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Brooke Thackray is a Research Analyst along with 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 describing many of
the trades and strategies in HAC.
Volatility*
HAC S&P 500 S&P/TSX
10% 13.7% 18%
Thackray’s 2011 Investor’s Guide * Gains and volatility are calculated for 1 year (since inception date of HAC -
Nov 19th) - Source: Bloomberg
♦ New Strategies
♦ Updated Charts and Tables Market Comments
♦ 2009/2010 Strategy Performance Reports HAC is over a year old. In the first year HAC has done well
– outperforming the S&P 500 and the S&P/TSX Compos-
S&P 500 Technical Status
The S&P 500 has just recently broken out of its trading range. Although this is a positive development, investors
should not get too excited. We are at the early stages of the breakout. Look for strong volume to confirm a continuing
rally. Just prior to the breakout, the S&P 500 bounced off its 50 Day Moving Average. This is also a positive devel-
opment. If the S&P 500 were too fall below its 50 DMA, then it is possible for a retracement to approximately 1120.
We are currently in the favourable season for the stock market and as such, the market is expected to move higher
over the next few months. Possible areas for a retracement are the middle of January and the month of February.
ite. For the last year from November 19th 2009 (HAC in- the S&P 500. Yes, the outperformance is impressive, but
ception date) to November 19th 2010, HAC gained 11%, even more impressive is the lack of volatility. Investors
versus 7.6% for the S&P 500 and 9.5% for the S&P/TSX do not like to see the value of their portfolio erode. Lower
Composite. HAC accomplished this outperformance with volatility translates into less gut wrenching declines. This
substantially less volatility than the S&P 500 or the S&P/ past summer, HAC was able to provide positive value by
TSX Composite. largely missing the major decline. That is not to say that
HAC will not go up and down over time, it has in the past
Up to this point in my writings I have not discussed per-
and will in the future, but one of the goals of HAC is to
formance, as investment regulations do not allow perfor-
avoid market declines that occur during the unfavourable
mance figures to be reported for any fund under one year
season for stocks.
old. To recap the performance of HAC, the fund outper-
formed the S&P 500 during the favourable season, from
the inception date of November 19th to the beginning of Where are We Now?
May, and side stepped the severe market correction dur- Mid-November, HAC started to step into the market and
ing May and June. towards the end of November, HAC moved to an essen-
The market bounced at the beginning of July and put in an tially fully invested position. Typically the best time to
atypical performance, rising into fall. This rally was main- get back into the market is towards the end of October.
ly driven by the expectation of QEII. Investors pushed At that time the market was overbought and waiting on
up the markets on the positive expectation of increased the launch of QEII. From a risk reward standpoint HAC
liquidity. Although HAC did not participate with broad decided to wait in the short-term, looking for an entry po-
market exposure, it did benefit from long investments in sition. In the end, our entry point was approximately at the
sectors that typically outperform at this time of year (see same level as the end of October.
past newsletters for details). At the current time, it is expected the market will
provide positive results over the next few months
Through the correction of the S&P 500 during spring and and HAC has positioned itself to capture the poten-
rally in autumn, the market essentially up flat. During this tial gains.
time period HAC increased in value and outperformed
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It is possible that the market may encounter soft spots for a good start to January.
in the middle weeks of January and the month of Feb- Although the sector can run for a long time in a strong
ruary. Although January is the fourth best month of the bull market, on average the seasonal period for technolo-
year (S&P 500 since 1950), the middle weeks in January gy has lasted until January 17th (1990-2010). See Thack-
can be soft. In addition February has on average been the ray’s 2011 Investor’s Guide for details. In markets that
second worst month of the year (S&P 500 since 1950). are not displaying signs of strength, the sector often rolls
Despite these weaker tendencies, we are still in the fa- over earlier in January at the same time as the Consumer
vourable six months of the year. Electronics Show. In 2011 the CES takes place from Janu-
Last year HAC was able to outperform the S&P 500 dur- ary 6th to 9th. It would be wise for investors to consider
ing the favourable season by overweighting the season- reducing exposure to the technology sector at this time,
ally strong sectors. It is the goal of HAC to do the same depending on technical indicators.
again this year.
Semiconductor
The portfolio for HAC at the end of November is listed on
the second page of this report. The major equity holdings The semiconductor sector has a very similar seasonal
for each sector are discussed below. trend to the technology sector, but with more beta.
Technology
The technology sector typically outperforms at this time
of year (mid-October to mid-January) as companies spend
money on computer equipment before yearend to clean
out their budget. Investors also push up the technology
sector as they anticipate increased electronics shopping
around the Christmas season and anticipate positive prod-
uct announcements at the Consumer Electronics Show in
January.
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The sector was responding well in November before the
earnings announcements started late in the month. Inves-
tors pushed up the sector in anticipation of strong earn-
ings. The sector weakened when the banks starting an-
nouncing poor earnings. The last major bank to report
was the Bank of Montreal which came out with positive
earnings, helping to buoy the sector.
Agriculture
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Consumer Discretionary been a good longer-term strategy for the average inves-
The consumer discretionary sector typically does well tor, shorter term traders should consider using technical
from October 28th to April 23rd. indicators to determine if they should temporarily exit the
sector for the middle weeks of January.
Small Caps
The small cap sector has a strong tendency to outperform
from December 19th to March 7th (Russell 2000 from
1979/80 to 2009/10). In this time period the Russell 2000
has beaten the S&P 500 more than 2/3 of the time and has
produced on average an extra 3.5%.
The rational for the sector to perform well starting in mid-
December is that the sector often sells off in early Decem-
ber as investors tend to take small cap losses in order to
offset any gains with their large cap stocks. Investors are
generally faster to sell small companies than large ones.
This has the effect of temporarily driving the prices down
The sector can have a bit of a flat spot in January, and as of the small caps and making them a good bargain. So far
such investors should consider taking a position in late this year, investors have not been generating tax losses
January. From this point the sector can have a strong run with small caps, but nevertheless small companies are
up until April 23rd. outperforming.
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Santa Claus Rally Historically, investing just for the short period at the end
of the year has cost investors profits. The best way to play
Santa Claus Arrives Early and Stays Late the rally has been to invest in the market from December
At Christmas time every year the media likes to 15th to January 6th.
write about the Santa Claus rally. The rally is typi- Compared with the dates that are typically bantered
cally described as the time period towards the end around in the media at this time of the year, this strategy
of the year when the market tends to outperform. has investors in the market for a longer period of time -
Unfortunately, most investors believe that the rally Santa arrives early and leaves late.
only exists for the last few days of the year.
Historically, the Nasdaq has also added a bit of extra
“juice” at this time of year. The S&P 500 has produced
an average gain of 2.0% from 1950/51 to 2009/10 and the
Nasdaq 3.0% from 1971/72 to 2009/10.
The returns for the average fifteen day period for the San-
ta Claus Rally are substantially better than the average
returns of any other fifteen day period over the same num-
ber of years listed above. The average of any randomly
selected fifteen day period for the S&P 500 has been 0.5%
and for the Nasdaq 0.6% – substantially less than the re-
sults for the Santa Claus Rally.
There is no guarantee that Santa will once again arrive
with the present of solid profits. Just remember that in the
past, it has paid to believe in Santa.
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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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