SET Monthly Issue December 2015

| December 15, 2015

Ready Or Not – Higher Interest Rates Are Coming 

The Fed is poised to end its zero-interest-rate policy (ZIRP) this week.  This policy has been in place since the 2008 financial crisis.

Under ZIRP, the Fed has kept interest rates near 0% and used periods of quantitative easing or bond buying to help boost asset prices and economic growth.

This has been a true test of the effectiveness of monetary policy in the face of economic crisis.

There have been some side-effects like excessive risk taking in asset markets and growing income inequality between the rich and poor.

But overall the policy has been a success.  Since 2009, the US economy has created more jobs than every other advanced economy combined!

And that’s been accomplished without much help from fiscal stimulus that is controlled by politicians in Washington.

As we start down the path of the first interest rate hiking cycle in nearly a decade, there will be opportunity and pitfalls.

This is no ordinary rate cycle… 

The early stages of the cycle are simply normalizing rates.  There is no precedent for what this means because the US has never maintained a ZIRP for this duration or in this way before.

All signs point to the Fed increasing rates gradually.  Interest rates will still be below historic averages for some time.

Keep in mind, the economy must continue to grow and strengthen in order for the Fed to continue raising interest rates.

The best opportunities will come from sectors with well-capitalized companies.  These companies have the potential to grow through a rising rate cycle.

Here’s one way you can profit from it…

Trade Alert: The Internet Of Things

The “Internet of Things” (IoT) is the network of physical objects embedded with electronics, software, sensors, and connectivity to the internet.  This enables the objects to collect and exchange data.

The Internet of Things allows objects to be sensed and controlled remotely across existing network infrastructure.  This creates opportunities for more direct integration between the physical world and computer-based systems,

Macro/Economic Trend:  A Disruptive Technology

A disruptive technology is an innovation that creates a new market.  It disrupts existing markets.  It displaces established market leaders and changes the competitive landscape.

Think about the first automobiles.  When they were first invented, they were a luxury item that few could afford.  This innovation didn’t disrupt the existing transportation market.

But when the Ford Model T was introduced in 1908, it changed the transportation market because it was low cost and affordable to the masses.  The Model T was a disruptive technology that changed the world.  But it didn’t happen until 30 years or so after the automobile was invented.

Now the IoT is progressing down the path toward becoming a disruptive technology nearly 20 years since the term was first coined in the mid-1990s.

IoT is one of the most talked-about trends in business and is a disruptive technology that is changing the way companies do business and they way people live their lives.

The expansion of IoT is predicted to accelerate over the next decade as the number of connected things grows and the amount of data mushrooms.

In other words, internet companies have only scratched the surface of the impact they will have on society, business, and the economy.

I’m recommending the First Trust Dow Jones Internet Index Fund $FDN.

Fundamentals:  A closer look at FDN

FDN tracks an index of internet stocks.  In order to be included in the index, a company must be in the Dow Jones US Index and generate at least 50% of its annual sales or revenues from the Internet.  It currently holds 41 stocks that are weighted according to market-capitalization.  It has an expense ratio is 0.57%.

The top five holdings and percentage weight for FDN are –

Company Name Ticker % Weight AMZN 11.55%
Facebook FB 10.35%
Netflix NFLX 5.65%
Alphabet Class A GOOGL 5.40%
Alphabet Class C GOOG 5.36%

Technicals:  The charts lead the way 

FDN is currently trading for $75.17.   It’s 3.7% below the 52-week high and up 21.1% over the last year.

First Trust Dow Jones Internet Index Fund

FDN has several bullish indicators.  It is above the 50-day and 200-day moving averages.  It is in a bullish uptrend with higher highs and higher lows.

The recent 3% pullback from the highs represents a good buying opportunity.  In the past, we have seen FDN find support on pullbacks of this magnitude.  Then the stock goes onto make new highs on a consistent basis.

Trade Alert

BuyFirst Trust Dow Jones Internet Index Fund $FDN up to $78.00

Recent Price: $75.17

Price Target: $90.00

Stop Loss:  $65.00

Remember:  Internet stocks have enjoyed a profitable year.  This disruptive force is building momentum and should continue to lead the market higher in 2016.

Sector Snapshots

Consumer Discretionary (-0.3%)

Consumer discretionary found themselves lower by 0.3% over the last month.  But we saw strength in retail stocks.  Our Market Vectors Retail ETF $RTH reached a high of $79.79… a gain of 6.4% from where we recommended it.  It is currently trading at $78.61 or a gain of 4.8% and above our $77.50 buy up to price.  The Santa Claus rally usually kicks into high gear during the last few weeks of the year.  Continue holding.

Consumer Staples (+2.7%)

Consumer staples reversed course over the last month.  The 2.7% gain erased the 2.4% drop over the previous month.  The outperformance of staples relative to cyclical consumer stocks is typically a sign that investors are avoiding risk.  We’ll keep an eye on this trend to see if it continues.

Energy (-10.9%)

The energy sector took a step back as oil prices fell to their lowest levels of the year following the recent OPEC meeting.  Oil production is set to drop dramatically next year.  We’re even seeing the potential for the US to lift the 40-year old ban on oil exports.

Our Vanguard Energy ETF $VDE is down following the drop in oil prices.  I believe that VDE represents a great value at the current price.  I believe there will be a major turnaround for energy stocks sometime in coming months.  I may have been too early to this trade.  If the market for energy stocks continues to deteriorate, we’ll have no choice but to cut this ETF loose if it closes below our $82.50 stop loss.

Financials (-2.9%)

Financials retreated last month.  The 2.9% drop erased the 2.9% gain from the previous month.  Financials are one sector that typically performs well in a rising interest rate environment.  I want to see how the market responds to the first rate hike before proclaiming financials are a good investment… but they’re certainly on my radar.

Healthcare (+0.5%)

Healthcare stocks strung together two months of gains in row.  The impact of the negative news from excessive price increases in the drug industry is beginning to wane.

Our ALPS Medical Breakthroughs ETF $SBIO is still stuck below technical resistance of the downtrend from the July peak. All signs point to the continuation of the bullish reversal off the October lows.  But it needs to break through this downtrend in order to continue moving higher.

Our iShares US Medical Devices ETF $IHI is showing relative strength to the S&P 500.  The gains have been bigger on good days and the losses have been smaller on bad days.  That’s a good indication that IHI should be among the leaders if a Santa Claus rally materializes in the weeks ahead.

Industrials (-2.6%)

Industrials stocks’ 2.6% loss was another lackluster month.  Big industrial companies are having a difficult time navigating the uncertain global economy.  One big industrial company, 3M $MMM, just cut their 2015 earnings forecast and guided below estimates for 2016.  Needless to say, there are strong headwinds for industrials.

Technology (+0.3%)

Technology stocks moved up 0.3% over the last month.  The sector is poised to be among the market leaders in 2016 as disruptive technology transforms the market landscape.  We’re recommending the First Trust Dow Jones Internet Index Fund $FDN… see page 4 for more details.

Our PureFunds ISE Cyber Security ETF $HACK has been disappointing.  But it represents one of the most intriguing investments of 2016 along with other internet stocks.

Materials (-3.6%)

Materials stocks are down 3.6% over the last month.  The drop erased the gains from the previous month.  And it is now in danger of retesting the recent lows.  The sluggish global economy, strong US Dollar, and weak oil prices are clearly weighing on this sector.  But a true turnaround is still out of reach for the materials sector.

Utilities (-2.9%)

Utilities retreated 2.9% over the last month as investors prepare for the Fed to raise interest rates.  Our Utilities Select Sector SPDR $XLU is up 2.5%.  I think the selloff in utilities has been overdone.  Remember, the early stages of this interest rate cycle are about normalizing interest rates.  The sector will continue to provide attractive income for years to come as the Fed gradually raises interest rates.  Continue holding.

Portfolio Changes

  • This month we’re buying FDN.

Category: SET Monthly Issues

About the Author ()

Comments are closed.