SET Monthly Issue August 2013
August 2013
AMAZING OPPORTUNITY!
August has been an interesting month so far…
Just a few weeks ago, the S&P 500 hit an all-time high of 1,709. Since then, the large cap index has fallen 3.7%.
Admittedly, a pullback of less than 5% isn’t much to get excited about. These types of pauses in a bull market happen from time to time… and it’s healthy.
But there’s no denying there has been a shift in investor sentiment toward US stocks lately.
And for good reason…
First off, European stocks are chock-full of potential as the recession in Europe comes to end. This is giving investors a real alternative to US stocks for the first time in a long time.
And don’t forget about interest rates. The yield on the ten year Treasury has increased 67.4% year-to-date. It’s unclear how these rates will affect the economy, corporate earnings, and the stock market.
I don’t know anyone who would be shocked to see stocks dip into a 10% to 20% correction like we have seen in the summers of 2010, 2011, and 2012.
But it’s not all bad news…
No matter how bad the correction, stocks have always bounced back.
The most important thing to remember is – it’s August! This is a notoriously slow month on Wall Street. The lack of trading volume and big money can lead to unusual price swings.
What’s more, with a few minor tweaks, investor sentiment toward US stocks could turn bullish in an instant and the correction may not even materialize.
Here are the three things I’m looking for in order to re-ignite the bull market in US stocks – the bond market stabilizes, defensive dividend paying stocks bottom, and Financials resume their leadership position.
In short, the recent weakness in US stocks needs to be taken with a grain of salt. After all, it is August. And the risk of missing out on the next leg higher outweighs the risk of a short term correction.
Let’s take a look at an ETF that has the potential to be a big winner no matter what stocks do in the short term.
It’s no secret advancements in drilling technology are revolutionizing the US oil & gas industry. But it’s not the only energy industry that’s benefiting from new technology.
Wind energy is also benefiting from new technology. Wind power technology is bigger, smarter, and more competitive today than it was just a few years ago.
And if you factor in the rising cost of carbon dioxide emissions, wind energy is quickly becoming one of the most cost effective energy sources around.
Macro/Economic Trend: Capacity and Opportunity
The formula that’s leading to big profits in wind energy is capacity plus opportunity.
Last year, US consumers, businesses, and electric utilities made big investments in wind energy in order to increase capacity.
Consumers and businesses invested $410 million to install 175 megawatts of wind turbines. And utilities invested a whopping $25 billion to install 13,000 megawatts of wind farms. That’s the largest new source of electricity.
Today the US has more than 60 gigawatts of wind energy capacity in operation.
Clearly, the uptick in wind energy investment and capacity is a step in the right direction. But it’s the opportunity for more growth that makes wind energy such a great investment.
According to the DOE, construction of wind energy needs to accelerate in order to meet their capacity outlook. But where will all of the new wind energy facilities be built?
In a word, offshore. Recently the Department of Interior announced it will auction off the rights to develop offshore wind energy facilities in federal waters off the coasts of Massachusetts and Rhode Island.
And this is only the beginning. In fact, the development of offshore wind energy hasn’t even started. The opportunity it provided will fuel a boom in the construction of wind turbines and the profits wind farms generate.
The First Trust Global Wind Energy (FAN) is a great way to get in on the explosive action in wind energy.
Fundamentals: A closer look at FAN
FAN holds 51 US and international stocks. The index is made up of 66.67% companies providing goods and services exclusively to the wind energy industry and 33.33% of companies with significant contributions to wind energy despite not being exclusive to the industry.
The expense ratio is 0.85%. But is capped at 0.60% until January 31, 2014.
Its current dividend yield is 1.82%.
The top five holdings and percentage weight for FAN are –
| Company Name | Ticker | % Weight |
| Nordex AG | NDX1.GY | 7.92% |
| Gamesa | GAM.SM | 7.60% |
| Vestas Wind Systems | VWS.DC | 7.37% |
| China Longyuan Power | 916.HW | 6.83% |
| Iberdrola | 1BE.SM | 6.81% |
Technicals: The charts lead the way
FAN is currently trading for $9.79. It’s up 60% from the 52-week low. And it has recently pulled back from a new 52-week high of $10.07.
As you can see, FAN has been in a strong uptrend. It’s steadily moving up and to the right. The green line represents a support zone of the line connecting the previous lows.
The surge higher over the last month in FAN was accompanied by a corresponding increase in volume. This is the type of bullish price action that can lead to huge gains in a relatively short period of time when confirmed with an increase in volume.
Trade Alert
Buy: First Trust ISE Global Wind Energy Index Fund (FAN) up to $11.00
Recent Price: $9.79
Price Target: $12.75
Stop Loss: $8.00
Remember: FAN has tremendous upside. But it could pull back to the support zone (green line on chart) before moving higher. Waiting for a pullback could juice up the returns but you could also miss out on this trade if FAN continues to surge higher.
Consumer stocks racked up solid gains in the second quarter while ignoring a series of weaker than expected retail sales reports. And the slightly better start to the third quarter for retail sales was met with widespread selling of consumer stocks.
Obviously, retail sales aren’t the only thing driving consumer stocks. Or it could be the overall shift in investor sentiment toward US stocks is taking a toll on consumer stocks.
Our iShares US Home Construction ETF (ITB) has taken a big hit from the weakness in consumer stocks. Obviously, investors have taken some profits in homebuilder stocks after a big run over the last few years. But the selloff seems overdone to me. The fundamentals of the US housing market and new builds in particular indicate there’s still plenty of upside.
Consumer Staples (-2.9%)
Consumer and defensive stocks have taken a back seat to cyclical stocks over the last few weeks. That typically bodes well for stocks. But it will also leave consumer staples stocks in a rough spot. I’m steering clear of this sector for now.
Energy (-0.7%)
Energy stocks slipped modestly lower over the last month. The move is more than a little confusing considering the fact that WTIC oil prices are near their highs for the year.
Typically we’ll see energy stocks and oil prices move in the same direction. The weakness of the massive energy companies, Exxon Mobil (XOM) and Chevron (CVX), has been a drag on the sector’s performance.
But energy is much more than just oil and gas… I’m recommending the First Trust Global Wind Energy ETF (FAN) this month… see Trade Alert for more details.
Financials (-2.1%)
Financials’ 2.1% loss over the last month was a sharp reversal from the big gains it had been racking up in the first half of the year. In fact, financial stocks provided the bullish leadership behind much of the market’s gains this year.
However, a slew of not-so-nice headlines about the banking industry have knocked the wind out the sector’s sails. The good news is, if banks can avoid making any more headlines, we could see financials resume their leadership role. Continue holding for bigger gains ahead.
Last month we recommended the First Trust NASDAQ ABA Community Bank Index Fund (QABA)… feel free to buy QABA while it’s below our $32.75 buy up to price.
Healthcare (-1.0%)
Healthcare stocks had a solid 2nd quarter earnings season. But nevertheless, healthcare stocks lost 1.0% over the last month. Our Health Care Select Sector SPDR (XLV) is down from the highs but still in a strong uptrend. Continue holding…
Industrials (+0.8%)
Industrial stocks were up last month as cyclical stocks took the lead from defensive and consumer stocks. The steady growth in the US, along with the end of the recession in Europe and an uptick in Chinese growth, bodes well for global economic growth and the demand for industrial goods.
Our iShares Dow Jones US Industrial ETF (IYJ) is currently up more than 10%. And it should continue moving higher as expectations for global growth accelerate.
Technology (-0.6%)
Tech stocks and Apple (AAPL) in particular got a shot in the arm when activist investor, Carl Icahn, tweeted “We currently have a large position in APPLE. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come.”
Obviously it’s a good sign when the sector bellwether is on the upswing. The reigniting of AAPL should fuel more upside in tech.
The First Trust Internet Index Fund (FDN) hit our $51.00 price target on August 9th. That’s our cue to sell FDN to lock in a massive 32.8% gain! Congratulations to everyone on a successful trade. And don’t forget to email me at customerservice@hyperionfinancial.com to let me know how you did or if you had any problems.
Our other two technology ETFs, SOXX and RYT, are both up around 5% and should benefit from the acceleration of global growth. Continue holding…
Materials (+1.6%)
Last month I pointed out that the outlook for economic growth in Europe and China needed to improve in order for materials stocks to move higher.
Well, guess what? Materials stocks rebounded after the outlook for Europe’s economic growth improved and China’s imports surged higher.
Our Guggenheim Timber ETF (CUT) is back near its 52-week high. And we’re up more than 16% at this time. Continue holding for more upside.
Utilities (-4.4%)
Utilities sold off as investors dump dividend paying defensive stocks as the yield on Treasuries and other bonds rise. There’s no way around it, as interest rates rise, dividends must go up or the price of the stock must come down. And right now, utilities don’t have the earnings power to juice up dividends. So that means there’s still more pain in the future for utilities.
- This month we’re buying FAN.
- Sell FDN for a gain of 32.8%.
Category: SET Monthly Issues
