Thackray Newsletter. Know Your Buy & Sells a Month in Advance. Published the 10th Calendar Day of Every Month

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1 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 (Thomson 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 technical 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.

2 Symbol Horizons Seasonal Rotation ETF (HAC : TSX) Portfolio Exposure as of July 31st, 2018 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 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. 2

3 of 3.9% and GDP growth of 4.1% on a year-over-year basis. The feeling is deceiving as worldwide growth has started to wane. Stock markets around the world are generally 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, including relative performance compared to the S&P 500. All of the graphs use hedged ETFs to remove the currency effect of the US dollar outperforming most world currencies in 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 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

4 have already been negatively impacted. The trade war impact has not been felt in the US stock market, as many 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 increase their growth rates with corresponding stock market 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. could set up gold to perform in the sweet spot of its seasonal period. What the HAC is going on? Towards the end of June, HAC increased its equity positions substantially in order to take advantage of the seasonal trend of the stock market performing well in the first eighteen calendar days of July heading into earnings season. As the 18 Calendar Day Earnings Month Effect trade finished, HAC reduced its equity positions and increased its bond positions. The increased allocation to equities for most of July proved to be profitable for HAC. My Call: Gold will probably find support at its current level and perform well until the end of September. Seasonal Opportunities Gold Down but not out! The seasonal period for gold bullion started on July 12th. Before its seasonal period gold bullion was not performing well and also in the first part of its seasonal period. In the first part of the year gold bullion was trading at approximately $1350 an oz. Recently it has been trading just above $1200. The $1200 level is a support level for gold 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 mitigate the effects of the US tariffs, it is not in its best interest 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 Energy Still consolidating The main seasonal period for the energy sector is from February 25th to May 9th. The energy sector also has a secondary seasonal period from July 27th until October 3rd. This seasonal period is not as robust as the February to May seasonal period and tends to work better if the energy sector has collapsed into July. This year the trade was not very attractive as the energy sector has been consolidating since April close to its January high. 4

5 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 environment. 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 % 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 remainder 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 October 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 attractive. It should be noted that if the stock market were to correct over the next two months, it would be expected that the health care sector would follow suit. Overall, on a technical and seasonal basis, the health care sector is setup to perform well relative to the S&P 500. My Call: The consumer staples sector will probably outperform the S&P 500 until the end of September. 5

6 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 starting to show some strength once again. For the ishares 7-10 year Government Bond ETF (IEF), resistance is just overhead at $ 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. My Call: US government bonds will probably move higher in August and September and outperform the S&P 500. 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 second 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 currently oversold, potentially the sector could be a good opportunity over the next two months. Utilities Opportunity ahead? The utilities sector has had a volatile year in 2018 as investors adjusted to changing expectations for increasing interest rates. Overall, the utilities sector has been performing at market. Resistance is just above the current price. The seasonal period for the utilities sector is from July 17th to October 3rd. It is reasonable to expect that the sector should perform relatively well compared to the S&P 500 if the S&P 500 has mediocre performance and expectations for rising rates become tempered. 6

7 My Call: The utilities sector will probably outperform the S&P 500 in August and September as investors favor 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 dollar 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 dollar in August and September. 7

8 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 dollar 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 announcement. 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 components). 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 defensible 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 dollar 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 information 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 announcement. And that you were supposed to avoid making forward looking material statements on a maybe. 8

9 Disclaimer: Comments, charts and opinions offered in this report are produced by 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, management 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 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 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 Mailing List Policy: We do not give or rent out subscriber s addresses. Subscribe or Unsubscribe to the Thackray Market Letter: Please visit alphamountain.com. 9