SET Monthly Issue April 2013

| April 16, 2013

April 2013


As you know, the S&P has started off the year with a bang.  Even after yesterday’s selloff, the large cap index has raced out to a 10% gain.

In fact, the recent rally sent the S&P to a high of 1,597 – the highest level ever recorded!

One of the biggest reasons why stocks are doing so well is the return of everyday investors.  You see, more money is flowing into, rather than out of, mutual funds that invest in stocks.

This is a major reversal from the last few years.  It’s really the first time since the credit crisis in 2008 that investors are confident enough to put money to work in mutual funds.

Obviously, they believe the recent uptrend is likely to continue… and I can’t blame them.

The Fed’s QE program is full go and the housing market is as strong as it has been in years.  These two elements are a powerful force fueling economic growth.

As they say, “the trend is your friend” and the trend in stocks is up.

But I have to tell you, there’s another trend that has me a little bit worried… You see, this isn’t the first time the S&P has gotten off to a fast start in the first quarter.

As you can see in the chart below – the S&P has had a great start in each of the last three years.  But in each of the previous years, the rally has entered into a correction in April or May (red arrows).


Here the bottom line…

The short term trend is higher and the Fed and housing market are strong catalysts for more upside.  And we don’t want to miss out on the next leg higher.  But the trend of spring time selloffs in each of the last three years is troublesome.

Obviously, anyone who bought at these peaks was kicking themselves a few weeks later as stocks fell.  But here’s the thing… The pain was always temporary.  In just a few months, stocks rebounded and went onto new highs.

When we take a longer term view, the risk of missing out on the next leg higher outweighs the risk of a short term correction.  I’ve found one ETF that typically does well no matter what the rest of the market is doing and another that should explode to the upside if stocks continue moving higher.


As we approach the time to “sell in May and go away”, it’s not a bad idea to play a little defense.

One way to protect yourself is by finding an asset class that doesn’t move in lock step with the broad market.  These investments often increase in value when stocks are moving lower but they can also move higher when stocks are too.  So they make good investments whether stocks are sinking or soaring.

Another thing I look for in a defensive ETF is a solid dividend.  The cash a fund throws off when stocks aren’t soaring can quickly offset sub-par performance.

One investment that fits both of these criteria is Master Limited Partnerships or MLPs.

Macro/Economic Trend:  Flowing Profits To Investors

As some of you know, MLPs receive special tax treatment under the US tax code.  But in order to qualify as a MLP, they must generate at least 90% of their income from qualifying sources.

And the best part is MLPs are traded on an exchange just like a regular stock.

However, they’re taxed differently than a regular stock. I’m not a tax advisor so I’m not going into all of the details.  (If you want to know more about the tax implications of owning an MLP or MLP ETN, consult your tax advisor.)

MLPs primarily own energy infrastructure assets like pipelines and storage tanks as well as some production assets like mature oil and natural gas wells.

Here’s the real beauty of MLPs…

Unlike many businesses in the energy sector, their profits aren’t dependent on oil and gas prices.  They make their money from the amount of oil and natural gas they’re pumping through their pipelines and being stored in their tanks.  And most of the revenue is tied to long-term fee-based contracts.

This fee based business model has highly predictable cash flows.  MLPs collect their toll for transporting and storing oil and gas whether commodity prices are sky high or dirt cheap.

The result is MLP returns have a very low correlation with the S&P 500.

Additionally, MLPs typically pay out most of their operating cash flow in quarterly distributions.  In other words, they pay huge dividends.  And they have a strong history of increasing their payouts.

As you can see, MLPs fit both of my criteria for good investments in times of uncertainty.  But that’s just part of the story…

Unlike many income producing investments, MLPs also have strong growth prospects.

Over the last few years, advancements in drilling technology have unlocked massive reserves of oil and natural gas in the US.  But in order to get the oil and natural gas from the well to the consumer, it will require huge investments in new energy infrastructure.

According to the Interstate Natural Gas Association of America, $250 billion in energy infrastructure needs to be built in order to transport all of the newly found oil and natural gas.  And the build-out of new energy infrastructure will likely fuel a new wave of growth for MLPs for years to come.

Simply stated, MLPs have everything we’re looking for in an investment.  They have strong growth prospects, returns that aren’t correlated to stocks, and they pay stable and growing dividends.  Introducing the Morgan Stanly Cushing MLP High Income Index ETN (MLPY).

Fundamentals:  A closer look at MLPY

The expense ratio is 0.85%.

Its current indicative yield is 8.46%.

The top five holdings and percentage weight for AMLP are –

Company Name Ticker % Weight
PVR Partners PVR 5.55%
Energy Transfer Partners ETP 5.51%
Buckeye Partners BPL 5.27%
Boardwalk Pipeline Partners BWP 5.16%
BrietBurn Energy Partners BBEP 5.10%

Technicals:  The charts lead the way

MLPY currently trades for $17.64.  It’s up 32% from the 52-week low of $13.47 and it’s just shy of the 52-week high.


MLPY has been marching steadily higher for the better part of three years.  In fact, the pullback over the last few months of 2012 was a complete anomaly.

Don’t forget, Congress was toying around with the idea of drastically increasing taxes on dividends during this time.  And investors were flooding out of MLPs ahead of the new tax hikes.

Well, the tax hikes didn’t come and MLPY quickly snapped back into its uptrend and it hasn’t looked back since.  MLPY should continue moving higher in this long established uptrend.

Trade Alert

Buy:  Morgan Stanly Cushing MLP High Income Index ETN (MLPY) up to $18.50
Recent Price:  $17.64
Price Target:  $21.00
Stop Loss:  $14.00

Remember:  MLPY is in a strong uptrend. But that’s not the only way we’ll profit from MLPY.  We’ll also be collecting a hefty dividend.  Grab your shares up to $18.50.


Oil prices have been on a wild ride over the last year.  A barrel of WTIC oil has come close to hitting $100 on a number of occasions.  But the last three times WTIC has approached this level, it has been quickly turned away.

A few weeks ago WTIC was once again approaching $100 per barrel.  And just like before, we saw traders and speculators pull the plug on the bullish oil bets.

As a result, WTIC oil prices quickly moved more than $10 to $87.40.  The selloff pushed WTIC to its lowest levels this year.  But here’s the thing… One indicator I’m watching closely shows producers are expecting oil prices to go up.

Macro/Economic Trend:  Rig Counts On the Rise

The number of oil rigs drilling for oil in the US has soared from a low of 179 in June 2009 to a high of 1,432 last August.  Since then, the rig count fell off a bit…

But over the last few months, this trend has reversed.  And the number of rigs drilling for oil is once again on the upswing.  In fact, last week the US oil rig count rose from 1,357 to 1,387 and is at the highest level of the year.

But that’s not all… the number of rigs drilling for natural gas increased too.

In short, the more rigs that are drilling for oil and natural gas, the more money the oil & gas services companies can charge for their services.  And the more money they’ll make.  That’s great news for the SPDR S&P Oil & Gas Equipment & Services ETF(XES).

Fundamentals:  A closer look at XES

XES is a modified equal weight index.  The ETF is essentially equally weighted among 45 of the biggest and best oil & gas equipment & service companies.

The expense ratio is 0.35%.

The top five holdings and percentage weight for XES are –

Company Name Ticker % Weight
Lufkin Inds LUFK 3.17%
Tidewater TDW 2.58%
Bristow Group BRS 2.57%
Weatherford Intl WFT 2.52%
Seacor Holdings CKH 2.49%

Technicals:  The charts lead the way

XES is currently trading for $37.22.  It has been on a nice run over the last year.  It’s up 36% from the 52-week low.  But it has pulled back about 9% from the recent high.

As you can see, the pullback has taken XES back to the support of the prior high (green line).


In fact, I’m expecting XES to catch bid between $38 and $36.  And then blow right through the previous high around $41.

Trade Alert

Buy:  SPDR S&P Oil & Gas Equipment & Services ETF (XES) up to $38.50
Recent Price:  $37.11
Price Target:  $45.00
Stop Loss:  $34.00

Remember:  XES has strong fundamentals and a long term uptrend on its side.  After the recent pullback to support around $38 to $36, XES appears to be poised for a run back to the recent highs and beyond.


Consumer Discretionary (+0.7%)

Retail sales missed the mark last month.  In fact, they fell 0.4% in March and were revised down to 1% growth in February.  It looks like the increase in payroll taxes trickled down to consumer spending.  But you wouldn’t know by the sector’s performance… over the last month, the sector ticked up just under 1%.

Unfortunately, our iShares US Home Construction ETF (ITB) didn’t follow suit.  But this is only temporary… the US housing market is on the upswing.

Consumer Staples (+5.8%)

The run in consumer staples and other defensive sectors continued last month.  In fact, defensive sectors were far and away the best performers.  This has taken a bit of the steam out of the market rally.  In order for this rally to continue moving higher, the cyclical stocks need to take over leadership.

Energy (-2.0%)

Energy stocks have had a great run over the last year.  And the recent pullback looks like a great entry point…

I’m recommending the SPDR S&P Oil & Gas Equipment & Services ETF (XES) and the Morgan Stanly Cushing MLP High Income Index ETN (MLPY) to get in on the action.

Financials (+0.1%)

Financials held their ground over the last month, but appear to be losing some of their bullish momentum.  We’re currently up about 10% on our SPDR S&P Bank ETF (KBE) trade.  But we could see earnings season light a fire under these shares.  I’m expecting a strong showing from this sector… Continue holding for bigger gains ahead.

Healthcare (+7.2%)

Healthcare stocks checked in with a 7.2% gain over the last month.  This sector has clearly been the biggest beneficiary of the return of the retail investor.  Investors that were burned in previous market meltdowns are clearly opting for defensive sectors like healthcare.  In fact, healthcare focused ETFs are often popping up on the biggest inflows list.

Industrials (-0.5%)

Industrial stocks took a step back this month.  And it’s not surprising given the economic data.  In short, we’ve seen a number of reports come in weaker than expected.  And investors are worried that we’re on the verge of another spring slowdown.

But as I pointed out earlier- these pullbacks don’t last long.  And with the Fed’s QE program buying assets, it’s unlikely we’ll see a true slowdown anytime soon.

Technology (+0.6%)

There’s no doubt about it, tech has been through a rough patch.  The lack of leadership from the big names in the sector is clearly hurting the sector’s performance. But it’s also made these stocks cheap relative to other sectors that have been moving straight up for months.  If investors shift their focus to tech, then the iShares Semiconductor ETF (SOXX) should be leading the way.

Materials (-2.8%)

Materials stocks and our iShares Basic Materials ETF (IYM) haven’t been able to get back on track after running into resistance around $73.00.  The strength of the US economy clearly hasn’t been enough to overcome weakness in the global economy.

What’s more, our housing trade made up of the Guggenheim Timber ETF (CUT) and the iShares US Home Construction ETF (ITB) is under pressure.  But any weakness is likely to be temporary.  Continue holding for bigger gains ahead.

Utilities (+5.8%)

Utilities surged 5.8% over the last month.  This sector has clearly been a big beneficiary of the return of the retail investor.  Investors are clearly looking to dip their toe into the stock market slowly with defensive sectors like Utilities.

Portfolio Changes

  • This month we’re buying XES and MLPY.


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