SET Monthly Issue April 2015

| April 21, 2015

Something More Than A Thrill Ride 

Over the last few months, the S&P 500 has been in a period of consolidation.

S&P 500

During that time, the price action of the large cap index has made a series of lower highs and higher lows.

As you can see, the chart of the S&P 500 resembles an amusement park thrill ride.  It’s a big change for investors that have been accustomed to a steady march up and to the right over the last few years.

The thrill ride for the S&P 500 has been marked by periods of excitement and terror.  But in the end, we’ve ended up right where we began and cost investors money.

In fact, the S&P has failed to close at a new all-time high since March 2nd.  That’s the longest the S&P has gone without closing at a new all-time high since the S&P got back to record highs in March of 2013.

As we typically see in periods of consolidation, investor sentiment is neither overly bullish nor overly bearish.

And there’s no reason for investors to be overly excited right now.  US economic data has generally been weaker than expected and traders that were short oil have been run over as oil prices have rallied 25% in the last month.

One thing I’m looking to swing momentum is 1st quarter earnings.

Keep in mind, earnings expectations were low coming into earnings season.  So, it should be easier for companies to beat the lowered estimates… and even earnings in line with expectations could provide a tailwind for stocks.

But until we see the S&P 500 breakout of the consolidation, we’ll continue to have more sideways trading like we have over the last few months.  

Trade Alert: Feed The Beast

Basic materials stocks have been disappointing over the last year.  In fact, their 7.2% gain over the last year makes them the 2nd worst performing sector behind only energy stocks.

The sector has been dealing with multiple headwinds from sluggish global economic growth, a strong US Dollar, and slumping commodity prices.

Nevertheless, the basic materials sector has begun moving higher in an upward trending price channel over the last six months.

And there’s one macro trend I believe will propel basic materials from laggards to leaders…

Macro/Economic Trend:  China Stimulus

During the last decade, China has established itself as the largest consumer of raw materials.  In fact, China consumes four times more basic materials than the US does every year.

As China’s economy grew, so did their demand for basic materials.

Companies responded by ramping up production of basic materials to meet China’s growth demand.  But China’s economy hasn’t grown as much as expected over the last few years.  And neither has their demand for basic materials.

As a result, there has been a glut of basic materials that have kept prices depressed and hurt the performance of basic materials stocks.

Here’s the thing…

China is taking action to boost economic growth.  China’s central bank has cut interest rates twice since November as well as reducing the reserve requirement ratio for Chinese banks.

In other words, money is cheaper and banks have more money to lend.

So, it’s easy to see how these efforts to boost the Chinese economy will lead to more demand for basic materials.  And as the world’s largest consumer of basic materials, this should propel the basic materials sector higher in the weeks and months ahead.

The ETF I like to profit from this powerful trend is the Materials Select Sector SPDR $XLB.

Fundamentals:  A closer look at XLB

XLB tracks an index of companies in the S&P 500 from the chemical, metals & mining, paper & forest products, containers & packaging, and construction materials industries.

It has 30 stocks that are weighted according to market cap.  The expense ratio is 0.15%.  It has a 12-month dividend yield of 1.94%.

The top five holdings and percentage weight for XLB are –

Company Name Ticker % Weight
E.I. du Pont de Nemours DD 11.15%
Monsanto MON 9.59%
Dow Chemical DOW 9.21%
LyondellBasell LYB 6.45%
Praxair PX 5.96%

 Technicals:  The charts lead the way

XLB is currently trading for $49.98.  It’s up 3.3% year-to-date and it’s up 9.7% over the last six months.

Materials Select Sector SPDR

XLB is currently just above support of the 200-day moving average.  It has also set a series of higher highs and higher lows over the last six months.

This bullish price action over the last six months, as well as the recent pullback from the highs to levels of support, provides us with an ideal entry point to go long XLB.

Trade Alert

BuyMaterials Select Sector SPDR $XLB up to $51.50

Recent Price: $49.98

Price Target: $62.50

Stop Loss:  $46.00

Remember:  XLB is in a bullish uptrend despite dealing with several headwinds over the last six month.  Now China is taking steps to jump start their economy that consumes massive amounts of basic materials.  These positive developments should lead to a swift uptick in basic materials stocks.

Sector Snapshots

Consumer Discretionary (+0.0%)

Consumer discretionary stocks were flat over the last month.  So far, consumers have elected to save the money they are saving at the gas pump rather than spend it.  So consumer stocks have cooled off over the last month.

One thing consumers are willing to spend money on is bars and restaurants.  Our PowerShares S&P SmallCap Consumer Discretionary Portfolio $PSCD that holds lots of these stocks is up 1% in the first month since we recommended it, but was up as much as 3.9% at one point.

Our PowerShares Dynamic Leisure & Entertainment Portfolio $PEJ has also pulled back from the recent highs.  But it could move higher in a hurry as earnings season gets into full swing.  Keep an eye on our $41.00 price target.

The Marked Vectors Gaming ETF $BJK appears to be forming a bottom.  We’re in at a great price on this ETF and you can still establish a position below $41.00 if you haven’t already done so.

Consumer Staples (+0.7%)

Consumer staples outperformed consumer discretionary stocks last month.  That’s a clear indication that investors are slightly less bullish about the consumer after some weak economic data lately.  In fact, our Guggenheim S&P Equal Weight Consumer Staples ETF $RHS recently made a new high.  Continue holding for more upside.

Energy (+8.7%)

The energy sector snapped back with an 8.7% gain over the last month.  The sector has benefited from a drawdown in oil inventories and decrease in US oil production.

Many traders have found themselves on the wrong side of this trade.  Shorting oil as well as energy stocks was an overcrowded trade.  The initial rebound in prices has led to a short covering rally.

However, the fundamental picture remains unchanged.  Saudi Arabia is flooding the market with oil.  They’re content to keep prices low in hopes of driving out competition that can’t survive with low oil prices.  I don’t think we’ve seen the low for oil as these major players battle for control.

Our Guggenheim Solar ETF $TAN continues to move higher.  At a current price of $48.00, we are up 42% on this trade!  Continue holding for more upside.

Financials (-1.6%)

Financials have been disappointing as the time for the first Fed rate hike gets pushed out further into the future.  The uncertain timing of the first rate hike will continue to be a headwind for financials.   Nevertheless, our Financial Select Sector SPDR Fund $XLF is up 14.3%.  Continue holding.

Healthcare stocks moved higher over the last month.  This resilient sector is benefiting from powerful macroeconomic and cyclical trends.  Our iShares US Medical Devices ETF $IHI is up 3.6%.   Continue holding.

Industrials (-1.0%)

Industrials were the worst performing sector over the last month.  The sector continues to be plagued by the strong US Dollar and sluggish global economic growth.

No other sector is more susceptible to the strong US Dollar hurting earnings growth as the large multi-national companies in the industrial sector.  I don’t see industrial stocks taking the lead until global economic growth accelerates or the US Dollar weakens.

Technology (+0.5%)

Technology stocks ticked higher over the last month.  However, investors are concerned about sluggish growth among tech companies.  There will be a boatload of tech companies reporting earnings over the next week.  The sector’s next move will largely be determined by how they performed in the first quarter and what they say about their future expectations.

Our Market Vectors Semiconductor ETF $SMH is down from the recent highs after industry bellwether Intel $INTC reported disappointing 1st quarter revenues.  But secular tailwinds from new technology and more demanding manufacturing techniques will help chip stocks get back on track in short order.  Continue holding.

Our First Trust NASDAQ-100 Technology Sector Index Fund $QTEC is all about big tech… so it’s an important week for QTEC with lots of big tech companies reporting earnings.  I think we’ll see lots of big tech companies deliver better than expected earning and send QTEC moving higher in a hurry.

The Global X Social Media Index ETF $SOCL is having a great year.  It’s up 12.8% this year and recently moved above our $20.00 buy up to price.  Continue holding for more upside.

Materials (+0.4%)

Materials sector has been dealt with more than its fair share of problems over the last few years.  Despite the problems, the sector is in an uptrend.  And now that the world’s largest consumer of basic materials, China, is taking action to jump start economic growth, we should see this sector move from laggard to leader.

Utilities (+1.2%)

Utilities stocks and bonds often move in the same direction.  But over the last few months, Utilities stocks and bonds are moving in opposite directions.  Bonds are at a 2 month high while Utilities have been moving lower over the last two months.  It’s clear that this safe haven sector is out of favor with investors right now.

Portfolio Changes

  • This month we’re buying XLB.
  • Move SOCL to Hold.

Category: SET Monthly Issues

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