SET Portfolio Update December 2012

December 4, 2012

Dear Sector ETF Trader Reader,

As the 18th-century poet Alexander Pope once wrote… “hope springs eternal”.

The stock market’s performance over the past two weeks is perfect example of just how much hope can fuel investor actions.

In fact, stocks have been riding a wave of hope.  Hope that politicians can reach an agreement to avoid the fiscal cliff of automatic spending cuts and tax increases that will take effect on New Year’s Day.

And for good reason… if they don’t, a US economy is virtually guaranteed to fall into a recession.

The math is simple.

Last quarter, US GDP expanded at an annual rate of 2.7% per year.  If they allow us to go over the cliff, it will pull GDP down about 4%.  That puts GDP growth at -1.3%, and that’s a recession.

Thankfully, the latest news out of Washington indicates politicians are working toward a compromise and the fiscal cliff will be avoided.  But with $600 billion in government spending, as well as tax rates on dividends and earned income at stake, there’s still much to be determined.

So far, renewed investor optimism has spurred a 5% surge in the S&P 500 over the last two weeks.

At this point, the large cap index is bumping into technical resistance.  And we could see the rally fade in the short term.

We’re going to take this opportunity to close out a few of our winning trades.  And position ourselves in the ETFs with the best potential for profits going forward.

Now onto the updates…

. . . . Consumer Staples Select Sector SPDR (XLP) – Buy up to $36.00

Our latest recommendation hasn’t wasted any time… XLP is up better than 4% since we recommended it.  This sector was obviously oversold when we bought it.  And the promise of future dividend payments far in excess of income you can get on fixed income investments should fuel further gains.  Grab your shares of XLP up to $36.00.

. . . . First Trust NYSE Arca Biotech Index (FBT) – Buy up to $47.00

Biotech stocks have come roaring back from their October slump.  FBT has surged 10% off the lows from late October.  And it should continue to do well as investors move into riskier stocks in search of growth.  Grab your shares of FBT up to $47.00.

. . . . iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ) – Buy up to $48.25

REZ has been bumping along support of the upward trending 200-day moving average for the past few months.  But rising multi-family real estate prices and strong rental income increases should help fuel more upside in our residential REIT ETF.  What’s more, depending on how the fiscal cliff negotiations turn out, dividends from REZ could receive preferential treatment compared to other dividend paying stocks.  Grab your shares of REZ up to $48.25.

. . . . First Trust Internet Index Fund (FDN) – Buy up to $39.50

A strong start to the holiday shopping season has sparked a rally in FDN.  More and more holiday shopping is being done online and that’s great news for internet companies.  Grab you shares of FDN up $39.50.

. . . . iShares Dow Jones US Basic Materials (IYM) – Buy up to $70.00

IYM has been a bit of disappointment.  Investors’ concerns about the slowing global economy are certainly holding our basic materials ETF back.  But if a compromise on the fiscal cliff is reached, it could spark a massive rally in the sector.  Grab your shares of IYM up to $70.00.

. . . . SPDR S&P Oil & Gas Equipment & Services (XES) – Buy up to $36.00

Oil services stocks are bouncing back after a miserable October.  The industry is facing headwinds from lower day rates.  This is primarily due to natural gas producers dialing back activity and lowering the overall demand for oil services.  But there’s still reason for optimism… oil prices are once again on the upswing.  After reaching a low of around $84 per barrel, WTIC has rebounded to more than $88.  If nothing else, oil prices seem to have put in a bottom.  And any upside should fuel higher prices in oil stocks.  Grab your shares of XES up $36.00.

. . . . iShares Dow Jones US Pharmaceuticals (IHE) – Buy up to $90.00

Pharmaceutical stocks are another area of the market that has come charging back after an October slump.  IHE has followed a similar path to other dividend paying stocks with about a 5% surge over the last two weeks.  And it should set the stage for more upside in the weeks ahead.  Grab your shares of IHE up to $90.00.

. . . . Market Vectors Agribusiness ETF (MOO) – Hold

The massive drought that struck the agricultural Midwest last summer has been all but forgotten in maelstrom of election and fiscal cliff talks.  But with grain commodity prices at very attractive levels, the stage is set for Agribusiness companies to have a banner year in 2013.  Continue holding for bigger gains ahead.

. . . . ALPS Alerian MLP ETF (AMLP) – Hold

AMLP slumped in the wake of President Obama’s reelection.  The potential for higher taxes on dividends did a number on many high yielding investments.  But the over-reaction didn’t last long. And AMLP has come storming back over the last few weeks.  Don’t forget, energy MLPs operate in an industry with high barriers to entry.  And they have enjoyed increasing cash flows year-in and year-out whether the economy is slumping or soaring. Continue holding AMLP for bigger gains ahead.

. . . . First Trust ISE Revere Natural Gas Index Fund (FCG) – Sell

Natural gas prices have begun to slump after more than doubling over the last seven months.  Unfortunately, natural gas stocks haven’t produced nearly as compelling of returns.  Sell FCG now for a modest gain.

. . . . PowerShares S&P SmallCap Health Care (PSCH) – Sell

For some time now, small cap stocks have lagged behind their large cap brethren.  And PSCH is no exception.  Let’s sell PSCH now for a 4% gain.

. . . . SPDR S&P Homebuilder ETF (XHB) – Sell

Homebuilder stocks have had a great run.  But it’s time to ring the register on XHB with a 22% gain.  Go ahead and sell XHB now.

. . . . SPDR S&P Retail (XRT) – Sell

Retail stocks are holding up well.  But we just haven’t seen the upside we would’ve liked. Let’s sell XRT now for a 3% gain so we can focus on ETFs with more potential.

. . . . iShares S&P N.A. Tech-Software Index Fund (IGV) – Sell

Tech stocks are always chock-full of potential.  But the reality is IGV has been stuck in a trading range.  And without a catalyst on the horizon, let’s capture a 5% gain on IGV now and turn our attention to investments with more potential.

Action To Take

• Sell iShares S&P N.A. Tech-Software Index Fund (IGV)
• Sell SPDR S&P Retail (XRT)
• Sell Homebuilder ETF (XHB)
• Sell PowerShares S&P SmallCap Health Care (PSCH)
• Sell First Trust ISE Revere Natural Gas Index Fund (FCG)

 

Category: SET Portfolio Updates