SET Monthly Issue December 2009

| December 15, 2009

December 2009


As 2009 comes to a close, I want to wish you and your family happy holidays and a successful New Year.

The three major indexes (Dow, S&P 500, and NASDAQ) are all rallying to new highs in the last month.

The S&P 500 is hitting resistance at the 200-week moving average.  200 period moving averages are often “brick walls” or heavy technical resistance levels.  It usually takes more than one attempt to break through, so expect some volatility over the next few weeks as the bulls and bears battle it out.

The Dow and S&P 500 both have moved above their long term downtrend lines.  That makes the uptrend since March the new dominant trend.  That’s a good sign the rally still has legs.

Now let’s turn our attention to the economic data.

Wholesale inventories turned positive for the first time in over a year.  The inventory restocking we were expecting has finally materialized.

And consumers made a strong showing this month too.  Retail sales outpaced expectations increasing by 1.3%.  Consumer confidence spiked to a new high as well. This tells me current estimates for economic growth may still be too conservative.

The recent rally has sent two of our ETFs to our price targets:

    • SPDR S&P Semiconductor ETF (XSD) hit $45.13 on December 12th for a 55% gain!


  • SPDR S&P Metals and Mining ETF (XME) hit $51.16 on December 2nd for a 31% gain!

Everyone should have sold their open positions.  If you missed the inter-day move, go ahead and lock-in your gains now.

Here’s a quick recap of our six positions we closed out in 2009.  Gains on these trades were 2%, 24%, 27%, 35%, 31%, and 55%!  Not a bad run… I’m expecting even better results in 2010.


Moving goods and people from point A to point B is a major component of the US economy.  Transportation accounts for around 10% of the US GDP.  The industry employs millions of workers while consuming materials and services from other sectors of the economy.

A sector with such a broad reach is vital to a healthy economy.

Thanks to the recent economic recovery, the environment for the freight component of the transports is improving by leaps and bounds.

In fact, the sector’s future prospects are so bright the legendary investor and CEO ofBerkshire Hathaway (BRK.A), Warren Buffet, is buying a railroad.  Berkshire Hathaway is buying Burlington Northern Santa Fe (BNI) for $100 per share.  A 31% premium to what the stock was trading at before the deal was announced.

Clearly, Mr. Buffet sees a lot of value in this sector.

Macro/Economic Trend:  Planes, Trains, and Automobiles

The 1987 movie Planes, Trains, and Automobiles starring Steve Martin and John Candy is a classic comedy in my book.  I love the scene where they’re driving the wrong way down the interstate.

When another driver tries to alert them they’re on the wrong side of the highway, Steve Martin’s character says, “He says we’re going the wrong way…”  To which John Candy’s character responded, “Oh, he’s drunk.  How would he know where we’re going?”  Classic…

While John and Steve may have been confused over their direction, it’s pretty clear where the Planes, Trains, and Automobiles (at least the freight trucks) sector is going…FedEx (FDX) is the proverbial canary in the coal mine in the overnight and freight business.  The company is seeing “better-than-expected growth in FedEx International Priority and FedEx Ground volumes”.  It’s a good sign of things to come…

The trend of increasing volumes should continue across the entire sector as the economy recovers.  As volumes increase, so should earnings.  The prospect of higher future earnings should make the transports one of the best performing sectors in the weeks and months ahead.

The ETF I like to profit from this trend is the iShares Dow Jones Transportation Average Index Fund (IYT).

Fundamentals:  A closer look at IYT

IYT holds 21 companies engaged in the transportation sector including railroads, delivery services, trucking, shipping, and airlines.

The expense ratio is 0.48%.

The top five holdings and percentage weight for IYT are –

Company Name Ticker % Weight
Burlington Northern BNI 12.83%
FEDEX FDX 11.26%
Union Pacific UNP 8.24%
United Parcel Service UPS 7.82%
C.H. Robinson Worldwide CHRW 6.41%

Strength in the transportation sector is being supported by improving economic fundamentals.

Right now, important economic data points like retail sales, wholesale inventories, and consumer confidence are improving.

As consumers’ fears of job loss and economic uncertainty fade, they are returning to normal spending habits.  As more goods are purchased, the transportation sector will profit by delivering new goods to meet the growing demand.

Technicals:  The charts lead the way

IYT’s in a strong uptrend since bottoming in March.  In fact, it’s up 86%.  Far outpacing the S&P 500’s 63% gain over the same period.

Now, after consolidating below the $73 level for more than two months, IYT is breaking out to new highs.  The former resistance at $73 is now a support level.  And the uptrend is also indicating support around $73.  This convergence of multiple support levels should limit the downside risk.


The strong rally since the March bottom has erased 60% of the losses from the ’08 highs.  As the rally nears the 61.8% Fibonacci retracement, IYT could enter another short term consolidation before pushing higher again.

Trade Alert

Buy:  iShares Dow Jones Transportation Average Index Fund (IYT) up to $78.00
Recent Price:  $75.13
Price Target:  $90.00
Stop Loss:  $68.00

Remember:  IYT’s tied to investors’ expectations of economic recovery.  If the economic indicators show the recovery is stalling, IYT will too.  But right now all signs point toward improving economic conditions.  IYT should continue to stair step its way higher.


The relative safety and steady dividend income utilities provide makes them a defensive sector.  But that didn’t save them from the market crash of ’08.

In fact, utility stocks were cut in half between December ’07 and March ’09.  So much for being a safe haven.  However, the losses were considerably less than more economically sensitive stocks (like financials).

Since March, the utilities have struggled to rebound while the rest of the market screamed higher.

The albatross around the utilities neck is the climate change debate.  Proposed legislation to “cap & trade” carbon produced by the utilities was largely an unknown liability.

Now the largest emitter of carbon, American Electric Power (AEP) is saying their early experience with carbon capture has exceeded expectations.  The CEO of AEP recently said in a Wall Street Journal interview that “advances in technology will allow [AEP] to eliminate emissions from their coal fired power plants by 2025”.

And most importantly, they’ll still be able to produce electricity cheaper than next generation nuclear power plants.

The new found optimism about eliminating carbon emissions has lifted a dark cloud of uncertainty from the industry.

Macro/Economic Trend:  Zero Yield Environment

Investors have essentially driven treasury yields too low.  The real interest rate is near zero when adjusted for the rate of inflation.  It’s known as a zero yield environment.  So even in the event of an economic collapse, we’d need negative interest rates for treasuries to go up in price.  (And I just don’t see that happening any time soon.)

Investors are seeking higher yields outside of treasuries.  And as the economy stabilizes, utility dividends are a great source of yield in an environment where yield is difficult to find.

In fact, the dividend yield on utilities is higher than their bond yields.  Historically this indicates it’s a great time to buy utilities.  Right now, utility dividend yields are around 4% and government treasuries only yield 3.6%.  The ETF I’m going to recommend pays a higher yield and gives us the opportunity for growth!

One ETF well positioned to profit from investors seeking higher yields is the Utilities Select Sector SPDR Fund (XLU).

Fundamentals:  A closer look at XLU

XLU holds 35 U.S. based utility stocks.

The expense ratio is 0.21%.

And, the dividend yield is 3.97%.

The top five holdings and percentage weight for XLU are –

Company Name Ticker % Weight
Exelon EXC 9.08%
Southern Co SO 7.27%
Dominion Resources D 6.21%
FPL Group FPL 6.18%
Duke Energy DUK 5.69%

In the past few weeks, we’ve seen electricity production increase.  This is in large part due to increasing demand for industrial use.  This is traditionally a leading indicator for higher profits for the utilities.

Increasing electricity production and consumption is a trend that will continue as the economy recovers.

Technicals:  The charts lead the way

XLU was one of the best performing sector ETFs last week.  In other words, XLU’s showing relative strength.

Take a look at the weekly chart of XLU below.  You’ll notice how it recently broke through a key level of resistance (the blue line) thanks to its recent strength.


Large moves like this on strong volume are usually indicative of institutional buyers rotating into the sector.  This is looking like the leading edge of a big push higher for XLU.

Trade Alert

Buy:  Utilities Select Sector SPDR Fund (XLU) up to $33.00
Recent Price:  $31.97
Price Target:  $40.00
Stop Loss:  $28.00

Remember:  An ideal entry into XLU would be on a pullback near the breakout around $30.50.  If you don’t want to try to time a pullback, buying XLU under our buy up to price should still net a solid profit over the next few months when dividends are taken into consideration.


Consumer Discretionary (+2.5%)

The holiday shopping season’s off to a good start.  Retail sales are up 1.3% in November.  And the December Michigan Consumer Confidence came in better than expected.  I’m expecting a strong finish to the year as consumers’ pent up demand is unleashed.  And this should keep the sector moving higher in 2010.

The sector remains in a strong uptrend.  And it should continue to be one of the better performing sectors as the ‘V’ shaped recovery continues.

Consumer Staples (+1.0%)

The consumer staples sector continues its steady climb higher.  It’s supported by the same economic data driving the discretionary stocks.

As the economic recovery becomes more mature, the rapid market gains we saw for much of ’09 will slow.  This should cause the staples to begin to rise at a pace closer to the overall market in 2010.

Energy (-3.0%)

Oil’s run to $80 per barrel was short lived.  A barrel of crude oil has retreated back to support around $70.  The main catalyst has been the recent strength in the US Dollar.
Remember, as the US Dollar strengthens, commodities like oil become more expensive to foreign investors.  The longer term downtrend in the US Dollar is still intact.  When it resumes its march lower, we should see oil prices recover.

Financials (-1.8%)

More and more large financial institutions are repaying TARP money as we head into the end of the year.  It’s hard to believe all of them are out of the woods with so many bad loans on their books.  It’s more likely they’re repaying the loans so they can skirt the bonus restrictions the “Pay Czar” has imposed on them.

The financials saving grace in ’09 has been low interest rates.  And more importantly, the large spread between the short term rates they borrow at and the higher rates they lend money.  When the Fed raises interest rates, the spread will shrink and the banks will make less money.  The wild card is commercial real estate.  A big melt down could see a repeat of the credit crisis of ’08 (and leave the banks wishing they hadn’t repaid their bailout so quickly).

Healthcare (+5.2%)

The political debate on healthcare reform is still the dominate force in the sector. What will the final bill look like?  It’s still anybody’s guess.

Healthcare stocks remain one of the most undervalued sectors in the market.  Once healthcare reform has been settled, we could see specific industries within the sector rally.  I’m watching this one closely.

Industrials (+1.6%)

As the global economic recovery picks up steam, the industrials should continue to post solid gains.  At this point, it’s all about the pace of the recovery.  Growth estimates remain relatively conservative.  If the recovery proves to be more robust than expected, industrials should outperform other sectors.

We’re recommending the iShares Dow Jones Transportation Average Index Fund(IYT) to profit as the economy expands.  See Trade Alert 1 for more details…

Technology (+1.6%)

According to some analysts, growth in business investment in technology is now outpacing growth in total business investment.  It’s clear that businesses are focusing on driving productivity and cutting costs through the use of new technology.
However, the amount of money businesses are spending on tech is still well below average.  As spending returns to more normal levels, the sector should continue to outperform other sectors of the market.

Our SPDR S&P Semiconductor ETF (XSD) hit our price target for a 55% gain!Congratulations on a great trade!

Materials (+1.3%)

Recent strength in the US Dollar has dimmed gold and other basic materials luster.  But not before our SPDR S&P Metals and Mining ETF (XME) hit our price target for a 31% gain!

At this point, I’m still expecting the US Dollar to head lower.  This should get the materials moving higher again.

Utilities (+8.4%)

The tide is turning for the utilities.  This month we’re recommending the Utilities Select Sector SPDR Fund (XLU)… see Trade Alert 2 for more details.

Portfolio Changes

  • This month we’re buying IYT and XLU…
  • SPDR S&P Semiconductor ETF (XSD) hit our price target.  Sell for a 55% gain!
  • SPDR S&P Metals and Mining ETF (XME) hit our price target.  Sell for a 31% gain!


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