SET Monthly Issue August 2014

| August 19, 2014

August 2014


Stocks have endured a troublesome month filled with lots of noise about stock market bubbles, geopolitical violence, corporate profits, and the economy.

That noise triggered a 4.3% pullback in the S&P 500 from the all-time high of 1,991.

The recent weakness hasn’t snowballed into a major selloff like so many predicted.  In fact, the S&P has staged a strong rally over the last few weeks.

Today, the large cap index is quickly closing in on its all-time highs.

Investors that ignored the naysayers or bought the dip are once again being rewarded like they have so many times during the five year bull market.

It boils down to this… The economy is strong and inflation is tame.

The economy grew at an annualized pace of 4% in the second quarter.  Employers have added over 200,000 jobs per month every month for the last six months.

What’s more, the Fed’s favorite measure of inflation, the Consumer Price Index, shows inflation is running below 2% per year.

In short, there’s no sign of a recession or top in the business cycle.  And bull markets typically don’t end without a downturn in the economy.


Healthcare stocks have ignored all of the noise being created by world events over the last few months and continued to march higher.

The strong performance of this sector simply can’t be ignored.  The best part about it is healthcare has a number of important trends that have pushed the sector higher.

And these same trends should continue to push the sector higher going forward.

Macro/Economic Trend:  Six Trends Lifting Healthcare Stocks

Right now, a combination of six trends is helping to fuel the healthcare sectors bullish uptrend.

The first is a major demographic trend – an aging population.  As the baby boomer generation ages, they are spending more on healthcare.

Secondly, drug companies are in an era of major advancements.  Decades of research are bearing fruit in the form of new drugs and treatments.

Third, healthcare companies are rapidly expanding into emerging markets.  These new markets hold huge opportunities for growth.

Fourth is growth in healthcare spending in existing markets.  New data from the Altarum Institute shows spending on prescription drugs is growing at 4.8% per year.

Fifth, merger and acquisition activities are accelerating.  Big pharmaceutical companies are buying smaller ones for their pipeline of drugs.

We’re also seeing deals where two companies merge to cut overhead.  And we’re even seeing deals where companies are spinning off parts of their business.  These types of deals get investors attention and boost valuations.

The sixth and final reason is Obamacare… the influx of 10 million new patients with health insurance is just beginning to have an impact on earnings.

Typically a person with insurance spends twice as much as someone without health insurance on healthcare.  As the late enrollments and other newly insured people grow accustomed to having insurance, their spending habits should fall in line with historical spending patterns.

The ETF I like to profit from these power trends is the First Trust Health Care AlphaDEX Fund (FXH).

Fundamentals:  A closer look at FXH

FXH tracks the StrataQuant Health Care Index.  This index is designed to measure the stock performance of healthcare stocks in the Russell 1000.

It currently consists of 76 stocks. The expense ratio is 0.70%.

The top five holdings and percentage weight for FXH are –

Company Name Ticker % Weight
Mallinckrodt MNK 3.47%
HCA Holdings HCA 2.66%
Universal Health Services UHS 2.54%
Salix Pharmaceuticals SXLP 2.45%
Medivation MDVN 2.45%

Technicals:  The chart leads the way

FXH is currently trading for $55.20.  It’s up 14.87% year-to-date and 33.5% over the last year.  It’s currently breaking out to new all-time highs.


As you can see, FXH is in a powerful uptrend.  It has been above the 200-day moving average since the beginning of 2012.  And just broke out to a new 52-week high.

Trade Alert

Buy:  First Trust Health Care AlphaDEX Fund (FXH) up to $56.00
Recent Price:  $55.20
Price Target:  $65.00
Stop Loss:  $50.00

Remember:  FXH has proven it can continue moving higher despite the noise from world events and uncertainty.  The recent breakout to a new all-time high is a clear indication investors are bullish on healthcare stocks.

Consumer Discretionary (+0.8%)

The consumer discretionary sector added 0.8% over the last month and made a new high today.  It appears that consumer discretionary ETFs are beginning to regain some of the bullish momentum they had lost over the last few months.

One thing that’s helping the sector is investors are looking ahead to better retail numbers in the next few months.

PowerShares Dynamic Media Portfolio (PBS) is up 11%.  It has been on the upswing over the last three months.  But it’s still 5.5% below the 52-week high.  The impact of the $75 billion takeover offer from 21st Centrury Fox (FOXA) for Time Warner (TWX) that was ultimately pulled has created some volatility in the media ETF.  Nevertheless, PBS has outperformed the S&P 500 over the last few weeks. Continue holding.

PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) is another ETF trying to build on its recent bullish momentum.  We’ve seen fund flows into consumer discretionary ETFs accelerate over the last few weeks.  PEJ should benefit from the uptick in economic activity and the jobs it creates.  Continue holding.

Consumer Staples (-0.5%)

Consumer staples suffered through a rough month as it lost 0.5%.  Our First Trust Consumer Staples AlphaDEX Fund (FXG) wasn’t immune to the correction.  But it has rebounded nicely over the last week.  We’re currently up 13%. Continue holding.

Energy (-2.5%)

Energy stocks have pulled back as the price of crude oil has fallen below $95 per barrel for the first time since January.  Crude oil prices are being impacted by speculation that demand for oil is dropping given the recent rise in inventories.

Our Market Vectors Unconventional Oil & Gas ETF (FRAK) is now 7.8% below the 52-week high.  The correction is directly correlated to the drop in oil prices.  This should only be temporary… drilling and production activity in the US is still showing signs of strong growth.  The recent pullback should be viewed as a buying opportunity… Grab your shares up to $32.00.

Our Guggenheim Solar ETF (TAN) is back on the upswing after recent data showed demand for solar panels will outpace supply for the first time since 2006.  This is officially the end of the supply glut that derailed the industry two years ago.  Continue holding for more upside.

Our Morgan Stanley Cushing MLP Hi Income ETN (MLPY) has been a strong performer over the last several months.  We’re currently up 23% and closing in on our $21.00 price target.  Continue holding…

Financials (-0.1%)

Financials continue to battle headwinds from negative investor sentiment.  But the large financial institutions are beginning to regain some bullish momentum.

The Financial Select Sector SPDR Fund (XLF) is just below the 52-week high.  A breakout above this technical resistance level could trigger the next leg higher. Continue holding.

Healthcare (+2.1%)

Healthcare stocks added 2.1% over the last month.  The bullish uptrend in the sector is too strong to ignore… We’re recommending the First Trust Health Care AlphaDEX Fund (FXH) to capitalize on the bullish fundamentals and bullish technical setup… Trade Alert for more details.

Industrials (-1.0%)

Industrials have endured a volatile month.  The sector found itself down 8.2% below the 52-week high and below the 200-day moving average for the first time since November of 2012.  The sector was clearly impacted by the geopolitical events that threatened global economic growth.  But as those concerns have eased over the last week, the sector has staged a dramatic rally.

Our Guggenheim Shipping ETF (SEA) followed in line with the correction and rebound that hit the sector as a whole.  What’s more, the dry bulk shipping index has begun to rebound as I predicted when I recommended buying SEA in June.  Grab your shares up to $23.25.

Technology (+0.7%)

Tech stocks posted a 0.7% gain over the last month despite an increase in volatility. Technology has been one of the top performing sectors so far this year.  Our Global X Social Media Index ETF (SOCL) has shot out of the gate.  It is currently up 7% and above our $20.00 buy up to price.  Continue holding for bigger gains.

Materials (+0.8%)

Materials posted a 0.8% gain after a 1.5% gain the previous month.  The sector appears to be in the midst of a bearish to bullish reversal.

Our iShares MSCI Global Metals & Mining Producers (PICK) is currently up more than 8% but it pulled back 5% from the recent highs.  Chinese demand for iron ore increased 19% in the first half of 2014.  And all signs point toward an uptick in demand during the second half of the year as well.  Continue holding…

Utilities (-2.0%)

Utilities stocks suffered through a 2% drop over the last month.  The weak performance has led investors to pull more than a $1 billion out of ETFs holding utilities in the last week.  The odds favor a deeper correction for this safe haven.

Portfolio Changes

  • This month we’re buying FXH.
  • Move SOCL from Buy to Hold.
  • Move FRAK from Hold to Buy.


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