SET Monthly Issue April 2009

| April 21, 2009

April 2009


The major averages locked in their 6th weekly gain in a row last week.

If you weren’t long the market during the first stage of this rally don’t worry, there’s more to come.

But use caution.  You don’t want to chase stocks and ETFs that have been bid up into the stratosphere.

There’s a better way to buy.

This week you get a great opportunity to buy into a few ETFs.  You see, the S&P 500 ran into a key resistance point on Friday and a pullback is likely in the cards (and has already started).

I have a method for buying a pullback in an uptrend.  The key is to wait until the ETF reaches the 20-day moving average.

Buying with this strategy can produce bigger winners.  But it also has some drawbacks.

It takes more time, and you’ll need to constantly monitor the ETF.  You can also miss out on some gains if the ETF reverses higher before it touches the 20-day moving average.

Trading this way is more of an art than a science.  Markets don’t always cooperate. So use this strategy selectively when entering new positions.

Regardless of how you place your order, the markets seem to be in a bullish trend right now.  I think the cyclical companies have the most potential for big gains.

We’ve identified two ETFs this month that should be among the leaders as economic conditions improve.


I believe the building and construction companies are poised for a comeback.  Why?

Just follow my thinking…

There’s $50 billion in federal infrastructure spending in the pipeline.  Just think of all the roads, bridges, and housing that will get built.  And it’s flowing right into a sector that’s been beaten down during the last year.

But that’s not all.  The government’s trying to prop up the housing market.  As that industry rebounds, construction is sure to benefit.

Macro/Economic Trend:  Rebuilding America

Take a look at most of the stimulus and life-line programs.  They all have lots of zeros on the price tag.  This money benefits the building and construction industry most directly.

It’s easy to see how infrastructure spending will benefit the construction and engineering firms.  These projects don’t design and build themselves.  This puts companies specializing in this business at the front of the line to benefit from these mega-sized projects.

According to, $27 billion has already gone out to state and local governments.  This is the start to rebuilding roads and bridges.  To make sure these projects start ASAP, states must assign the funds within 120 days… or lose the funding.

I’m just guessing but I don’t think the states are giving this money back.  We should see the cash flow into the private sector soon.

Next up is the big daddy of all government programs.

It’s designed to revive the dead housing market.  Well it’s not exactly a single program.  It’s actually a combination of different programs with the same goal.

They’re aimed at everything from enticing banks to lend (TARP), lowering mortgage interest rates, providing first-time home buyer tax credits, and foreclosure prevention.

The total price tag is a mind blowing $1.31 trillion (yes, trillion with a T).  The government will succeed in stabilizing the housing market.  There aren’t many things that can’t be fixed with that kind of money, at least in the short term.

In fact, we’re already seeing an uptick in the number of home sales.  Even if it’s from a dismally low level, it’s still a positive sign.

If you dig a little deeper into the numbers, you’ll find something interesting.  The majority of home sales are foreclosures and distressed sales.  And there’s one thing most of these foreclosed homes need… Repairs!

Deferred maintenance, or in some cases an outright trashing, by the previous owner is a big problem buyers face.  And these often young and frugal buyers are opting to tackle some repairs themselves.

This spells good times for the retailers of home improvement products used by the do-it-yourselfer.

Like it or not, infrastructure spending and truck loads of money flowing into the housing market are going to drive revenue for some companies.

We’ve found one ETF uniquely focused on the construction industry.  Most of the companies are sure to benefit from all that stimulus.  It has a good mix of the different elements found in the industry.  It’s the PowerShares Dynamic Building & Construction Portfolio (PKB).

Fundamentals:  A closer look at PKB

PKB is an intellidex ETF.  This simply means the underlying index is adjusted quarterly to hold “stocks with the greatest potential for capital appreciation”.  Sounds good so far.

Currently it’s a mix of 80% industrials and 20% consumer discretionary.  This mix gives good exposure to the key components of the spending plan.

Construction and engineering firms make up close to 40% of the industrial portion.  A couple of home builders and retailers of home improvement products make up the consumer discretionary.

The expense ratio is capped at 0.6% (until August 30, 2009).  It’s a little high but we’re getting a great mix of stocks not available in other individual ETFs.

Right now, the top five holdings and percentage weight for PKB are –

Company Name Ticker % Weight
NVR Inc. NVR 5.61%
URS Corp URS 5.47%
Jacobs Engineering Group JEC 5.24%
Lowe’s LOW 5.15%
Home Depot HD 4.98%

The P/E ratio of 10.6 is similar to the overall market.

But since cyclical companies growth rates accelerate much faster during times of economic recovery, we are buying this ETF at a discount based on expected growth rates.

Technicals:  The charts lead the way

Take a look at this chart of PKB and you’ll see this ETF has rallied hard off its low back on March 9th.  Similar to the broader market indexes like the S&P 500 and the Dow.

But, PKB is showing strength relative to these broader indexes.  This relative strength indicates it should continue to post bigger gains and smaller losses.

The short term uptrend that started back on the March 9th is pretty easy to spot. This series of higher highs and higher lows puts PKB in a strong short term uptrend.


To add fuel to the fire, it successfully broke through the intermediate term downtrend on April 16th.  This makes the short term trend the dominant trend and more likely to continue.

Trade Alert

Buy:  PowerShares Dynamic Building & Construction Portfolio (PKB) up to $10.75
Recent Price: $9.85
Price Target: $13.00
Stop Loss: $9.15

Remember: This ETF holds cyclical stocks that have been under accumulation since the March 9th bottom.  Even with the impressive gains over the last six weeks, PKB still hasn’t retraced all of its year-to-date losses.  We should see this ETF continue its uptrend back to $13 per share and beyond.

However, the market is ripe for a pullback.  You can wait until this ETF hits its 20-day moving average at $9.75 to squeeze some more profit out of it.  Or go ahead and buy in below $10.75.  Either way this trade should produce a nice profit.


It wasn’t that long ago we communicated through phones tethered to our home or office wall.  The development of email and cell phones has cut the cord on the way we communicate.  These technologies have changed the way we live our lives.

America and the rest of the world is crisscrossed with fiber optic cables and dotted with cell phone towers.  And the advancements in this technology just keep coming.

We’re also seeing a major push by (who do you expect) government agencies to expand broadband networks to rural communities.

Now there’s a trend for people to replace land lines with mobile phones.  While land lines are on the out, going in are more profitable high bandwidth internet connections.

This technology touches more and more people every day.  It’s fast becoming a necessity of modern life.  A major shift in consumer habits will generate riches for the entire industry… especially when economic conditions really improve.

Macro/Economic Trend:

Cyclical businesses take a big hit when times are tough.  But they also have the potential to deliver huge gains when the economy turns around.

Technology is one cyclical sector that sees a big boost in the early stages of economic recovery.  We’ve all heard the mantra, ‘technology will lead us off the bottom’.

I like the multimedia networking industry right now.  These companies produce hardware for telecom, data networking, and wireless equipment.  All of this ties to the growth of smart phones.

If you don’t know what a smart phone is, welcome to the 21st century.  These technological wonders handle phone calls but are loaded with other features.  They can text, email, browse the internet, give turn by turn directions via GPS, and play music just to name a few.

The smart phone seems to be the missing piece in our on-the-go culture.  Their popularity is growing by the day, as sales reach a frenzied pace.

We got a big dose of good news from one smart phone maker earlier this month.Research in Motion (RIMM) is the maker of the popular BlackBerry smartphone. According to their most recent earnings announcement, they have 25 million subscribers.  Plus, they shipped 26 million new devices last year alone.

These numbers blew away analysts’ estimates.  I find it impressive these numbers were posted in the heart of a consumer spending downturn!

These numbers indicate good things are ahead for this industry.  The ETF we like to profit from this trend is iShares S&P North American Technology – Multimedia Networking Index Fund (IGN).

Fundamentals:  A closer look at IGN

IGN holds 28 securities of hardware producing tech firms (including the amazing RIMM).  These companies range from the large to small cap stocks.  The large caps like Cisco Systems, Qualcomm, and Corning carry more weight individually but the small caps make up 40% of this ETF.

These small caps growth rates carry big upside potential and should help power it higher.

An expense ratio of 0.48% is about average for indexed sector ETFs.

The top five holdings and percentage weight for IGN are –

Company Name Ticker % Weight
Research In Motion RIMM 9.73%
Corning GLW 9.52%
Qualcomm QCOM 8.41%
Cisco Systems CSCO 7.86%
Motorola MOT 6.01%

Technical Analysis:  The charts lead the way.

IGN is locked in an uptrend since the March 9th lows and it’s broken out to fresh year-to-date high.  This tech ETF is showing strength relative to the broader technology sector.  Relative strength means IGN should continue to produce bigger gains and smaller losses.


We have multiple indicators flashing bullish signals.  A good sign this trend will continue.

A few of my favorite, the MACD and RSI are both bullish.  Another good sign is the up/down volume indicating this ETF is under accumulation.

Trade Alert

Buy: iShares S&P North American Technology – Multimedia Networking Index Fund (IGN) up to $20.75
Recent Price: $19.70
Price Target: $26.00
Stop Loss: $16.36

Remember: This part of the tech industry is posting the best numbers in the sector. Look for IGN to lead the market recovery.

Even the strongest bull markets have pullbacks.  And the markets are ripe for a pullback after a six straight weeks of gains.  You can buy into this ETF below our buy up to price of $20.75 or try and maximize this trade by buying the pullback.  The 20- day moving average is currently $18.45.


Consumer Discretionary (23.6%)

Investors donned their rose colored glasses last month.  They’re disregarding current economic conditions and are now looking toward economic recovery.

Consumer confidence came out of the free fall by moving modestly higher.  Renewed optimism is the key to consumers loosening the purse strings. Also, positive news out of the stock market is sure to help.

Consumer Staples (7.4%)

Investors are moving toward more economically sensitive sectors.  The defensive sectors, like staples, are showing weakness.  Interestingly their percentage losses over the last nine months now match the consumer discretionary sector.

This shift away from defensive sectors will leave this sector lagging the rest of the market.

Unless government efforts to return growth to our economy are derailed, this sector is not going to ring up big gains anytime soon.

Energy (10.3%)

It’s all about demand and right now it’s not there.

This is one case where less bad economic news isn’t enough to ignite a rally.  Is it a post bubble hangover or is it something more?

Oil did stage a rally from $40 to $50 dollars a barrel but has since stalled out.  It’s trading in a technical ‘no man’s land’ with no real conviction on either side.

Long term the prospects are good.  But until we know how supply and demand will match up when growth returns, I don’t see this sector gaining any traction.

Financials (35.7%)

A fools rally?

Financials made a big recovery from severely depressed levels.  But I’m not sure they’re out of the woods yet.

There’s no question money can be made, or lost, trading the financial stocks.  The big swings these stocks are taking provide ample opportunities to profit.  But the problem is the swings lack technical or fundamental basis.

I get the feeling these stocks are being picked up by bottom fishers.  They’re betting the government isn’t going to let the big institutions fail at any cost.

But, I’m not convinced all of them will survive.  And lumping them all under the same umbrella could prove to be a big mistake.  This is one case where the individual companies make a better investment than an ETF.

Healthcare (2.5%)

Healthcare stocks have run over a couple of speed bumps.

First were the proposed reforms to our healthcare system and a cut back in Medicare reimbursements.  However, stocks bounced back from this news.

Second was the overall move by investors towards more cyclical stocks.

As money gets reallocated from defensive sectors to more economically sensitive ones, healthcare has been unable to hold onto its recent gains.

Overall, the long-term outlook for the sector remains strong.  We expect to see a rebound as money that’s been on the sidelines comes back into the market.

Industrials (22.4%)

How fast can the stimulus spending reach this industry?  Well, by looking at the big gains this sector made last month, investors are betting it’s going to be soon.

We’re recommending the PowerShares Dynamic Building & Construction Portfolio (PKB) to take advantage of this trend.  (See Trade Alert 1 for more details)

Technology (15.3%)

I’ve said it before and I’ll say it again.  Tech leads the market off the bottom.

We’re recommending the iShares S&P North American Technology – Multimedia Networking Index Fund (IGN) this month.  (See Trade Alert 2 for more details)

Materials (20.1%)

Materials stocks rallied hard off the bottom as investors look to better times ahead.

A Chinese recovery and increasing demand for materials will be a major factor in this sectors performance.  The question is how much of this is already baked into the cake?

Gold on the other hand pulled back to its 200-day moving average.

The good news is a double bottom pattern is forming at this level.  A good sign that bullish momentum could be resuming.

Utilities (9.1%)

The utilities are running out of steam.

This defensive sector is seeing production spike and capacity expand at the same time demand is in the tank.  That’s not a good recipe for profits.

On a technical basis this sector ran headlong into its 50-day moving average and has been trending down ever since.

As investors continue to turn to riskier investments, utilities will be left on the back burner.

Portfolio Changes

  • This month we’re buying PKB and IGN…


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