ment Policy Statement (IPS) that states a percentage range for dierent asset classes,
depending on risk tolerance and other factors. The overall equity alloca on to the
stock market, typically has a 10-20% range around a specied target value in an
investment por olio. Based upon seasonal trends demonstra ng lower expected risk
adjusted returns in the unfavorable six month period for stocks, seasonal investors
may want to lower their equity holdings within their risk parameters and equity alloca on range for their por olios.
Within the six month unfavorable seasonal period for stocks, there are shorter-term
opportuni es in the broad stock markets for more ac ve investors. For example, the
stock market tends to rally from the end of June, into the rst half of July (see Thackrays 2016 Investors Guide, page 43 and page 73 for details). This summer rally,
tends to be ephemeral and it might be wise for seasonal investors to use ght stops
on their posi ons.

(2) Reduce Beta

At mes of expected lower returns, generally it makes sense to reduce risky investments. If the market corrects, riskier investments tend to correct more, especially if
the market suers a major correc on.

(3) Reallocate into Seasonally Strong Sectors

Not all sectors are seasonally equal. Some sectors perform be er at certain mes
of the year. In fact, seasonal inves ng is primarily a sector rota on strategy, favoring
dierent sectors at dierent mes of the year when they tend to outperform. Although the unfavorable six month period may not be kind to the broad stock markets
on average, some sectors tend to underperform and others outperform. To state the
obvious, investors should favor the sectors that tend to outperform. In general, it is
the defensive sectors that tend to outperform in the six month unfavorable period for
stocks, including the health care, u li es and consumer staples sectors. The defensive
sectors have dierent seasonal periods within the unfavorable period (see Thackrays
2016 Investors Guide for details). Naturally, if the stock market has a major correcon, the defensive sectors will s ll be expected to correct, but typically not by as
much as the cyclical sectors.
There are other sectors of the market that tend to perform well in the six month
unfavorable period for stocks, such as gold and the agriculture sector. Both of these
sectors tend to perform well at dierent mes within the unfavorable period, based
upon supply and demand rela onships within their sectors.
Investors also have the op on to invest in government bonds from May 6th un l the
beginning of October. Government bonds tend to perform well at this me of the
year as investors look for a place to park their money during the six month unfavorable period for stocks. For more informa on see Thackrays 2013 Investors Guide,
page 55.

Conclusion
No one can tell you if the stock markets are going to go up or down this summer no
one! That is true for all forecasts, as they are only forecasts based upon probability.
Dierent investment methodologies assign dierent probabili es to dierent events
in order to forecast an outcome. This is true, even for fundamental analysts.
Seasonal analysis looks at historical trends in the market over the long term in order
to develop an investment strategy. Exogenous events can have an impact on any well
founded investment strategy, both posi vely and nega vely. Seasonal analysis is not
immune from these eects. Currently, this year, there is a lack of apparent catalysts to
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Stock Markets are in for a Cold Summer

drive the stock market higher during the six month unfavorable period for stocks: the
bull market is extended, the stock market is richly valued, central banks have limited
ability to increase liquidity and corporate earnings are fading. Given the nega ve
backdrop over the next six months (from May 5th to October 27th), stock markets are
probably in for a rough summer.
All the best seasonal inves ng.
Brooke Thackray

Disclaimer: Brooke Thackray is a research analyst for Horizons ETFs (Canada) Inc. All of the views expressed herein
are the personal views of the author and are not necessarily the views of Horizons ETFs (Canada) Inc., although any of
the recommendations found herein may be reected in positions or transactions in the various client portfolios managed
by Horizons ETFs (Canada) 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 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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Contact: For further information send an email to brooke.thackray@alphamountain.com

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