SET Monthly Issue August 2015
Defending The Internet From Cyberattacks
So far the summer of 2015 has been a forgettable one for US stocks. Right now the S&P 500 is up a paltry 3.4% year-to-date.
Over the last six months, the large cap index has gyrated up 1%… down 1%… up 2%… down 2%… and going nowhere fast.
What’s more, we’re no longer seeing all sectors moving higher simultaneously. There have been individual pockets of strength and weakness among the sectors.
Healthcare and consumer discretionary have generally been the strongest sectors, while the energy sector has been the weak link thanks to falling oil prices.
More than anything, there’s nothing for investors to be excited about. And the latest economic data did little to change that.
Don’t get me wrong, there are some good things happening in the economy. US consumers are as healthy as they have been in a decade. The jobs market, retail sales, and housing all reflect the slow and steady growth of the US economy.
But those strengths are offset by concerns about a slowdown in worker productivity, slowing Chinese economic growth, a strong US Dollar, falling oil and commodity prices, and the lack of private and public investment in future growth.
Needless to say, finding the right themes and investments is more critical today than it has been at any other times of the current bull market. One theme that’s more important than ever is the growing threat from cyber attacks.
Trade Alert: Cyber Threats Are Big Business
Today’s world is more connected and convenient than ever before. Everything from mobile devices, cars, homes, businesses, and governments are connected online and that data is stored or backed up in the cloud.
These technological advancements have made life and doing business easier or better for those that use them. But they also come with the added risk and vulnerability to cyber attacks.
Now more than ever, cyber security is the top priority of individuals, businesses, and governments alike.
Macro/Economic Trend: Cybersecurity is the #1 risk
Cyber threats come is all shapes and sizes. They range from simplistic password fraud to ransomeware and complex Distributed Denial of Service (DDoS) attacks.
In a recent ‘State of The Internet’ report from Akamai $AKAM, they found that DDoS attacks hit a record high in the second quarter of 2015. The volume of attacks grew by 132% year-over-year and 7% since the first quarter.
You can check out the DDoS attacks happening right now at www.digitalattackmap.com.
Another study finds that it takes an average of ten hours before a company can even begin to resolve a DDoS attack. And those outages cost a company an average of $100,000 per hour.
In short, a DDoS attack can easily cost an internet-reliant company $1 million before the company even starts to mitigate the attack!
But the monetary value is secondary according to www.cybersecurityindex.org. The biggest threat to businesses and governments is media & public perception.
In other words, businesses don’t really care about keeping your personal information safe. They care about the bad publicity that comes along with a cyber attack. They don’t want to lose future customers because they get blasted in the media for their lack of effort to protect their information.
There’s no doubt about it, governments and businesses are spending more and more money to prevent cyber attacks. And that’s a boon for cybersecurity companies… regardless of the motivation behind the spending.
I’m recommending the PureFunds ISE Cyber Security ETF $HACK to get exposure to public companies that are reaping the rewards of increased spending on cyber security.
Fundamentals: A closer look at HACK
HACK launched on November 12, 2014. It tracks the ISE Cyber Security Index. It includes companies that provide cyber security related hardware/software and services.
It currently holds 33 US and international stocks. It has an expense ratio is 0.75%.
The top five holdings and percentage weight for HACK are –
| Company Name | Ticker | % Weight | ||||
| Fortinet | FTNT | 4.98% | ||||
| Proofpoint | PFPT | 4.54% | ||||
| Palo Alto Networks | PANW | 4.54% | ||||
| Science Applications Inter | SAIC | 4.52% | ||||
| Trend Micro | TMICF | 4.50% | ||||
| 8/4/15 | ||||||
Technicals: The charts lead the way
HACK is currently trading for $30.06. It’s up 13.5% year-to-date. But it has also pulled back 12.5% from the 52-week high of $33.91.
The recent pullback found support around $29.00 and HACK is beginning to move higher once again. I believe this pullback is a great buying opportunity.
Trade Alert
Buy: PureFunds ISE Cyber Security ETF $HACK up to $32.00
Recent Price: $30.06
Price Target: $50.00
Stop Loss: $25.00
Remember: HACK is focused on a very specific industry within the broader technology sector. That makes it susceptible to bigger moves than other more diversified ETFs. That cuts both ways… I believe HACK is positioned to make a big move to the upside after the recent pullback.
Sector Snapshots
Consumer Discretionary (-0.1%)
Consumer discretionary stocks were flat over the last month. Retail sales and housing data came in better than expected in July.
Not much change with our Market Vectors Gaming ETF $BJK. The hard landing for China’s economy has hurt gaming profits in Macau. I’m looking for a bounce in the next few months. Continue holding.
Our PowerShares S&P SmallCap Consumer Discretionary Portfolio $PSCD has been caught up in the general de-risking of investor portfolios over the last few months. Nevertheless, PSCD offers upside based on a healthy US consumer. Continue holding.
Consumer Staples (+0.1%)
Consumer staples were also flat. Improvement is the health of the US consumer is a positive but the strength of the US Dollar and weakness in China is a headwind.
Energy (-2.8%)
The energy sector is down another 2.8% over the last month. The junk bond markets are pricing in a massive wave of defaults on debt issued by energy companies. There’s still more pain in store for the sector.
Financials (-0.5%)
Financials held up better than the overall market thanks to upbeat quarterly earnings. Our Financial Select Sector SPDR Fund $XLF is up 20%. Financial are having a hard time building on the positive quarter. Let’s take these profits off the table. Sell XLF now for a gain of 20%.
Healthcare (-1.4%)
Healthcare stocks slipped 1.4% lower over the last month. Not even the strongest sector could buck the overall weakness in the market.
Biotech stocks endured a pullback as traders took profits and investors rotated into less risky sectors. The pullback in ALPS Medical Breakthroughs ETF $SBIO is a great buying opportunity. Continue to build your position in SBIO.
Our iShares US Medical Devices ETF $IHI is looking good. It’s up 2.5% over the last month and 8.2% since we recommended buying it. The recent breakout should set the stage for the next leg higher. Continue holding.
Industrials (-0.5%)
Industrials have been a mixed bag. There have been pockets of good performance but it has always been accompanied by weakness in others.
One area of strength is the airlines that continue to benefit from strong demand and lower fuel costs. Our US Global Jets ETF $JETS made a high of $25.13 this week. That’s a 12.2% gain in a few short months. Continue holding.
Technology (-2.3%)
Technology has been a mixed bag… but overall it was down 2.3% in the last month.
Our Market Vectors Semiconductor ETF $SMH hasn’t done well since the announcement of a few big mergers in late May. This is the calm before the storm of the next product cycle. Continue holding.
Our First Trust NASDAQ-100 Technology Sector Index Fund $QTEC is all about big tech companies. It failed to break out above resistance at $45.00. Since then, it drifted back to support near $41.00. It’s beginning to move higher again over the last week. Continue holding for the breakout above $45.00.
Outside of Facebook $FB, the social media industry is a mess. And after the latest round of quarterly earnings reports, I’ve lost faith in any social media besides Facebook. The issues of revenue streams, costs, and profitability are all too real for social media companies right now. It’s time to sell our Global X Social Media Index ETF $SOCL as these issues mount.
Materials (-3.1%)
Materials took another 3.1% nosedive as the strong US Dollar, weak commodity prices, and weakness in China contribute to a toxic environment for materials stocks.
Utilities (+6.2%)
Utilities benefited from the flight to safety over the last month. The 6.2% gain for the defensive utilities sector doesn’t bode well for the rest of the market.
Portfolio Changes
- This month we’re buying HACK.
- Sell XLF for a gain of 20%.
- Sell SOCL for a 2% loss.
Category: SET Monthly Issues
