SET Monthly Issue February 2011

| February 15, 2011

February 2011


I’m starting to get a little uneasy…

Since the Fed first hinted at QE2 back in August, stocks have been trending steadily higher.

It’s shocking how the Fed has been able to lead the markets higher.  Ben Bernanke is a modern day Pied Piper.  He’s leading the rats – I mean investors – away with his magic pipe.

And no matter what happens, stocks continue their smooth and steady climb higher.

In just the last month, we’ve had a number of events that should have triggered a significant pullback.

The uprising in Egypt and the resignation of Hosni Mubarak… Inflation in emerging market economies… A global food crisis… Weak job growth… And that’s just to name a few…

But nothing can shake this rally because it’s not natural.  It’s the creation of the Fed.

Billions of dollars in treasury purchases are flooding the markets with liquidity.  And all that money has to go somewhere.  Right now developed markets, like the US and Europe, are the safest place to invest.

I think the QE2 induced rally will continue for at least a few more months.  But nobody really knows for sure…

And that’s what makes me so uneasy.

We’re really in unchartered territory.  We’ve never see the Fed expand its balance sheet to this size before.  So there’s no telling how or when this bull market will end.

Here’s what I’m looking at right now…

The Fed is committed to making more asset purchases through the end of the second quarter.  And I’m not about to fight the Fed.  So, despite any uneasiness, it’s best to stick with investments that are working.

Here’s the good news… This rally can continue beyond QE2.  The economy just needs to improve to the point where it doesn’t need government assistance.

That’s where the leading economic indicators come in.  They’re our best clue to gauging the economy’s ability to continue without government training wheels.

Right now the leading indicators are improving.  So, the economy should be stronger in six months than it is today.  It gives me hope this bull market will transform from one fueled by the Fed into one built on real economic progress.

So there you have it… The smooth rally continues to rack up gains and makes me uneasy.  But there’s no sense fighting the Fed.  So, I’m sticking with an investment that’s been working… Technology.


Investing in companies that produce breakthrough technologies is a great way to make money in any market.  Investors love driving these stocks into the stratosphere.

Most investors focus on the biggest tech firms.  Let’s face it, the big companies likeApple (AAPL) and Google (GOOG) get all the headlines.

But here’s the thing…

Most of the time, it’s the small, under-the-radar companies that make the technological breakthroughs.  It’s these small cap companies who develop game changing technologies.

That’s what makes investing in small cap technology stocks so exciting.  All a company needs is one breakthrough technology to drive their share price sky high.

Macro/Economic Trend:  Smartphone Revolution

The smartphone revolution is now in full swing.  But it’s still early in the game.  In other words, there’s still plenty of money to be made.

The smartphone industry is a beautiful example of profiting from breakthrough technology.  And the best part is the industry is still taking shape.

Every smartphone is a collective effort by many small cap technology companies. They make the touch screens, buttons, sensors, sounds, switches, batteries, semiconductors… And everything else smartphones need to work.

But here’s the best part…

There is no finish line for the smartphone revolution.  There’s no point where everyone will say, “That’s it… we’ve created the perfect smartphone.”

In fact, the industry is built around an upgrade cycle!  And consumers continually shell out big bucks for the latest and greatest technology.

The smartphone upgrade cycle is fueling a boom in small cap technology stocks unlike anything we’ve ever seen.  It’s a perfect storm for an entire industry to grow sales and earnings.

I’m sure you’ll agree the business model is a thing of beauty!

Remember, there’s no dominant player… There’s no finish line…

There’s only unlimited profit potential for small companies creating breakthrough technologies to fuel the upgrade cycle.

The ETF best positioned to profit from this never-ending cycle is the PowerShares S&P SmallCap Information Technology (XLKS).

Fundamentals:  A closer look at XLKS

XLKS is based on the S&P SmallCap 600 Capped Information Technology Index.  It holds 131 stocks.

The expense ratio is 0.29%.

The top five holdings and their percentage weightings are –

Company Name Ticker % Weight
Cypress Semiconductor CY 3.73%
Varian Semi. Equipment VSEA 3.35%
TriQuint Semiconductor TQNT 2.23%
Veeco Instruments VECO 1.97%
Wright Express WXS 1.93%

Technicals:  The charts lead the way

XLKS is on a roll right now.  Since the beginning of September, XLKS is up 50%.  That’s a huge gain any way you slice it!

Those huge gains translate into XLKS showing relative strength.  In other words, small cap technology stocks are racking up gains faster than other sectors.  And in a trending market like we have right now, the leading stocks should continue to lead.

XLKS hasn’t been below its 50-day moving average since September 1, 2010.  I’d say that qualifies as a strong uptrend!  And it’s showing no sign of slowing down.

As they say, the trend is your friend.  So let’s ride the strong uptrend in XLKS for a nice profit.


Trade Alert

Buy:  PowerShares S&P SmallCap Information Technology (XLKS) up to $33.00
Recent Price:  $32.11
Price Target:  $40.00
Stop Loss:  $25.50

Remember:  XLKS is benefiting from technology stocks growing their businesses by leaps and bounds.  Small cap technology stocks are one of the hottest sectors in the market.  And with the Fed fueling a stock market boom, the hottest sectors should continue to lead the markets higher.


Consumer Discretionary (+4.4%)

Consumer discretionary stocks shot up by more than 4% last month.

The US consumer continues to surprise analysts with their ability to buy stuff.  A feat that’s especially impressive in light of 9% unemployment.  Clearly the other 90% of people who are employed are not afraid to spend money.

And now we’re seeing improvement on the job front as well.  Initial jobless claims fell to 383,000 last week.  That’s their lowest level since July of 2008.  And it’s great news for consumer stocks.

Our position in iShares Dow Jones U.S. Consumer Services Sector Index Fund(IYC) blew through our $71 price target on Friday.  Everyone should be locking in their 21% gains!  Congratulations on another big winner.

Consumer Staples (+0.9%)

Consumer staples are back at their 2007 highs.  But they’re facing stiff resistance at these levels.  I don’t expect to see staples lead the market anytime soon.  Let’s steer clear for now…

Energy (+4.9%)

The unrest in Egypt is clearly impacting oil prices.  Initially, oil prices shot up to $92 per barrel as investors priced in a “fear premium”.  But since Egyptian President Hosni Mubarak resigned, oil prices have been trending down into the mid $80s.

Despite the fluctuation in crude oil prices, our PowerShares S&P SmallCap Energy Portfolio (XLES) continues to move higher.  Our peak gain is 33% so far.  XLES is turning into a huge winner for us. Continue holding XLES for further gains ahead.

Oil & gas companies aren’t the only ones benefiting from higher energy costs.  So are the alternative energy companies.  Our Market Vectors Global Alternative Energy ETF (GEX) is still in consolidation mode.  But I’m expecting a big move to the upside in the weeks ahead.

Financials (+2.2%)

Financial stocks continue to climb a wall of worry.  It’s easy to poke at the wounds leftover from the credit crisis.  But the reality is the financial sector is on the mend.
It’s become clear new regulations won’t crimp bank earnings as much as once feared. And M&A activity is heating up in the sector.

That’s great news for our SPDR KBW Bank ETF (KBE).  We hit a peak gain of nearly 22%.  But there’s still plenty of upside.  Hold tight for further gains ahead.

Our iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ) is off to a good start.  It’s closing in on our buy up to price.  So go ahead and pick up your shares under $41 if you haven’t already.

Healthcare (+0.6%)

Here’s a shocker… Healthcare stocks are lagging behind more economically sensitive sectors.

Here’s what’s surprising.  The biotech and pharmaceutical industries are now the lagging industries.  They had been the sector leaders for months.  Clearly, there is still plenty of uncertainty surrounding this sector.  I’m steering clear for now.

Industrials (+5.4%)

Industrials shot up another 5% this month.  The sector is being led higher by manufacturing companies.  Expanding production and tame inflation in the US is a great combination for surging profits.

Our iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ) has surged nearly 10% higher.  And our Market Vectors Agribusiness ETF (MOO) checks in with nearly a 13% gain!  Hold tight for bigger gains ahead.

Technology (+2.8%)

Tech stocks continue to post solid gains.

However, one thing is becoming clear.  The next generation of technology isn’t going to be powered by the same old players.  The old guard stocks like Intel (INTC),Microsoft (MSFT), and Cisco (CSCO) are being left behind.

Today’s technology is being fueled by small cap tech stocks.  That’s a trend I’m expecting to continue.  We’re recommending the PowerShares S&P SmallCap Information Technology (XLKS) this month… see the trade alert for more details.

Our iShares S&P North American Technology-Software Index Fund (IGV) is up 19%.  Software companies are looking good as the economic recovery picks up steam. Continue holding for bigger gains ahead.

Materials (+2.7%)

Basic materials stocks posted a solid 2.7% gain this month.  The players in industrial metals like steel and aluminum lead the gains.

Clearly, rising commodity prices are playing a large part in the sector’s success.  As the global economy strengthens, growing demand for commodities should continue to pressure commodity prices higher.

Our First Trust ISE Global Platinum Index Fund (PLTM) has a peak gain of 33%.  But it still has plenty of upside.  Platinum’s dual role as both a precious metal and an industrial metal should continue driving prices higher.

Utilities (+0.8%)

Investors are avoiding large cap utilities stocks like the plague.  However, the small and mid cap utilities are posting some nice gains.  But with QE2 juicing the market, this defensive sector seems to be the odd man out.  We’ll keep utilities stocks on the back burner for now.

Portfolio Changes

  • This month we’re buying XLKS.
  • Sell iShares Dow Jones U.S. Consumer Services Fund (IYC) for a 21% gain.


Category: SET Monthly Issues

About the Author ()

Comments are closed.