THACKRAY SEASONAL TRADE
May 5, 2017
Warning Storm season ahead for stock market (May 6 - Oct 27) !
Although a hurricane can hit
at any me during hurricane
season, there is a higher prob-
ability of a hurricane hi ng
Florida in September than any
other month
In academic circles, the favor-
able-unfavorable six month
eect for stocks is called the
Halloween Eect
Authored by: Brooke Thackray
Introduc on
Dierent loca ons in North America are more prone to storms than others depend-
ing on their geography and proximity to water. Regardless of where you live, a storm
can hit at any me, but there is typically one season of the year that is more prone to
storms than others. Even when the storm season arrives, there is no guarantee that
a storm will hit. Some mes a storm may start to develop far away and then fade. In
some seasons, a storm may not develop at all. The fact is that depending on your
loca on, there is a probability distribu on for storms during the year. Some months
tend to have more storms than others. Hurricane season in Florida lasts from June 1st
to November 30th. Although a hurricane can hit at any me during hurricane season,
there is a higher probability of a hurricane hi ng Florida in September than any other
month.
Seasonal inves ng is akin to storm forecas ng, as it is centred around probability
distribu ons. Seasonal inves ng takes into account the probability of return distribu-
on of the six month favorable and six month unfavorable periods. In the favorable
six month period for stocks (October 28th to May 5th), the stock market tends to
produce larger gains and fewer losses, when compared to the other six months of the
year.
It might be argued that weather condi ons at certain mes of the year are respon-
sible for a storms development, rather than the me of year itself. Although this is
true, there is sta s cal evidence that the stock market performs be er for six months
of the year and is less suscep ble to correc ons than the other six months of the
year. In academic circles, the favorable-unfavorable six month eect for stocks is
called the Halloween Eect.
The Halloween Eect has been the subject of numerous academic studies. The most
exhaus ve of which is a study from October 2012 en tled The Halloween Indica-
tor: Everywhere and all the me by Ben Jacobsen and Cherry Y. Zhang from Massey
University in New Zealand. Jacobsen and Zhang looked at more than 300 years or
market data in 108 countries. The study found stock market returns from November
through April are on average 4.52% greater than those over the summer. The average
dierence between November-April and May-October returns is 6.25% over the past
50 years. A Sell in May trading strategy beats the market more than 80% of the me
over 5 year horizons.
The stock market is richly valued by a number of metrics. Although these valua-
ons indicate that the stock market is suscep ble to a correc on, it does not indicate
if and when there will be a correc on. In other words, valua on metrics are not good
ming tools. They are s ll useful indicators, illustra ng the suscep bility of the stock
market to a correc on and if a correc on were to occur the possible magnitude of the
correc on.
The problem isnt just that the stock market is richly valued, increasing the chances
1
 of a correc on on a go-forward basis, there is an addi onal layer of risk with the S&P
500 just entering its six month unfavorable period for stocks (May 6th to October
27th) where most large losses have historically occurred. Pu ng these factors togeth-
er elevates the risk that the stock market could suer a correc on this summer.
If there is one me of the year that makes sense for investors to lower the risk in their
If there is one me of the year
por olios, it is the six month unfavorable period for stocks. The stock market rallied
that makes sense for inves-
strongly a er the U.S. elec on based upon the belief that Trump would be able to
tors to lower the risk in their
implement pro-business policies. So far, he has stumbled with implementa on and
por olios, it is the six month
it looks like future ac ons are going to take longer than expected. There may be a
unfavorable period for stocks
storm ahead this summer, 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.

Adding Up the Pieces

The equa on below (Exhibit 1) is meant for illustra ve purposes and is not an all
inclusive list of variables aec ng stock market value. Nevertheless, it does point out
that conceptually it is dicult to jus fy a strong rally in the stock market at this me.
Some investors may argue that this equa on does not incorporate the possibility of
Trump implemen ng aggressive pro-business policies. It is dicult to include this
intangible factor as the policies may be delayed or never implemented. It could also
be argued that the expecta on of implementa on is already largely incorporated into
todays stock prices.
Exhibit 1: Conceptual Stock Market Outlook Equa on

Poor
High High High Slow Federal 6-Month
+ + + + + Outlook for
Stock Market Debt Profit Economic Reserve Unfavorable = Stock Market
Valuations Margin Margins Growth Tightening Period for Stocks
May 6 - Oct 27
Some investors may argue that the state of the variables in the equa on have ex-
isted in their current state of high valua on for a long me and therefore should be
ignored. Although the market valua on variables have largely remained elevated for
a long- me, the Federal Reserve has recently raised its target rate for the third me,
which has shi ed the narra ve in the stock market to a more cau ous stance. In ad-
di on, the stock market has now entered into the six month unfavorable season for
stocks. This period for stocks is a signicant factor in stock market performance as
historically this is the me period when the stock market tends not to perform as well
as the other six months of the year.
Further, some investors may argue that we are in a new era of higher valua ons such
as P/E ra os. This might be the case, but even so, it is s ll very dicult to state that
the stock market is cheap at this me or undervalued. Most investors would agree
that the stock market is at best fairly valued, and probably overvalued.
This report will analyze the above variables in order to present the view point that
investors need to be cau ous over the next six months.

Stock market valua on stretched to the upside

High High stock market valua ons are not necessarily a precursor to a
Stock Market stock market correc on. A stock market can have a high P/E ra o and
Valuations
keep climbing. In other words, a high P/E ra o is not a good market
ming indicator by itself. On the other hand, when the stock market is richly valued,
large sustainable returns are less likely to occur. In addi on, the stock market is more
suscep ble to a correc on as it is o en priced for a perfec on. An unexpected
May 5, 2017 2
At the current me, it is dif-
cult to argue that the stock
market is undervalued or
even moderately valued
Many investors argue that
high P/Es are jus ed be-
cause of low interest rates.
In other words, investors are
forced into inves ng in stocks
because there is no alterna-
ve (TINA).
May 5, 2017
nega ve event can rapidly change the percep on of the appropriate valua on to the
downside.
At the current me, it is dicult to argue that the stock market is undervalued or
even moderately valued. The composite of the twelve-month trailing P/E ra o, the
Shiller P/E (CAPE) ra o and the Buet indicator all point to a richly valued stock mar-
ket.
The current twelve-month trailing P/E ra o is 23.8 (Exhibit 2). This compares to the
long-term average of 15.6 (from 1871 to April 2017). Although analysts prefer to use
the forward twelve-month P/E ra o, using the twelve-month trailing P/E ra o is a
more valid method for comparisons. Arguing the merits of a forward or trailing twelve
month P/E ra o are beyond the scope of this report.
A high P/E ra o means that stocks are expensive: investors are paying a high price for
every dollar of earnings. The P in the ra o is price/share and the E is earnings/
share, with P/E being (price/share)/(earnings/share). High P/E ra os make the stock
market suscep ble to a correc on because if earnings disappoint there is a long way
back to a more normal level.
Many investors argue that high P/Es are jus ed because of low interest rates. In
other words, investors are forced into inves ng in stocks because there is no alterna-
ve (TINA). There is some merit to this argument, but you cannot use it indenitely
as P/Es keep expanding higher. If you are going to use the TINA argument, there
should at least be a variable or cap that limits the upper bound on how far the P/E
should be able to expand. If the P/E ever managed to get to 50, I am sure that inves-
tors would s ll be using the same TINA ra onale.
Is
the current P/E of 23.8 a fake P/E (sarcasm intended)? A large por on of earnings
growth has been engineered. Companies have been buying back their stocks at
record rates. In many cases they have borrowed at a lower rate from the bank and
bought back their shares in order to reduce their dividend payout. If you are borrow-
ing at a rate less than your dividend rate, you are saving money and lowering your
P/E. By reducing the number of shares outstanding, earnings per share increase and
the P/E decreases. A large por on of the earnings per share growth that has occurred
in this bull market has been the result of companies buying back their shares. If this
did not occur then the S&P 500 P/E ra o would be even higher today than it is cur-
rently prin ng. The problem is that companies have started to reduce their buy-back
ac vi es, mi ga ng the inuence of buybacks to support a higher P/E in the S&P 500.
3

According to the Bue
Indicator, the stock market is
extremely overvalued and is
suscep ble to a correc on
When valua on metrics are
stretched to the extreme
upside, the stock market is
suscep ble to a correc on
May 5, 2017
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.
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 book-
stores just as stock markets were peaking. The tle of the book was an echo of ir-
ra 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. 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. The indicator is currently at 29.2 as of April 2017 and is poin ng to
an overvalued stock market (Exhibit 3).
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 indica-
tor 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 pro-
duced in the U.S.). As of January 2017, the indicator was registering 1.3, represen ng
a stock market valua on of 130% of the economy (Exhibit 4). Since 1970, this is the
highest level other than the year 2000. In other words, according to the Bue indi-
cator, the stock market is extremely overvalued and is suscep ble to a correc on.
So why are investors s ll in the game pushing the stock market up when they real-
ize 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 valua on metrics are stretched to the extreme upside, the
stock market is suscep ble to a correc on.
High margin debt makes the stock market suscep ble to a correc-
on.
High It is ironic that investors typically have the least amount of cash
Debt holdings at market tops and conversely the greatest amount of cash
Margin at market bo oms. Likewise, margin levels are highest at market tops
and lowest at market bo oms. Exhibit 5 shows the posi ve rela onship of real margin
debt to real S&P 500 levels since 1985. Real margin debt level is at an extremely high
level. Low interest rates can explain part of this phenomenon, as investors can borrow
4

With such low vola lity in the
markets, margin calls have
been benign aec ng very
few investors. If the stock
market corrects sharply, then
this changes very fast.
May 5, 2017
money cheaply to invest, but it does not account in total for the extreme level.
Why are high debt margins a problem? Quite simply, if investors are already borrow-
ing heavily to invest, where are addi onal funds going to come from to drive the stock
market higher? If you are maxed out it is very dicult to come up with new money
to buy stocks. Investors have been buying the dips for the last few years. This is a
great strategy in a bull market which has helped to sustain this bull run, but with high
margin debt, buying the dips becomes more dicult.
With such low vola lity in the markets, margin calls have been benign aec ng very
few investors. If the stock market corrects sharply, then this changes very fast. In-
vestors using margin are forced to sell their posi ons in order to cover their margin
requirements, which in turns forces the stock market lower, forcing more margin
calls. Investors using excessive amounts of margin, either ignore the dangers of such
a strategy or do not understand how leverage can work against investment posi ons.
The sectors of the stock market that succumb to margin calls are the ones that tend
to have the highest amount of leverage and specula ve interest.
High Corporate Prot Margins leave li le room for error?
High Corporate prot margins are high....isnt that a good thing? High
Profit prot margins are good, as it means that companies are making
Margins money, but unfortunately the prot margin mes series is a mean
regressing data series. In other words, when prot margins are at high levels, they
have only one way to go...down. If prot margins are high compared to historical
standards, then companies will enter into the industry driving prot margins down.
On the ip side, if prot margins are too low, companies will exit the industry, increas-
ing prot margins. Prot margins are not like the stock market that keeps going up
over the long-term, they tend to regress to the mean.
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 6) and have maintained a pa ern of earnings expansion. There
is only so much a company can cut in order to increase their earnings.
As of October 2016, prot margins are 9% and above the one standard devia on line.
If corporate prot margins are high but trending down, earnings will suer, and as a
result the P/E ra o will increase as earnings decrease. A higher P/E ra o decreases
the outlook for returns and makes the stock market more suscep ble to correc ons.
With U.S. corporate prot margins above their standard devia on range, they are
5

The current recovery has
failed to follow past robust
recoveries
May 5, 2017
poised to correct and move back to their long-term average. Some investors may
argue that if President Trump is able to implement his pro-business policies, opera ng
costs will decrease and help boost prot margins and therefore earnings. It is dicult
to determine if the policies will be implemented as planned. In addi on, given the
run-up in the stock market it could be argued that the future benets of such policies
have already been reected in stock prices.
Not only are prot margins high, but they are trending down. Wage growth has been
steadily growing and as of March 2017, it is 3.5% (Exhibit 7). Increasing wage growth
hurts prot margins and pushes down overall prots. The end result is that price to
earnings ra o increases making stocks more expensive and suscep ble to a correc-
on.
The Economic Engine that Hasnt
Slow The U.S. economy has had one of the most lackluster recoveries a er
Economic the 2007-2008 nancial crisis (Exhibit 8). Typically, a er a major
Growth recession, real GDP has a peak growth spurt and then se les down.
The current recovery has failed to follow past robust recoveries, as the real GDP
growth rate has fallen short of most other recoveries. Part of this can be blamed on
businesses holding back because of the mul -year uncertainty surrounding the
implica ons of Obamacare (when Obama was in power). Trump has promised steady
3% growth (horizontal line in graph), but this will be a very dicult objec ve to
achieve.
Emerging markets and Europe have shown signs of economic improvement, which
has been reected in their stock markets. China appears to be struggling more than
expected. Despite the overall percep on that global growth is improving, problems
may lie ahead for both Europe and the emerging markets. Although Europe seems to
smoothed over many of its problems, more problems keep developing. Strong growth
will go a long way to keeping the problems at bay for now. Nevertheless, it would
hardly be a surprise to see problems come out of the woodwork if growth slowed.
Emerging markets could also suer from a stronger U.S. dollar. As a lot of the emerg-
ing market countries and corpora ons have their debt denominated in U.S. dollars, a
higher U.S. dollar would impact the emerging markets ability to pay their liabili es
and consequently hurt their stock prices.
6

There is an old adage on Wall
Street, three steps and a
stumble.
The current recovery has
failed to follow past robust
recoveries
May 5, 2017
In a bygone genera on, there was a cliche When the U.S. economy sneezes, the rest
of the world catches a cold. Although the U.S. is no longer the same economic pow-
erhouse that it was in previous genera ons, a weak U.S. economy will eventually have
an impact on global economies, par cularly in emerging markets.
Federal Reserve Tightening - No helping higher stocks markets
Federal The peak of the last target rate increase for the Federal Reserve was
Reserve 5.25% on June 29th 2006. On September 18th, 2007 the Federal
Tightening Reserve started to decrease its target rates. On December 15, 2017
the Federal Reserve increased its target rate from 0.25% to 0.5%, followed by two
more rate increases with the last one on March 16th, 2017. The narra ve surrounding
the rst two increases suggested that the Federal Reserve increasing its target rate
meant that the economy was healthy. And really how much of a dierence does an
increase of 25bps make (sarcasm)? In addi on, investors ocked to the nancial
sector due to insurance companies and banks bene ng from higher interest rates.
The third increase in the target rate did not have the same impact as the rst two, as
the stock market started to stumble. There is an old adage on Wall Street, three
steps and a stumble, which means that the stock market tends to perform poorly
a er the third interest rate increase by the Federal Reserve. The stock market lived up
to the wisdom of the saying and stumbled as investors started to realize that an
increase in short-term rates can have a nega ve impact on the stock market.
Coming o zero-bound interest rates, it would be expected that the rst interest rate
increases would have a nominal impact on the markets and a large posi ve eect on
the net interest benet for banks. At some point, a er successive increases, it would
be expected that the nega ve eect on economic growth would more than oset the
net interest benet for banks.
What is par cularly concerning is that the Federal Reserve is not raising rates to slow
growth down as is o en done at the top of a business cycle, but rather the Federal
Reserve is raising rates to try and normalize its interest rate posi on and give itself
ammuni on to be able to decrease rates if needed in the future. At some point inves-
tors will catch on that the Federal Reserve raising rates is not necessarily a good thing.
The Big Factor in the Equa on - Six Month Unfavorable Season -
May 6th to October 27th
6-Month The big factor in the outlook equa on is the six month unfavorable
Unfavorable season (May 6th to October 27th). All of the previous variables
discussed in the report that have made the stock market suscep ble
Period for Stocks
to a correc on have existed for a number of months. The fact that the stock market
has entered the unfavorable seasonal period adds an addi onal layer of risk.
Historically, the unfavorable season for stocks has a much weaker prole than the
other six months of the year. It has a lower frequency of gains, a lower frequency of
large gains, a higher frequency of losses, a higher frequency of large losses and sub-
stan ally lower average returns.
In the six month unfavorable period, the stock market may not be nega ve in any one
year. In addi on, within the six month unfavorable period, stocks will probably not be
nega ve for the en re period. Over the long-term, the stock market generally has a
trend with a slope that is much less than that of a correc on. As a result, most of the
me in the unfavorable period tends to be posi ve for stocks. The payo o en occurs
a er an extended period of rising markets. Many investors opt to ride the bull wave
as they feel they will be able to exit their posi ons when the stock market goes down.
Unfortunately, correc ons can be fast, making such a strategy dicult to implement.
7
Exhibit 10: In past presenta ons, I have shown the average seasonal performance of the S&P
S&P 500 Unfavorable vs. 500 (Exhibit 9), and asked the audience their thoughts on inves ng in the favorable
Favorable Period
Performance (1950-2016) seasonal period (shaded grey) and the unfavorable seasonal period. A large por on
Unfavorable Favorable Oct28- of the audience o en responds that the unfavorable season has on average produced
Period Period May5>
May 6 to Oct 28 to May6- a at return and so why not just hold the market during this me and benet from
Oct 27 May 5 Oct27 the next strong seasonal period.
1950/51 8.5 % 15.2 % YES
1951/52 0.2 3.7 YES This is not the best way to look at this seasonal trend as it does not reect the true
1952/53 1.8 3.9 YES risk/reward rela onship between the favorable six month period for stocks from
1953/54 -3.1 16.6 YES
1954/55 13.2 18.1 YES October 28th to May 5th compared to the unfavorable six months. It is not a mat-
1955/56 11.4 15.1 YES ter of whether the stock market is posi ve on average in the unfavorable six month
1956/57 -4.6 0.2 YES
1957/58 -12.4 7.9 YES
period (since 1950, the S&P 500 has been posi ve 62% of the me in the unfavorable
1958/59 15.1 14.5 period), but rather how much risk is incurred during this period.
1959/60 -0.6 -4.5
1960/61 -2.3 24.1 YES Exhibit 9: S&P 500 Avg. % Cumula ve Yearly Gain
1961/62 2.7 -3.1
1962/63 -17.7 28.4 YES
1963/64 5.7 9.3 YES
1964/65 5.1 5.5 YES
1965/66 3.1 -5.0
1966/67 -8.8 17.7 YES
1967/68 0.6 3.9 YES
1968/69 5.6 0.2
1969/70 -6.2 -19.7
1970/71 5.8 24.9 YES
1971/72 -9.6 13.7 YES
1972/73 3.7 0.3
1973/74 0.3 -18.0
1974/75 -23.2 28.5 YES
1975/76 -0.4 12.4 YES
1976/77 0.9 -1.6
1977/78 -7.8 4.5 YES
1978/79 -2.0 6.4 YES
1979/80 -0.1 5.8 YES
1980/81 20.2 1.9
1981/82 -8.5 -1.4 YES
1982/83 15.0 21.4 YES
1983/84 0.3 -3.5
1984/85 3.9 8.9 YES In the same presenta on, I would then show the table in the side bar, Exhibit 10,
1985/86 4.1 26.8 YES
1986/87 0.4 23.7 YES (Thackrays 2017 Investors Guide, page 57) and ask: if you could only choose one
1987/88 -21.0 11.0 YES six month period in which to invest, which period would you choose, October 28th
1988/89 7.1 10.9 YES
1989/90 8.9 1.0 to May 5th, or May 6th to October 27th? I then give the audience a few minutes to
1990/91 -10.0 25.0 YES analyze the data and discuss the results amongst themselves. The answer is almost
1991/92 0.9 8.5 YES
1992/93 0.4 6.2 YES unanimous, choosing to invest in the six month favorable period.
1993/94 4.5 -2.8
1994/95 3.2 11.6 YES The audiences viewpoint on inves ng during the year changed when they had to
1995/96 11.5 10.7 make a decision between two alterna ves. They were forced to include risk into their
1996/97 9.2 18.5 YES
1997/98 5.6 27.2 YES analysis. Average buy and hold investors do not have to make the decision about
1998/99 -4.5 26.5 YES being in or out of the stock market. They are already in the stock market and ra onal-
1999/00 -3.8 10.5 YES
2000/01 -3.7 -8.2
ize why they should stay invested. The bias results with investors fearing that they
2001/02 -12.8 -2.8 YES will miss out on large returns if they exit the stock market during the unfavorable six
2002/03 -16.4 3.2 YES
2003/04 11.3 8.8
month period.
2004/05 0.3 4.2 YES
2005/06 0.5 12.5 YES
So what did the six month seasonal numbers from Exhibit 10 reveal? The most obvi-
2006/07 3.9 9.3 YES ous metric is that the favorable seasonal period outperforms the unfavorable season-
2007/08 2.0 -8.3
2008/09 -39.7 6.5 YES
al period more than half the me; in fact 72% of the me (number of YESs in far right
2009/10 17.7 9.6 hand column). Not as easily seen, but important are the other metrics:
2010/11 1.4 12.9 YES
2011/12 -3.8 6.6 YES The unfavorable seasonal period produces an average geometric loss of 0.5%,
2012/13 3.1 14.3 YES
2013/14 9.0 7.1
compared to the average geometric gain of 7.7% in the favorable period (Exhibit
2014/15 4.1 6.5 YES 11).
2015/16 -1.1 -0.7 YES The frequency of losses equal to or greater than 10% is substan ally higher in
2016/17 4.0 12.5 YES
the unfavorable period versus the favorable period, 11.9% and 3.0% respec vely
(Exhibit 12).

May 5, 2017 8

Technically, there is nothing
wrong with the S&P 500 at
this point. A er all, the S&P
500 is at an all- me high (May
5, 2017).
The length of a bull market
does not tell an investor if a
stock market is going to cor-
rect in the next month or two
May 5, 2017
The frequency of gains equal to or greater than 10% is substan ally less in the
unfavorable period versus the favorable period, 11.9% and 41.8% respec vely
(Exhibit 13).
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.
Technically, the S&P 500 is sound, but it is stretched to the Upside
Technically, there is nothing wrong with the S&P 500 at this me. A er all, the S&P
500 is at an all- me closing high of 2399 (May 5, 2017). Nevertheless, cau on should
be used while inves ng in the six month unfavorable period for stocks.
At the me of wri ng this report, the 200 day moving average for the S&P 500 is
2246. A lot of traders track the movement of the 200 day moving average and if the
S&P 500 falls this level, there is a good chance that the 2200 level will be tested. If the
S&P 500 breaks below 2200, especially on heavy volume, the stock market will have
turned and will have a decidedly bearish bias.
Exhibit 14: S&P 500 Technical Price Ac on
Pu ng the current bull market in perspec ve?
The length of a bull market does not tell an investor if a stock market is going to cor-
rect in the next month or two. A bull market can keep going a lot longer than inves-
tors 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.
9

Exhibit 15: S&P 500 Bull Markets (20%+) % Gains and Length (months) 1929 - 2017
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
May 5, 2017
Historically, since 1929, S&P 500 bull markets have averaged 32 months and have pro-
duced an average gain of 109%. The current bull market that started with the bo om
on March 9, 2009 has so far been running for ninety-seven months and has produced
a gain of 255%. Both measurements have more than doubled the long-term averages.
The only two bull markets since 1929 that have produced greater gains are the 1949
to 1956, 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 16: S&P 500 Bull Market (20%+) Performance Since 1929
1929 to 2017 1929 to 1948 1949 to 2017 Current Bull Mkt
Length Avg. (months) 32.2 9.6 56.7 97.8
% Gain Avg. 109% 64% 158% 255%
Source Data: Bloomberg
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.
10
 (1) Reduce Equi es
It is fairly standard in the investment industry to operate a por olio with an Invest-
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 al-
loca 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 Thack-
rays 2017 Investors Guide, page 80 and page 123 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 invest-
ments. 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. Al-
though 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
2017 Investors Guide for details). Naturally, if the stock market has a major correc-
on, 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 unfavor-
able 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 analy cs.
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
May 5, 2017 11
 founded investment strategy, both posi vely and nega vely. Seasonal analysis is not
immune from these eects. Nevertheless, the stock market is overvalued according
to a number of valua on metrics and the stock market has just entered its six-month
unfavorable period. Given the nega ve backdrop over the next six months (from May
6th to October 27th), stock markets are probably in for a stormy summer.

All the best seasonal inves ng.

Brooke Thackray

Disclaimer: Comments, charts and opinions oered 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 o ered 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, or AlphaPro Management Inc.,
although any of the opinions or recommendations found herein may be reected in positions or transactions in the vari-
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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
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mation presented is for educational purposes and is not investment advice. Historical results do not guarantee future
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