SET Monthly Issue February 2015

| February 17, 2015

February 2015


After a slow start to the year for stocks, the S&P 500 made its first new high of the year last week.

The uptick in stock prices was accompanied by an uptick in oil prices and a decrease in uncertainty.

Not surprisingly, the number of investors that are bullish on stocks grew and indicators show that greed is the dominant emotion driving the market.

In other words… it was an old fashioned ‘risk on’ week for stocks.

The way I see it, many investors are waking up to the fact that their concerns about the global economy are overblown.

As a result, we saw money flowing out of safe haven assets, like fixed income and utilities, and into other sectors that will benefit from economic growth.

However, there are still plenty of potential landmines out there that could serve as headwinds for stocks.

There’s still a lot of uncertainty in the energy space.  The fracking bust in the US is going to take a toll on the economy.

One thing’s for sure, a 34% drop in the US oil rig count is going to put a lot of people with high paying oil industry jobs out on the streets.

This will have the biggest impact on the economies of Texas and North Dakota that have boomed in recent years as US oil production ramped up.

The fallout could easily spread into other industries, like homebuilding, that have focused their business in these areas.

Remember, there’s always something creating uncertainty.  We just have to manage our way through it and position ourselves to benefit from it when those fears begin to fade.


Health care spending accounts for a whopping 17.4% of the US economy.

It’s the largest industry in the nation and health care spending grew 5% in 2014. That’s faster than inflation and wage growth.

Macro/Economic Trend:  Unsustainable Healthcare

The soaring cost of health care prompted a major healthcare overhaul with the Affordable Health Care Act.  But the recent data shows it has done little to clamp down on soaring prices.

Once again, spending appears to be growing at an unsustainable rate.

Over the long run, that spells trouble for the healthcare system.  But the current spending trends are unlikely to change this year.

In fact, consumers are just now beginning to loosen their purse strings on many types of spending.  In many ways, consumer spending on services hasn’t fully recovered from the 2008 financial crisis and recession.

But recently we’ve seen consumer spending on services begin to accelerate.

One area that’s at the crossroads of consumer service spending and healthcare spending is the medical device industry.

Not surprisingly, earnings estimates for medical device companies are being revised higher to reflect this revival in spending.  And I believe there is still room for these stocks to run.

The ETF I like to profit from this trend is the iShares US Medical Devices ETF (IHI).

Fundamentals:  A closer look at IHI

IHI tracks an index of medical device manufacturers and distributors.

It has 48 stocks that are weighted according to market cap.  The expense ratio is 0.45%. It has a dividend yield of 0.65%.

The top five holdings and percentage weight for IHI are –

Company Name Ticker % Weight
Medtronic MDT 15.68%
Abbott Laboratories ABT 10.36%
Thermo Fisher Scientific TMO 8.05%
Baxter International BAX 6.33%
Stryker SYK 5.03%

Technicals:  The chart leads the way

IHI is currently trading for $117.25.  It’s up 3.5% year-to-date and it’s up 21.5% over the last year.

As you can see, IHI is in a steady uptrend.  It had a period of consolidation last year that ended in October when it tested support of the 200-day moving average.


It’s now in a new uptrend we believe will propel the ETF up another 20% in weeks and months ahead.

Trade Alert

Buy:  iShares Medical Devices ETF (IHI) up to $120.00
Recent Price: $117.25
Price Target: $140.00
Stop Loss: $105.00

Remember: IHI is in a strong uptrend.  It has been so strong that there haven’t been many opportunities to buy this ETF on a pullback.  This powerful trend, along with improving fundamental and macro data, should fuel another 20% upside in IHI.


Consumer Discretionary (+7.5%)

Consumer discretionary stocks had a great month.  Investors are bidding up retail stocks in anticipation of more consumer spending due to cheaper energy costs.

The Market Vectors Retail ETF (RHT) reached our $75 price target.  That’s our signal to take our 18.8% profit… not too shabby for a four month hold time.  Congratulations to everyone on a successful trade!

We’re also taking profits on the PowerShares Dynamic Media Portfolio (PBS) today. PBS is currently up 16.3% and near the all-time highs.  Let’s pocket these gains now.

However, we will continue to hold onto our shares of PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ).  This ETF has already broken out to new high of $37.02.  And it should be on track to make a run at our $41.00 price target in short order.

The Marked Vectors Gaming ETF (BJK) appears to have made a bullish reversal.  This ETF is now up 6.6%… you can buy shares up to $41.00.

Consumer Staples (+3.5%)

Consumer staples enjoyed a solid 3.5% gain over the last month.  The drop in oil prices is clearly benefiting this sector as well.  The gains have been more heavily concentrated in the largest stocks in this sector… that hasn’t benefited our Guggenheim S&P Equal Weight Consumer Staples ETF (RHS).  But nevertheless, RHS holds tremendous upside as consumer related stocks continue to move higher.

Energy (+9.1%)

The energy sector logged its second monthly gain in row.  But I believe there is still more fallout to come from the drop in oil prices.  There will be a buying opportunity here… but I’m not ready to pull the trigger when there is still so much uncertainty.

The good news is our Guggenheim Solar ETF (TAN) has shot up nearly 20% over the last month.  As I pointed out last month, solar stocks were undervalued.  And there’s still more upside for this high growth industry.  Continue holding.

Financials (+4.0%)

Financials bounced back with a 4.0% gain last month.  Investors seem to have shaken off the weak 4th quarter earnings and are now looking ahead to the potential benefits the healthy US economy will provide in the future.

This economically sensitive sector is now in a solid uptrend.  That’s good news for ourFinancial Select Sector SPDR Fund (XLF).  We’re currently up more than 14% and on our way toward the $29.00 price target.  Continue holding.

Healthcare (+0.5%)

Healthcare stocks weren’t the most popular stocks last month.  Investors opted to put money into more cyclical sectors.  But our First Trust Health Care AlphaDEX Fund(FXH) still managed to reach a new high of $62.97.  That’s a solid gain of 14%.

And we believe there’s still more upside for the entire healthcare sector.  We believe the medical devices industry is the one area with the biggest upside… we’re recommending the iShares US Medical Devices ETF (IHI) this month… see Trade Alert for more details.

Industrials (+4.5%)

Industrials logged a solid 4.5% gain over the last month.  There’s a lot to like about the sector, but ongoing sluggish economic growth outside of the US is still a concern given the exposure many industrials have to the global economy.

Technology (+5.6%)

The tech sector was spurred 5.6% higher by strong performances from Apple (AAPL) and Cisco (CSCO).

Our Market Vectors Semiconductor ETF (SMH) is breaking out to new highs.  It’s now above our $55.00 buy up to price. Continue holding for more upside.

Our First Trust NASDAQ-100 Technology Sector Index Fund (QTEC) is quickly moving back toward the December high.  Once it clears this overhead resistance, it should make its way toward our $50.00 price target in short order.

The Global X Social Media Index ETF (SOCL) is carving out a nice base over the last few months.  It’s even up 5.7% over the last month.  This could be setting up to be one of the best trades of the year if it plays out as expected.  Grab your shares up to $20.00.

Materials (+7.5%)

The bull market in the US Dollar has been a headwind for materials stocks over the last several months.  Not surprisingly, materials stocks have had a strong month as the dollar stabilized.

Utilities (-7.1%)

Utilities stocks have given back a big chunk of their gains as the ‘risk on’ trade sucked money out of safe haven investments.  The sector is still in an uptrend but I don’t see it repeating last year’s strong performance.

Portfolio Changes

  • This month we’re buying IHI.
  • Sold RTH at $75.00 price target for a gain of 18.8%.
  • Sell PBS at $26.38 for a gain of 16.3%.
  • Move SMH to Hold.


Category: SET Monthly Issues

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