SET Portfolio Update November 2010

November 2, 2010

Dear Sector ETF Trader Reader,

Get ready for some fireworks…

The markets have had a great run since the end of August.  Stocks in the S&P 500 are up about 15% during that time.

Simply stated, it’s been great for our ETFs!

We’ve locked in profits of 15%, 10%, 15%, and 18% as the markets rallied the last few months.  And we’ve hit peak gains in the double digits on five other ETFs.  All but one of those highs has hit in the last few weeks!

Here are just a few of the reasons stocks are red hot right now…

First off is quantitative easing (QE).  QE is when the Fed prints money and buys long term US Treasuries to bring down interest rates.

QE is designed to stimulate economic growth.  And ever since Fed Chairman Bernanke began dropping hints the Fed would roll out a second round of QE (QE2), the markets have shot straight up.  And the US Dollar has plummeted.

Right now the markets are pricing in around $500 billion in QE.

If QE2 exceeds $500 billion… stocks, commodities, and precious metals should rally. However, if QE2 is less than $500 billion, we could see a short term correction.

But that’s not all…

Today is also mid-term elections.  And investors are expecting Republicans to regain control of the House and Senate from the Democrats.

If nothing else, a Republican controlled Congress will create gridlock.  And gridlock will prevent any more government induced shocks and provide a bit of certainty to the future. And with all else being equal, investors like certainty…

And to top it off, third quarter earnings are better than expected.

In fact, 219 of the 263 companies in the S&P 500 reporting earnings so far have beat analysts’ estimates.  Clearly corporations are finding ways to keep profitability high in this slow growth recovery.

What does this mean for you?

The combination of QE expectations, mid-term elections, and better than expected quarterly earnings have investors feeling extremely bullish.  And that’s great news for our ETFs.

This week we’ll see QE and mid-term election speculation and rumor turn into reality.

The big question is… Will reality be as good as the hype?

Clearly it has the potential to spark some big moves in the market.  So buckle up, the news this week should provide some fireworks.

Now for the updates…

Position Updates

. . . . Guggenheim Global Solar ETF (TAN) – Buy up to $9.50

TAN has pulled back a bit since I recommended it last month.  But it’s still in a strong up-trend off the June lows.  And the fundamentals for the industry are looking strong.  The growth potential in the industry is simply amazing.  Earnings growth and margin expansion in the low cost producers should continue to drive TAN higher.  Go ahead and buy TAN up to $9.50 if you haven’t already.

. . . . First Trust ISE Global Platinum Index Fund (PLTM) – Buy up to $32.75

PLTM dropped the day we sent our recommendation.  Everyone should have been able to get into the platinum miners ETF at a great price.  Since then, we’ve seen trading volume in PLTM spike… a clear indication precious metals’ investors are looking to diversify away from overbought gold.  Go ahead and buy PLTM up to $32.75 if you haven’t already.

. . . . Guggenheim Airline ETF (FAA) – Sell

FAA shot up quickly after our recommendation.  It hit our $42.50 price target last week.  I sent out a special sell alert for you to grab your 18% gain in just five weeks.  Like I said in the sell alert, FAA could continue to move higher.  But the easy money has already been made.  Go ahead and sell FAA to capture a quick profit if you haven’t already!

. . . . iShares N.A. Technology – Software Index Fund (IGV) – Buy up to $55

IGV has resumed its uptrend.  Our entry on the pullback after IGV broke out to a new 52-week high is looking great.  The technical breakout for IGV and the underlying strength of the fundamentals in the software industry is a great combination.  It looks like tech stocks are beginning to lead the market.  Don’t forget software companies are a hot sector in tech right now.  Go ahead and buy IGV up to $55 if you haven’t already.

. . . . SPDR KBW Bank ETF (KBE) – Buy up to $23.50

KBE continues to limp along.  Negative investor sentiment toward banks is holding KBE back.  But a Republican win in the mid-term elections could be just the spark we need.
Rumor has it the Republicans will try to gut the financial reform bill currently putting a dent in banks’ profitability.  And to top it off, our downside appears to be limited.  KBE is holding above the support zone around $21 to $22.  If banks can shake the negative investor sentiment, KBE could be off to the races.  Go ahead and buy KBE up to $23.50.

. . . . iShares Pharmaceuticals Index Fund (IHE) – Hold

IHE’s uptrend continues…

The big pharmaceutical companies are benefiting from a weak US Dollar.  Hopes for a Republican victory in the mid-term elections aren’t hurting either.

The weak US Dollar makes overseas profits more valuable.  And Republicans are expected to rollback some of the healthcare reforms creating uncertainty about drug maker’s profitability.

Don’t forget the industry is primed for a round of M&A activity.  The big pharma companies need to rebuild their drug pipelines.  All in all, it has the makings for a bullish rally in IHE. Hold tight for now.

. . . . iShares Oil Equipment and Services Index Fund (IEZ) – Hold

IEZ is our play on higher oil prices.  And we’re up more than 17% as I write.

Crude oil has settled just over $80 per barrel.  IEZ lagged crude oil prices as they shot up from the low $70s.  Now IEZ is playing catch up.

And in an odd turn of events, new offshore drilling regulations should be a positive for IEZ. The new regulations should lead to increased demand for many oil drilling services and that’s great news for the companies in IEZ.  Continue holding IEZ for further gains.

. . . . First Trust NYSE Arca Biotechnology Index Fund (FBT) – Hold

FBT’s gains have slowed this month.  But we’re still sitting on a solid 9% gain.

Biotech stocks are dealing with headwinds from an uncooperative FDA.  But the bigger biotechs with positive earnings are providing a lift to FBT.

I believe the possibility of new M&A deals could send the industry and FBT rocketing higher at a moment’s notice.  Continue holding FBT for further gains.

. . . . iShares Dow Jones U.S. Consumer Services Sector Index Fund (IYC) – Hold

IYC is charging onward and upward.  We’re now up more than 9%.

In fact, IYC’s quickly approaching its April high.

Some of the big names in IYC like Walt Disney (DIS), McDonalds (MCD), andAmazon.com (AMZN) beat analysts’ earnings estimates.  As a result, they’ve made huge gains the last few months.  I’m expecting bullish investor sentiment and strong earnings to continue to propel IYC higher.  Hold tight for further gains.

. . . . iShares Dow Jones U.S. Real Estate Index Fund (IYR) – Hold

IYR set another new high of $56.67 in the last few weeks.  Good enough for a peak gain of 16% since we recommended it.

In short, investors continue to pump money into REITs.

IYR’s 3.5% dividend yield provides solid income.  REITs are also a nice hedge against inflation.  Earnings growth is also accelerating among many of the best run REITs.  Hold tight for further gains ahead.

. . . . SPDR S&P Semiconductor (XSD) – Hold

Semiconductor stocks are mounting a major comeback.  We’re now up 8% on our XSD trade.

As I expected, the slowdown in new PC orders that derailed the sector a few months ago was completely overblown.  But the real growth is coming from the chip makers in the communications industry.  Broadcom (BRCM) saw their quarterly profits surge and management provided strong guidance on future growth.

Hold tight as the semiconductor industry races higher.

. . . . Utilities Select Sector SPDR Fund (XLU) – Hold

XLU continues to hang around its 52-week high.

There are some catalysts that could drive utilities even higher.  The greatest potential rests with the evolution of electric cars.  More electric cars will certainly increase electricity demand down the road.  Eventually investors will catch on… and we’ll keep collecting our fat 4.1% dividend yield while we wait.  Hold tight for further gains.

Action To Take

• Sell Guggenheim Airline ETF (FAA) for an 18% gain.

 

Category: SET Portfolio Updates