Thackray Market Letter

— Know Your Buy & Sells a Month in Advance —

Published the 10th Calendar Day of Every Month
Volume 4, Number 8, August 2010 Written by Brooke Thackray

Brooke Thackray is a Research Analyst along wth Don Vialoux for the Horizons AlphaPro Seasonal Rotation ETF
that trades under the symbol HAC on the Toronto Stock Exchange. The objective of HAC is long-term capital ap-
preciation in all market cycles by tactically allocating its exposure amongst equities, fixed income, commodities
and currencies during periods that have historically demonstrated seasonal trends. The Thackray Market Letter is
for educational purposes and is meant to demonstrate the advantages of seasonal investing by descibing many of
the trades and strategies in HAC.

sented the viewpoint that economic numbers have been

Market Comment
Recently I was on BNN Market Call Tonight (Thursday
August 5th). Usually, I send out an email to my database
announcing my appearance so that interested newsletter
subscribers can garner extra information on my insights
at the time. I was unable to send out an announcement
email this time as there was a possibility that I was going
to have to switch appearance dates and my appearance
was not confirmed until the last day. To replay this ap-
pearance, please reference the BNN website.
At the start of my Market Call Tonight appearance with
Brett Harris, we were discussing the conflicting trends of
the stock market and economic reports. In summary, I pre-
abysmal over the last few months, although recently there
has been some “green shoots” popping up. In contrast
the stock market has been rallying on strong earnings. So
far approximately three-quarters of the companies in the
S&P 500 have been analyst profit expectations and top-
line revenue numbers have been better than expected. In
July the S&P500 rallied to a peak of 11,742 on July 15th
(close to my possible July 19th peak date), and then for
the rest of the month moved up and down to close slightly
below the July 15th date.
So who is right, the economic reports or the stock market?
As I have discussed before the conventional wisdom is
that the stock market is a leading indicator by six to nine

S&P 500 Technical Status

The market rallied in July based upon strong earnings and small signs of better economic reports. Volume has been
decreasing as prices have been rising, which is showing a lack of conviction from investors. The S&P 500 has bro-
ken through resistance at 1100 and is set to rise to the 1150. It is going to be hard for the market to break this level
but it is possible. Investors should be cautious at this time as volume is declining, we are past the positive momen-
tum of earnings and moving into the main seasonal weak period for the market.

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 Horizons AlphaPro Seasonal Rotation ETF (HAC :TSX)
Portfolio Exposure as of July 31st, 2010
Symbol Holdings
United States Dollar Exposure
XLP Consumer Staples Select Sector SPDR Fund
XLY Consumer Discretionary Sector SPDR Fund
IHI iShares Dow Jones US Medical Devices
IBB iShares Nasdaq Biotechnology Index Fund
MOO Market Vectors Agribusiness ETF
GDX Market Vectors Gold Miners ETF
IYT iShares DJ Transportation Average ETF
Canadian Dollar Futures (Sep 2010) Currency Hedge **
Cash and Equivalents & Other
Total (NAV $18,751,066)
** Actual exposure reflects gain / loss on hedge (Notional exposure equals 45.7% of current NAV)
months, but does that mean that it is correct and we are
finding our way off a bottom at this time? As I mentioned
in my BNN interview with Brett, if there is a conflict be-
tween two entities, in this case indicators, the standard
way of determining which one is correct is to refer to an
objective outside source to mediate the conflict. Fortu-
nately, there is another indicator that can help resolve the
conflict (divergence) – the bond market.
In environments of stable Federal Reserve policies, U.S.
ten year bond yields tend to be correlated to the direction
of the stock market. When the stock market is in a strong
rally, bond yields tend to go up and vice versa (bond
yields are inversely related to bond prices). The reasons
are fairly simple. If the stock market is rallying on the
prospects of an economy heating up, yields will rise in
anticipation of an increase in interest rates as the demand
for money increases and the possibility of increased short
term rates by the Fed also increases. More importantly,
especially in the short-term, when the stock market rallies
investors start to leave the safety of the bond market to
participate in stock market gains.
Unfortunately, in my BNN interview (we were running
out of time for the beginning time slot) I was not able to
fully present what the bond market was indicating and
the possible ramifications. Typically, when there is a con-
flict between the stock market and bond market, it is the
bond market that is correct. The bond market is much,
much bigger than the stock market and it is considered to
be “wiser money,” as large institutions tend to drive this
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% of NAV
9.8
-10.0
4.7
4.8
5.4
4.7
-5.0
14.4
0.7
85.0
100.0 %
market.
Before looking at the current correlation between bond
yields and the stock market, it is important to go back to
July 2007 when a major divergence between the two indi-
cators took place (graph at top of page 3).
In July 2007, ten year bond yields peaked (represented by
CBOE Interest Rate 10-year - TNX) and started to decline
on the expectation of a slowing economy. It was not until
October that the S&P 500 started its decline that rocked
the investment community. In this case the bond market
predicted a stock market decline approximately three
months in advance.
In December 2008 ten year bond yields bottomed and
turned up on the expectation of better times ahead. It was
not until approximately three months later that the stock
market followed suit and started in strong rally in March.
Where are we currently? The ten year bond yield peaked
at the beginning of April and has been falling ever since.
The stock market peaked a few weeks later on April 26th
and corrected strongly in May. More recently the stock
market has rallied in July, but bond yields have contin-
ued to decrease. It is possible that the current divergence
between bond yields and the stock market is a temporary
aberration and that bond yields will start to pick and de-
crease the divergence. Recent history does not support
this position and investors should be taking heed from the
bond yield trend and remain cautious and skeptical of any
ensuing rallies in the stock market.
 Disconnect Between U.S. 10 Year Treasury Yield and S&P 500

Despite the bond market indicating a possible correc- tors sell to try and clear off their positions ahead of the
tion in the stock market, the bulls are definitely trying weekend. This did not take place, illustrating the desire of
to get control of the market. In the first week of August the bulls to push the market up at this point.
the market received bullish and bearish news on the job
In addition, a lot of the technical indicators point to a pos-
front- the ADP private payroll numbers were bullish, the
sible short-term rally. Does it make sense to step back into
jobless claims bearish and the non-farm payroll numbers
the market to capture any short-term gains? From a sea-
bearish. Out of these three “employment” reports, the
sonal point of view, this period of the year has produced
non-farm payroll (NFP) numbers are the most important
an average negative return and very few large gains (see
as they carry the most weight. The NFP could not meet
the July 2010 Thackray Market Letter). On a risk-reward
the very modest expectations of job losses of 65,000, and
basis taking on long term positions in the equity market
produced 131,000 job losses. The Canadian job market on
does not make sense. For the average investor, stepping
Friday also produced disappointing results. The expecta-
into the market ignores the bigger economic picture and
tion was for an increase of 15,000 jobs (after producing
potential for the market to suffer large losses that can oc-
93,000 jobs in June). The results were also disappointing
cur at this time of year. Once again investors should be
as Canada turned in its first negative number of the year
very cautious and skeptical of any rallies in the short-term.
with a loss of 9,300 jobs. Interestingly, although the mar-
ket whipped sawed back and forth during the week, on
Friday after the bearish reports the markets declined but HAC : TSX Update
managed a rally at the day’s end. The S&P/TSX ended In my June newsletter, I discussed the position that the
up in positive territory and the S&P 500 ended up with a market may rally into mid-July based upon strong earn-
loss of less than a half of one percent. In volatile markets ings. Although HAC made a very successful short-term
Fridays can often be a large negative day as the specula- investment at the end of the month in May based upon

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market conditions and historical trends that occur around their sales of gold, muting the negative impact of holding
Memorial Day and the days surrounding month end, HAC positions in October. The seasonal sell date for gold and
made a decision to forego the opportunity to increase eq- gold stocks will be examined in later newsletters.
uities substantially in order to try and take advantage a
Investors looking to invest in the gold sector (stocks) in
short-term rally based upon the economic reports that
Canadian dollars can consider the (XGD) iShares S&P
were coming out at the time.
TSX Global Gold Index ETF.
In July HAC was largely in cash with small positions
added to the portfolio to take advantage of strategic op- MOO Market Vectors Agribusiness ETF
portunities. The changes have positioned HAC well for From a seasonal perspective agriculture stocks tend to do
near term performance. well from August to the end of December. The main pe-
riod of seasonal strength tends to occur in the autumn.
From a technical basis, the sector started showing signs
of strength in July and HAC took on a small position in
HAC : TSX Buys
the portfolio. More recently the agriculture sector has
GDX Market Vectors Gold Miners ETF shown strong relative strength compared to the broad
market. This trend is expected to continue.
Gold and gold stocks have on average presented a buy-
ing opportunity in the month of July. Overall, gold stocks
are favoured over the metal during their seasonally strong
period as the stocks represent higher leverage to an in-
crease in metal prices. In the last few months the metal
has been outperforming gold stocks, but that is showing
signs of changing as gold stocks are showing signs of
strength. From July 25th to September 25th, for the years
from 1984 to 2009, gold stocks have produced a return
of 6.8%. From both a seasonal and technical perspective,
gold stocks are currently looking favourable.

Investors looking to invest in the agriculture sector

(stocks) in Canadian dollars can consider the (COW)
Claymore Global Agriculture ETF.

IYT - Transportation DJ Transportation Avg. ETF

(SHORT SELL)
In last month’s newsletter I discussed the potential trade
of shorting the transportation sector based upon its aver-
age poor performance during the month of August. HAC
entered into a relatively small short position mid-July.
There is a technical risk in the GDX pattern as recently
the stock price has had a minor breakthrough on an as-
cending triangle pattern. During seasonally strong peri-
ods breakdowns do not materialize as often as during the
unfavourable season. Regardless, this is something worth
monitoring.
In the past it has been best to reduce exposure to gold
stocks during the month of October as gold prices were
often put under pressure from the European Central banks
selling their gold holdings at this time of year. In more
recent years, the central banks have substantially reduced

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Creating a short position in transportation is expected to
provide risk reduction in the event of a market decline in
the near future as the sector is expected to have stronger
negative performance compared to the broad market. The
objective in this case is to provide larger returns from a
declining market from the short position of IYT than the
loss of returns with the long positions of other holdings.
XLP and XLY Positions
HAC continues to hold XLP in the portfolio and com-
bine this with a short position in XLY. If HAC views the
market as having short-term positive momentum, it has
covered the short position in XLY and then resumed it
again in less favourable times. HAC expects to continue
to use this profitable strategy during the duration of the
unfavourable season until October.
Upcoming Opportunities and Observations:
Natural Gas
Natural gas is an extremely volatile commodity and in-
vestors should be very cautious investing in this sector.
From a seasonal basis the best time to invest in the natural
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gas sector is from August to December 21st (for full de-
tails, please reference Thackray’s 2010 Investor’s Guide).
In summary the natural gas sector can do well at this time
of year because of “shoulder season” for the supply and
demand for natural gas occurs at this time and hurricanes
in the Gulf of Mexico can disrupt supply, pushing up the
price of natural gas. For the record, the U.S. hurricane
center has forecasted an above average number of hur-
ricanes for this year.
The month of September can produce large returns for
natural gas and did very well last year. The current sup-
port level for natural gas is $4.00 and could present a
good entry point with favourable conditions.
Canadian dollar- US Dollar
The Canadian dollar is trading in a band with resistance
@ $97.50 and support @ 92.50. Recently, the Canadian
dollar has been pushing up against resistance. The short-
term direction of the Canadian dollar is largely dependent
on: the price of commodities (mainly oil) and the risk ap-
petite in the stock market.
Currently oil inventories are extremely high and global
growth is slowing. Combining these factors with the pos-
sibility of the market losing its appetite for risk at this
time of year, the Canadian dollar is not expected to breach
resistance and run away past parity at the current time.
It is more likely that the Canadian dollar will do well rela-
tive to the US dollar later this year.
IHI - Shares Dow Jones US Medical Devices
In July IHI was a relatively small holding in HAC. Re-
cently, the technical pattern has been weakening as it ap-
proached the end of its seasonally strong period. Inves-
tors should consider selling this sector.
Utilities Select Sector SPDR ETF Metals and Mining Sector- NEGATIVE September
The utilities sector typically outperforms from July 17th The metals and mining sector has typically been negative
to October 3rd. in September. The chart below shows the current position
of the Metals and Mining Select Sector SPDR ETF.

The sector has been showing strength since the beginning

of July and now is currently at its resistance point. If it If the market pulls back and XME bounces off $55, the
breaks through resistance it will be an attractive invest- possible downside target is $45.
ment. The caveat is that it is not expected to produce large
positive performance if the market is in a strong declining September - A Cautionary Note
mode. The month of September has historically been the worst
month of the year. Since 1950 the S&P 500 has produced
iShares Barclay 20+ Year Treasury Bond ETF an average loss of 0.7% and has only been positive 42%
(TLT) of the time. Typically, September has not produced large
On average bonds typically start to outperform at the be- gains and investors should be cautious during this month.
ginning of May. This year bonds took off at that time as
the stock market fell apart. Currently TLT is consolidat-
ing at approximately 100. If deflation becomes more of a
concern and the economy continues to slow down, TLT
could rally from this point.

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Disclaimer: Brooke Thackray is a research analyst for JovInvestment Management Inc. All of the views
expressed herein are the personal views of the author and are not necessarily the views of JovInvestment
Management Inc., although any of the recommendations found herein may be reflected in positions or
transactions in the various client portfolios managed by JovInvestment Management Inc. HAC buys and
sells of securties listed in this newsletter are meant to highlight investment strategies for educational pur-
poses only. The list of buys and sells does not include all the transactions undertaken by the fund.

While the writer of this newsletter has used his best efforts in preparing this publication, no warranty with
respect to the accuracy or completeness is given. The information presented is for educational purposes
and is not investment advice. Historical results do not guarantee future results

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