SET Monthly Issue April 2014

| April 15, 2014

April 2014


So far 2014 is shaping up to be very different than 2013.  In fact, the sectors that led the market rally last year are turning out to be this year’s biggest losers.

Let’s take a closer look at a few of the reasons behind the recent changes… and how we can profit from them.

Last year, stocks with strong revenue growth and high valuations led the market rally. This included sectors like consumer discretionary and technology, as well as industries like biotech and solar.

At the beginning of 2014, investors, including huge hedge funds that manage billions of dollars, place big bets on more upside on these hot investments.

And they performed well over the first few months of the year.  But as they began to underperform in March, many hedge funds were forced to unwind these positions.

As one hedge fund after another has pulled out of growth stocks, it has shifted the balance of power…

Growth stocks no longer have momentum and value stocks have become the new market leaders.

Dramatic shifts from growth to value like we have experienced over the last month don’t happen very often.  But when they do, we typically see energy and consumer staples stocks take over market leadership.


We’re now into the fifth year of a bull market run that began back in March of 2009. Any way you slice it, we’re now entering into the later innings of the market cycle.

One of the sectors that performs well late in an economic or market cycle is energy.

Right now the US onshore oil and gas production is the best place to be.  And that means unconventional oil and natural gas…

Macro/Economic Trend:  Growing US Production

As I mentioned earlier, the dramatic shift from growth to value, as well as entering into the later stages of the market cycle, bodes well for energy stocks.  We could simply buy the entire energy sector with a broad based energy ETF like Energy Select Sector SPDR (XLE).

I believe there are bigger gains to be made by drilling down into the hottest segment of the industry…

Unconventional oil and gas is the segment of the energy sector that offers the most upside.  The unconventional segment includes oil and gas production from coalbed methane, coal seam gas, shale oil, shale gas, tight natural gas, tight oil and tight sands.

The thing that sets these unconventional sources apart from conventional crude oil and natural gas is the ease of extraction.  Unconventional oil and natural gas is much harder to get out of the ground.

But thanks to advances in technology, unconventional oil and natural production has exploded in the US.  The US now produces 10% of the world’s oil due to unconventional oil.

In fact, the International Energy Administration said the increase in US oil production has caused a global supply shock that is reshaping the entire industry.

The opportunity to make money in US onshore unconventional oil and gas has been led by a variety of large and small companies.  Now the big oil and gas companies are making their move to dominate the segment.

Over the last year, we’ve seen several big players reprioritize the US onshore oil and gas market as their top priority.  Companies have been selling foreign assets and repositioning themselves to make a big splash in this market.

I believe we’re about to embark on a massive round of mergers and acquisitions within the US onshore segment.  This type of widespread deal making can drive valuations up in a hurry.

The ETF I like to profit from the coming surge in unconventional US oil and gas production is the aptly named Market Vectors Unconventional Oil & Gas ETF(FRAK).

Fundamentals:  A closer look at FRAK

FRAK tracks an index of 58 stocks involved in unconventional oil & natural gas.

The expense ratio is capped at 0.54%.

The top five holdings and percentage weight for FRAK are –

Company Name Ticker % Weight
Anadarko Petroleum APC 7.97%
Occidental Petroleum OXY 7.70%
Eog Resources EOG 7.17%
Hess HES 5.62%
Devon Energy DVN 4.97%

Technicals:  The charts lead the way

FRAK is currently trading for $30.73.  It’s up 8.1% year-to-date and recently made a new 52-week high of $31.20.  As you can see in the chart below, FRAK has enjoyed a steady climb higher over the last few years.


And more importantly, it has bucked the recent market weakness.  It’s impressive to see FRAK make a new high as the hot growth sectors have pulled back recently.

The 200-day moving average has been a solid floor of support during FRAK’s march up and to the right across the chart.  This ETF is clearly exhibiting signs of strength and looks to be taking over as one the market leaders.

Trade Alert

Buy:  Market Vectors Unconventional Oil & Gas ETF (FRAK) up to $32.00
Recent Price:  $30.73
Price Target:  $37.50
Stop Loss:  $26.50

Remember: FRAK is in a long term uptrend with strong fundamentals supporting the move higher.  We could see a quick pullback to around $29 per share before FRAK moves higher again.  You can try to time your entry into this ETF to pick up the shares a slightly better price.  But you could end up missing out on the move to the upside if the pullback doesn’t materialize.


Consumer Discretionary (-5.4%)

The consumer discretionary sector suffered a 5.4% drop over the last month.

The selloff can largely be attributed to analysts slashing their first quarter earnings growth estimates.  Now that earnings season is upon us, we’ll see if companies can beat these lowered estimates and bounce back or live ‘down’ to these expectations and continue their slump.

The negative sentiment toward consumer discretionary is so bad that even a stronger than expected retail sales report for March didn’t get investors’ attention.  The report showed retail sales jumped 1.1% last month.

These numbers clearly indicate US consumers are willing to spend money.  And should provide a boost to our ETFs once the negative sentiment toward growth stocks subsides.

iShares US Home Construction ETF (ITB) is currently trading for $23.58.  It’s right at a strong technical support level.  We should see the price rebound from here. Continue holding.

PowerShares Dynamic Media Portfolio (PBS) – the market selloff has taken a toll on PBS over the last month.  It’s currently trading for $23.57, down from a high of $26.89 last month.  As one of last year’s hottest growth sectors, it has been dragged down by investors rotating out of growth stocks.  Needless to say, it’s highly unusual to see a drop like this driven solely by investor sentiment.  But that’s exactly what’s going on here.  The fundamentals for media stocks haven’t changed.  I think we could see PBS rebound from the selloff that has clearly been overdone.  Continue holding.

PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) is trading for $32.49.  It’s just below our $32.75 buy up to price.  This looks like a great buying opportunity to me… Use this pullback to pick up shares of PEJ at a great price if you don’t own it already.

Consumer Staples (+0.6%)

Consumer staples have outperformed consumer cyclicals for two months in a row after underperforming relative to cyclicals in six out of the last seven months.  There’s no doubt about it, staples are benefiting from the growth to value rotation.

Our First Trust Consumer Staples AlphaDEX Fund (FXG) made a new high on April 4th. It has pulled back to $35.88.  But it should bounce back quickly as value stocks gain momentum.  Continue holding.

Energy (+3.2%)

Energy stocks led all sectors last month with a 3.2% gain.  The strong gains can be largely attributed to the low valuations seen across many of the oil and gas companies.  These stocks have been the new hot investment as the growth trade has lost momentum.  In fact, we’re recommending the Market Vectors Unconventional Oil & Gas ETF (FRAK) this month to take advantage of the sector new found momentum… see the trade alert for more details.

High flying solar stocks haven’t been so hot over the last month.  Our Guggenheim Solar ETF (TAN) has dropped like a rock from the recent highs.  It’s certainly disturbing to see our paper profits disappear.  At a current price of $39.66, we’re still up more than 15%.  And I still believe in the fundamental growth story that has pushed TAN up and up and up over the last year.  I think we’re nearing a turning point for the correction as we near the 200-day moving average.  Continue holding.

First Trust Global Wind Energy ETF (FAN) has held up much better than TAN.  It’s down about 5% from the 52-week high to $11.90.  This is another rock solid fundamental story that should continue to push our ETF higher.  Our price target is $12.75.

Our Morgan Stanley Cushing MLP Hi Income ETN (MLPY) spun off another dividend this month.  Our total return on MLPY is now 9.45%.  Feel free to buy MLPY up to $18.50 if you don’t already own it.

Financials (-2.6%)

Financials dropped after the Federal Reserve minutes showed they were unlikely to start raising interest rates as quickly as we were led to believe by Fed Chairman Janet Yellen.  But nevertheless, interest rates are destined to start rising at some point.  And that should be good for long term growth in the sector.

The Financial Select Sector SPDR Fund (XLF) is currently trading for $21.45.  And it’s downright cheap on a historical basis for financial stocks.  But in order for that to happen, banks must show us they can grow earnings in the new regulatory environment.  It will happen, and when it does, XLF will be off to the races.  Grab your shares up to $22.25.

Our First Trust NASDAQ ABA Community Bank Index Fund (QABA) has been on a roller coaster ride lately.  QABA has fallen nearly 8% to $34.96 since making a new high in March.  This is directly attributed to the Fed and interest rates.  The sooner interest rates begin to rise, the sooner community banks will see margins expand. Continue holding.

Healthcare (-5.1%)

Healthcare has gone from the penthouse to the outhouse.  A large chunk of the money that flowed into high flying drug and biotech stocks this year has come flooding back out in a tidal wave of sales.  The 5.1% drop over the last month is the largest monthly drop in more than two years.

Industrials (-1.5%)

Industrials are down 1.5% over the last month.  But this cyclical sector isn’t in the same situation as the high flying growth stocks.  In fact, the cyclical sector is an interesting buy at these levels.  If economic activity picks up as expected, we should see industrials take on a market leadership role.

Our iShares Transportation ETF (IYT) made a new high in early April.  And it has held up well in the growth stock selloff.  An uptick in economic growth should provide IYT with a nice lift going forward.  Continue holding…

Technology (-1.4%)

The technology sector has been split into two separate groups.  On one hand, there are the high flying growth stocks like social media stocks that have seen their valuations soar.  And on the other, you have your steady old guard tech like IBM, Qualcom, and Microsoft that have much lower valuations.  Over the last month, we’ve seen the former take a big hit while the latter have continued to move steadily higher.

Materials (-1.9%)

Materials are another sector that is holding up well lately.  In much the same way as industrials, materials haven’t had the hyperbolic move like some growth stocks.  And they will play an important role if economic growth accelerates as expected later this year.

Utilities (+1.9%)

Utilities have enjoyed a 10% run to the upside over the last three months.  But investors aren’t chasing the performance.  Inflows into utilities ETFs have been in the middle of the pack during their strong run.  This defensive sector has been a good place to hide over the last few months, but it’s not the place we’ll find the big returns in the future.

Portfolio Changes

  • This month we’re buying FRAK.


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