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Three top ETF picks from Horizons’ Brooke Thackray

Brooke Thackray is research analyst at Horizons ETFs (Canada) Inc. His focus is technical analysis and seasonal investing.

Top Picks:

Horizons NYMEX Natural Gas ETF (HUN.TO)
Purchased on Sept 1 at $8.19

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Natural gas has a strong seasonal period that lasts from September 5 to December 21. In this time period, from 1995 to 2014, the Henry Hub spot price has been positive 80 per cent of the time and has produced an average gain of 43 per cent. This seasonal period is driven primarily from an increase in demand to meet the needs of the approaching heating season.

Consumer Staples Select Sector SPDR Fund (XLP)
October is the transition month from the six-month unfavorable period for stocks (May to October) and the favourable period (end of October to the beginning of May), where stocks have a historical track record of outperforming compared to the unfavourable period. In October, the consumer staples sector has been one of the best performing sectors as investors tend to look for a defensive vehicle to play the stock market. Typically, it is best to exit the consumer staples sector in late October by rotating into a higher beta sector to take advantage of the stock market's tendency to perform well over the following six months.

Cash
Although the stock market may have bottomed, September and October on average have been the two most volatile months of the year, presenting further possible opportunities ahead. There are some positive signs, as the S&P 500 has been climbing, through all of its ups and downs, from its low in late August. Nevertheless, it does not mean that S&P 500 as about to roar to new highs. Investors should be looking to take advantage of any large dips in the stock market between now and the October 27, buying the sectors of the stock market that start their seasonally strong period in early October. Historically, October 28 represents the start of the favourable six month period for stocks and seasonal investors should by and large be invested in the stock market.

Past Picks: May 5, 2015

iShares 1-3 Year Treasury Bond (SHY)
New comments: The short-term U.S. treasury bond market proved to be a good spot to hide while longer term bonds bottomed later in June. Recently, short-term U.S. government bonds have dipped as we approach the September FOMC meeting and the possibility that the Federal Reserve may raise rates on September 17.

Then: $84.78; Now: $84.66; -0.14%; Total return: +0.04%

*Short* SPDR® S&P® Homebuilders ETF (XHB)
Covered position June 5 at $36.06

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New comments: The home builders sector (S&P GICS®) typically performs poorly from April 27 to June 13. In this time period, from 1990 to 2014, the home builders sector has produced an average loss of 4 per cent and has been negative 71 per cent of the time. With a relatively strong U.S. economy, new home starts have been consistently strong over the last few months and have beaten expectations. Although short selling the sector in its seasonally weak time did not produce the gains as expected, the results indicate a stronger probability for a long trade in the sector from October 28 to February 3, during the sector's seasonally strong period.

Then: $34.92; Now: $37.27; -6.73%; Total return: -6.83%

Consumer Staples Select Sector SPDR Fund (XLP)
Exited position August 21 at $47.71

New comments: The consumer staples sector outperformed the S&P 500 for most of the summer. In August, on an absolute basis, the sector started decline and also underperform the S&P 500. Recently, the sector has started to stabilize. The sector's defensive characteristics remain attractive in this volatile market and historically it has been one of the top performing sectors in October, one of the most volatile months of the year.

Then: $49.25; Now: $48.05; -2.44%; Total return: -1.83%

Total Return Average: -2.87%

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Disclosure:

Personal

Family

Portfolio/Fund

SHY

N

N

N

XHB

N

N

N

XLP

N

N

N

Market outlook:
Up until August, the S&P 500 traded in a very tight range from 2,040 to 2,135. Generally, the longer the consolidation period, the greater the strength of the breakout once the market breaks. Earlier this year, the market was unable to break above its 2,135 high in May, as there was a lack of a catalyst. Although the U.S. economy has been improving, S&P 500 earnings have been less than stellar, including the recent 2015 2Q earnings growing by only 1.5 per cent on a year-over-year basis. The global economic outlook has also put a damper on stock markets, as Europe has been muddling along and China has been slowing.

The big concern is China. After many years of strong GDP growth including 10 per cent growth and above, China has been slowing and now expects 7 per cent growth this year. Many analysts are predicting even lower growth. As China struggles to control its economy, investors are worried about the knock-on effects, particularly with commodity-based countries such as Canada. According to Factset, the expectation is for an earnings contraction in 2015 Q3. With a S&P 500 forward profit margin of 10.9 per cent, which is at the high end of the historical range, it is going to be difficult for companies to grow their earnings substantially. It is possible for the S&P 500 earnings to once again surprise on the upside and help support the market, but it is going to be difficult for the S&P 500 to move to new highs in the short-term.

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