SET Monthly Issue February 2013

| February 19, 2013

February 2013


As we kick off this President’s Day shortened week, the S&P is riding a seven-week winning streak.  An impressive run to be sure…

Investors everywhere are wondering if this will be the eighth week of the rally or the start of a correction.

Over the last few weeks, investor sentiment has taken a turn for the worse.  More and more investors are becoming bearish on the market in the short term.

And for good reason…

The seven-week winning streak has pushed the majority of sectors into overbought territory.  In fact, it’s not unusual for stocks to go through a cooling off period after a big rally.

This period of market correction can take place by time or price.  In other words, stocks can simply trade sideways for a period of time or they can move lower in price until they’re no longer overbought.

But here’s the thing…

Just because a stock or sector is overbought doesn’t mean a correction is imminent. They can remain overbought for long periods of time before they correct.

It appears the S&P will continue to plow its way higher until it tests the all-time high of 1,576.  That’s reason enough to be bullish on this months ETFs!


I’m sure you’re aware industrial production is a key driver of economic growth.  And even though the US is largely a service economy, small changes in industrial production can send ripples through the entire economy.

And the 200,000 or so mid-size US businesses with annual revenues between $10 million and $1 billion are ripe to fuel a rebound in industrial production.

Macro/Economic Trend:  Business Spending Not As Bad As Expected

Right now, industrial companies are in the sweet spot to outperform expectations.

It’s simple really… investors are afraid companies aren’t going to invest in their businesses.  And the lack of business investment will be a drag on GDP and the entire industrial sector.

To make matters worse, recent data from the Commerce Department seems to confirm those fears.  The report shows factory orders were weaker than expected in December.

Here’s the thing, December was wrought with fears about the fiscal cliff.  So it’s not surprising to see some data come in weaker than expected.

Simply put, I think December’s data was thrown off by fears of the fiscal cliff and not a true gage of the strength of the recovery in industrial production.

According to new data, mid-sized businesses are planning to ramp capital expenditures on things like buildings and equipment.  They’re revamping stores and factories and even investing energy efficient technologies.

In short, I’m expecting mid-sized businesses to fuel a massive surge in industrial production in the weeks and months ahead.  And one ETF I like to profit from surging industrial output is the iShares U.S. Industrial ETF (IYJ).

Fundamentals:  A closer look at IYJ

IYJ tracks the Dow Jones Industrial index.  It currently has 230 stock holdings.

The expense ratio is 0.46%.  And it has an annual dividend yield of 1.57%.

Currently, the top five holdings and percentage weight for IYJ are –

Company Name Ticker % Weight
General Electric GE 11.85%
United Technologies UTX 3.71%
3M MMM 3.19%
Union Pacific UNP 3.12%
Caterpillar CAT 3.03%

Technicals:  The charts lead the way

IYJ broke out above resistance between $71 and $72 to start 2013.  And after a brief pullback, the ETF has raced up to nearly $80 per share.


As you can see IYJ is in a strong uptrend (green line).  And there’s clearly a lot of bullish momentum fueling this rally.

However, it’s important to note IYJ recently broke through the all-time high of around $78.  So it wouldn’t be surprising to see IYJ pullback to test this old resistance level before pushing higher.

A nice thing about an ETF that’s reaching new all-time highs is there’s no technical resistance from sellers who were trapped in the ETF the last time it was at this price.

Trade Alert

Buy:  iShares U.S. Industrial ETF (IYJ) up to $81.00
Recent Price:  $79.85
Price Target:  $90.00
Stop Loss:  $70.00

Remember:  IYJ is in a strong uptrend and recently broke out to a new all-time high. It appears to be on the fast track to racing up to around $90.  But you might want to wait for a pullback to around $78.00 before pulling the trigger on this trade.


There’s no doubt about it – semiconductor stocks had a rough 2012.

The main culprit was weak PC sales that hurt demand for the suppliers of all the parts used in computers.  And semiconductors were no exception…

The slowdown in PC sales isn’t likely to change anytime soon.  After all, mobile computing devices like tablets and smartphones are still the hot items.

But there’s reason to believe chip makers could rebound in 2013.

Macro/Economic Trend:  Ride The Cycle Higher

First off, the semiconductor business is cyclical.  It’s just the nature of the industry.

The business ebbs and flows along with macroeconomic trends, product cycles, and seasonal effects.  But demand for semiconductors has never gone down and stayed down for very long when the overall economy is growing.

What’s more, there are a number of catalysts that could drive revenues through the roof even as declining PC sales continue to be a drag on the industry.

Look, it’s not rocket science – chip makers are adapting to the new environment. They’re finding huge potential in autos and industrial equipment, as well as smartphones and tablets.

And an easy way to get exposure to chipmakers is the iShares Semiconductor ETF(SOXX).

Fundamentals:  A closer look at SOXX

SOXX is an ETF seeking to replicate the performance of the Philadelphia PHLX Semiconductor Sector Index.  The ETF holds 31 semiconductor stocks.

The expense ratio is 0.48%. And the dividend yield is 1.15%.

The top five holdings and percentage weight for SOXX are –

Company Name Ticker % Weight
Applied Materials AMAT 8.47%
Texas Instruments TXN 7.93%
Intel INTC 7.61%
Taiwan Semi TSM 7.47%
Broadcom BRCM 7.40%

Technicals:  The charts lead the way

Obviously, the best time to invest in the cyclical stocks is when they’re near a bottom in the cycle and the stocks are cheap.  But trying to call the exact bottom can be risky!

It’s often safer to wait for the ETF to put in a bottom and then catch the ETF once it’s established a new uptrend.  And I think we’re catching SOXX at one of those times.


The ETF has gone through a long period of correction and consolidation.  Then it recently broke out to the upside of the downtrend line that had been in place since early 2011.

In short, I think this should fuel significant upside in SOXX in the weeks ahead.

Trade Alert

Buy:  iShares Semiconductor ETF (SOXX) up to $60.25
Recent Price:  $58.28
Price Target:  $70.00
Stop Loss:  $50.00

Remember:  SOXX is breaking out of a multiyear consolidation pattern.  And it should make a run at the 2007 highs around $70 in the weeks and months ahead.


Consumer Discretionary (+4.0%)

Online shopping and monetizing mobile internet continue to be the hot button issue for consumer retailers.  That’s great news for our First Trust Internet Index Fund(FDN). FDN hit a new high of $43.62.  We’re currently up more than 13% on this trade.  And with holdings like Google (GOOG) that are on quite a roll, FDN should keep moving toward our lofty $51.00 price target.

Consumer Staples (+4.4%)

We sold our shares of Consumer Staples Select Sector SPDR (XLP) for a nice gain in our mid-month update.  And even though the sector has continued to move higher, I think we made the right decision.  At this point, the sector is overstretched to the upside and due for a correction.  We’ll look to get back into XLP down the road when the stocks aren’t as richly valued.

Energy (+6.6%)

The entire energy sector has been on fire lately. In just the last two months, the energy sector has soared 11% higher.  The glut of domestic oil production and high worldwide gasoline prices is a boon for US refiners.  It will be interesting to see if the White House steps in to put an end to rising prices at the pump.  Obviously, adding new refining capacity would help solve the problem.  But it’s not easy gaining regulatory approval to build refiners these days.

Our SPDR S&P Oil & Gas Equipment & Services ETF (XES) exploded to the upside. And it blew right by our $40 price target last week.  That’s our cue to sell. Congratulations to everyone who locked in gains of up to 20%.

We’ll give this sector a chance to cool off and look to get back in down the road.

Financials (+4.1%)

Financials are moving higher as well.  The combination of global economic stability along with stock buybacks should fuel strong bank earnings growth this year.  OurSPDR S&P Bank ETF (KBE) is now up more than 10% to around $26.25 per share. Continue holding for bigger gains ahead.

Healthcare (+3.8%)

As investors pour more and more money into equities… it’s fueling a market wide rally that helped lift healthcare stocks 3.8% in the last month.  But the sequester on Federal Spending will likely cut into Medicare payments to healthcare providers.

Our First Trust NYSE Arca Biotechnology Index Fund (FBT) hit a new high of $50.77.  That’s a solid 11.9% gain and it’s well on its way to our $53.00 price target. Continue holding for bigger gains ahead.

Industrials (+4.6%)

Industrial stocks are kicking it into high gear.  And we’re recommending the iShares U.S. Industrial ETF (IYJ) to get in on the action… see Trade Alert 1 for more details.

Technology (+1.3%)

The much beleaguered tech bellwether, Apple (AAPL), just can’t catch a break.  The stock is now down more than 30% from the peak… and could be heading lower still!
Despite these headwinds, the tech sector still managed to eke out a small 1.3% gain in the last month.  In fact, outside of AAPL, the tech sector is looking ripe for a comeback.

And the iShares Semiconductor ETF (SOXX) gives us a great way to profit from the coming rebound in semiconductor stocks… see Trade Alert 2 for more details.

Materials (+0.8%)

The rally in materials stocks and our iShares Basic Materials ETF (IYM) ran out of gas as it approached a key technical resistance level around $73.00.  But this should only be a temporary setback.

The entire sector is now in a strong uptrend and has cleared many technical hurdles in the last few months.  Once IYM clears $74.00, it should be on the fast track to the 2011 highs.

Our homebuilding ETFs have backed off their recent highs a bit.  There’s been some noise in the housing data but the fact is housing is on the upswing.  And it should fuel bigger gains in the Guggenheim Timber ETF (CUT) and the iShares US Home Construction ETF (ITB). Continue holding for bigger gains ahead.

Utilities (+3.9%)

Utilities surged nearly 4% over the last month.  But the sector is now running into technical resistance.  And the truth is there isn’t anything coming down the pipe that could fuel a rally much beyond these levels.  I’m steering clear of this sector for now.

Portfolio Changes

  • This month we’re buying IYJ and SOXX.
  • Sell XES for gains of 20%!
  • Move ITB to hold.


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