SET Monthly Issue December 2014
December 2014
It’s around this time of year when the stock market picks up steam. The seasonal rally known as the Santa Claus rally typically pushes the S&P 500 up more than 1.5% in the last two weeks of the year.
The rally is driven by a host of factors…
First off, trading volume is typically light with many people’s attention on the holidays. These light volume days tend to have a bullish bias with few heavy hitter making big bets this time of year.
We also tend to see investors get their tax loss selling done before the holidays. So, there simply aren’t as many sellers the last few weeks of the year.
There are also portfolio managers that are doing some window dressing. They dump their big losers and buy stocks that are performing well so they don’t have the stinkers on the books at the end of the year.
And with the S&P 500 down 3.4% in the last week, it appears that investors have already done much of their tax loss selling and window dressing.
The way I see it, a few things need to happen in order for the rally to take place this year.
First off, the price of oil needs to stop falling. The uncertainty falling oil prices create for energy stocks and anyone that has lent money to these companies is eclipsing the benefit lower energy costs will have on consumers.
What’s more, the pain the drop in oil prices is causing the economies of oil producing countries can’t be ignored.
The second thing is the Fed…
The US central bank is meeting this week. There’s widespread disagreement about the timing of the first rate hike. In order for the Santa Claus rally to materialize, the Fed needs to clarify their outlook for interest rates.
As long as those two things happen, we should see stocks enjoy a nice boost over the last few weeks of the year. Let’s take a look at one ETF that’s set to soar into the new year…
There’s no doubt that the biggest story of the year has been the collapse in oil prices. The price of WTIC oil is down nearly 50% from the June highs to around $55.00 per barrel.
The biggest beneficiary of the drop in oil prices are consumers. With oil prices at this level, it would put an additional $500 per year in every American household.
But it’s not just American consumers that will get the benefit of falling oil prices. Don’t forget that energy costs typically make up a much higher percentage of income in other countries. So the drop in oil prices will have a big impact on consumers around the globe.
One area of the economy that should get a big boost is travel and gaming.
Macro/Economic Trend: Doubling Down
It has been a bad year for the casino and gambling industry.
The world’s largest casino operators have made huge bets on Chinese gaming in recent years. They have spent billions of dollars building casinos in Macau, the only part of China where casinos are legal.
These investments have turned Macau into the world’s biggest gaming market.
But the slowdown in the Chinese economy, as well as stricter government regulations, has cut into the incredible growth of Macau. In fact, October was one of the worst months ever for Macau. Gambling revenues are down around 20% from the same time last year.
As a result, many casinos have fallen short of revenue and growth forecasts this year.
Here’s the thing…
Gambling has been a part of the Chinese culture for a long time and that’s not changing. Many of the causes for the slowdown in Macau are temporary.
The current down cycle has nearly run its course. And it’s time to position ourselves to benefit from the next upturn.
The ETF I like to profit from this trend is the Market Vectors Gaming ETF (BJK).
Fundamentals: A closer look at BJK
BJK tracks an index of global gaming stocks.
It currently has 47 stocks. The stocks are weighted according to a modified-market capitalization. The expense ratio is 0.65%. It has a dividend yield of 1.18%.
The top five holdings and percentage weight for BJK are –
| Company Name | Ticker | % Weight |
| Las Vegas Sands | LVS | 8.22% |
| Galaxy Entertainment | 27 HK | 8.08% |
| Sands China | 1928 HK | 7.08% |
| Wynn Resorts | WYNN | 6.09% |
| MGM Resorts | MGM | 5.20% |
Technicals: The chart leads the way
BJK is currently trading for $39.42. It’s down 25.2% year-to-date and more than 30% below the 52-week high.
Needless to say, the recent performance leaves a lot to be desired. But if we take a look at a longer term chart, there’s reason for optimism.
Going back to the start of the current bull market, you can see BJK is in a long term uptrend. It was clearly over-extended at the beginning of the year after a huge rally in 2013.
Now, after the significant pullback, BJK is nearing support of the 200-week moving average (blue line). This technical support level should provide a floor for BJK.
We should see an immediate bounce at this level. From there, I expect to see a period where BJK forms a new base before moving higher again.
Trade Alert
Buy: Market Vectors Gaming ETF (BJK) up to $41.00
Recent Price: $39.42
Price Target: $55.00
Stop Loss: $34.00
Remember: Gaming stocks have gone through a significant pullback within the long-term uptrend. Now’s the time to position yourself for the next upswing.
Consumer Discretionary (-1.6%)
An uptick in consumer confidence and a drop in oil prices helped retail sales grow at the fastest pace in eight months. However, the sector has been weighed down this week by fears that falling oil prices could result in job cuts in the energy sector that has been one of the biggest job creators.
Our Market Vectors Retail ETF (RHT) is up 4.7% to $53.74. It is holding near the recent highs as investors hope a strong holiday shopping season will boost industry profits. Continue holding…
PowerShares Dynamic Media Portfolio (PBS) and PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) are both pushing toward their highest price in months. They are in position to finish a lackluster year on a strong note. Continue holding.
Consumer Staples (-1.7%)
Consumer staples have fallen back in lockstep with the broad market. This safe haven sector had been surging higher recently. And it remains in a strong uptrend.
Energy (-16.5%)
The energy sector is down 16.5% over the last month…. that’s an unmitigated disaster.
Investors are dumping energy stocks as oil prices fall. Anyone that has tried to buy the dip has been crushed as oil prices continue to fall and pull energy stocks lower.
Guggenheim Solar ETF (TAN) is being weighed down by the drop in oil prices. The entire energy sector is out of favor with investors right now… including solar. It can’t get much worse than this… Continue holding as the tug-o-war between the bearish sentiment and bullish long-term fundamentals plays out.
Our Morgan Stanley Cushing MLP Hi Income ETN (MLPY) is a casualty of the drop in oil prices. Obviously, I didn’t expect to see oil prices nearly cut in half. At these prices, the viability of many energy infrastructure projects is being called into question. Investors are simply opting to dump anything and everything tied to energy. Unfortunately, that includes the MLPs in this ETF. MLPY hit our $14.00 stop loss last week… that’s our cue to exit this trade and move on to other opportunities.
Financials (-1.9%)
The uncertainty created by falling oil prices spilled over into the financial sector this month. The high yield bond market and financial institutions have been important sources of money for the growth in US oil production. Now the drop in oil prices is casting doubt on the ability for companies to repay these loans.
The Financial Select Sector SPDR Fund (XLF) actually hit a high of $25.07 last week before oil prices took another leg down. Needless to say, oil prices need to find a bottom to calm investors’ fears. Continue holding.
Healthcare (-0.8%)
Healthcare stocks held up much better than most sectors in the recent pullback. OurFirst Trust Health Care AlphaDEX Fund (FXH) reached a new high of $61.73. The recent pullback is nothing to be feared… healthcare stocks remain in a strong uptrend. Continue holding.
Industrials (-4.7%)
Industrials have fallen back despite an uptick by transportation stocks. One thing weighing on the sector has been a drop off in new factory orders in recent months.
Technology (-3.6%)
Tech stocks haven’t been able to avoid the sharp pullback over the last week. The selloff sent the tech industry down 3.6% over the last month.
Nevertheless, investor optimism is high for strong consumer electronics sales this holiday shopping season. That’s good news for our Market Vectors Semiconductor ETF (SMH) that continues to lead the technology sector. You can buy SMH up to $55.00.
Our First Trust NASDAQ-100 Technology Sector Index Fund (QTEC) was a new high of $44.83 before the stock market started to pull back. The recent weakness should be short lived. Continue holding…
Our Global X Social Media Index ETF (SOCL) can’t shake the bearish investor sentiment that has plagued it over the last several months. Keep an eye on our stop loss at $17.00 per share. If it closes below this level, it’s time to cut this ETF loose.
Materials (-7.7%)
Materials stocks slumped last month as a strong US Dollar and weak global economic growth weighed down commodity prices. This cyclical sector is trading in a volatile range as investors look for signs of accelerating growth.
Utilities (+0.4%)
Utilities were the only sector to eke out a gain over the last month. But the rally for this safe haven sector appears to be running out of steam. But it still has appeal for income investors that need to generate income from their investments.
- This month we’re buying BJK.
- Exited MLPY at $14.00 stop loss.
Category: SET Monthly Issues
