SET Monthly Issue January 2011

| January 18, 2011

January 2011


According to Sam Stovall over at Standard & Poor’s, “a positive performance in January traditionally leads to a gain during the rest of the year.”

He goes on to say, “Since 1945, whenever the S&P 500 rose in January, it continued to advance during the remainder of the year 85% of the time and posted an average increase of 11.6% in price.”

So, while history is no guarantee of future success, the odds certainly favor another great year for stocks.

What’s more, strong fundamental and technical trends are supporting the market’s advance.  As a result, investor optimism is reaching an extreme in bullish sentiment.

It’s worth noting when investor optimism has reached these extremely bullish levels in the past we’ve seen market corrections.

As investor optimism rises, so do their expectations for company performance.  It raises the bar companies must clear to continue their rapid accent.

Now, as earnings season gets underway, it will be important to monitor the market’s reaction to earnings and management projections.

We’ll likely see a correction sometime in the near future.  But the bottom line is the markets should end the year much higher than they are now.

To get the year started, I’ve identified two great ETFs.  They have the potential to weather any short term pullback and outperform over the weeks and months ahead.


Alternative energy is an all encompassing tag line for energy produced from wind, solar, water, geothermal, and biomass.  By and large, these are renewable sources of energy.

Simply put, right now is a great time to be an alternative energy company.

As the global economy picks up steam, more energy is consumed.  This creates demand for all types of energy.  And now, more than ever, governments and private companies are turning to alternative energy sources to meet their needs.

Macro/Economic Trend:  Hottest Growth In The Energy Sector

Alternative energy stocks have the biggest upside potential in the energy sector.

Remember, the industry is still in its infancy.  And we’ve only just begun to scratch the surface of the growth potential in alternative energy.

According to the US Energy Information Administration (EIA), worldwide renewable energy production will grow at 3% per year for the next 25 years.  Faster than any other energy source.

What’s behind the rapid growth in renewable energy?

Over the past few years, major technological advancements are making alternative energy sources more viable.  Until recently, it was much cheaper to produce energy simply by burning fossil fuels.

Now the cost to produce energy from alternative sources is fast approaching parity with fossil fuel sources.  Simply put, this is a major turning point in the evolution of the alternative energy industry.

But that’s not all…

Commodity prices are jumping. You can see it in the prices of oil, coal, natural gas, and uranium. As commodity prices climb, it‘s making alternative energy sources that much more attractive.

What’s more, governments are focusing on the reduction of pollution and greenhouse gases.  As a result, they are subsidizing the development of alternative energy sources.

Nowhere is this more evident than in China.  The world’s second largest economy is placing a major emphasis on developing new energy sources.

In 2009 alone, China spent $34.6 billion to develop alternative energy sources.  And they’re expected to spend more than $800 billion on energy infrastructure over the next five years!

There’s no doubt about it, alternative energy will play an ever increasing role in worldwide energy production.  And as the cost of fossil fuels soar in 2011, I think we’ll see investors flock to alternative energy investments.

The Market Vectors Global Alternative Energy ETF (GEX) holds many of the hottest companies in the wind, solar, geothermal, water, and biomass industries.  And it also has great exposure to China’s alternative energy stocks.

Fundamentals:  A closer look at GEX

GEX holds 31 stocks from around the world.  The top two countries are the US with more than 42% and China with more than 17%.  The companies must derive at least 50% of their revenue from the alternative energy industry.

The expense ratio is 0.62%.

The top five holdings and percentage weight for GEX are –

Company Name Ticker % Weight
First Solar FSLR 9.71%
Cree CREE 9.36%
Vestas Wind Systems VWS DC 8.48%
Kurita Water Industries 6370 JP 5.06%

Technicals:  The charts lead the way

Following a steep correction in April and May, GEX has formed a solid base over the last six months.

Take a look at the chart below.  You can see the support and resistance lines (red lines) have formed a wedge.


A wedge by itself is neither bullish nor bearish.  It all depends on which way the ETF breaks out from the wedge.

In this case, GEX has broken through the upper resistance level.  This is a bullish breakout and a great indication GEX is positioned to continue moving to the upside.

To add fuel to the fire, the breakout also shot GEX past the 200-day moving average. Now the old resistance line and the 200-day moving average should act as support on any future pullback.

Trade Alert

Buy:  Market Vectors Global Alternative Energy ETF (GEX) up to $22.00
Recent Price:  $21.11
Price Target:  $27.00
Stop Loss:  $17.75

Remember:  GEX recently broke out of a six month long consolidation pattern.  And to top it off, it’s is now trading above the 200-day moving average.  This is a great setup that should lead to big gains in short order.


Real Estate Investment Trusts, or REITs, have delivered solid gains over the past year.

In fact, since we recommended the iShares Dow Jones US Real Estate Index Fund(IYR) last May, it has a total return of better than 20%.  Not too shabby.

Now there’s a development in the commercial real estate world.  I think residential REITs who specialize in multifamily housing are going to be the big winners in 2011.

So, we’re going to lock in our 20% gains on IYR and move into an ETF that focuses solely on residential REITs.  Here’s why…

Macro/Economic Trend:  Double Digit Rent Hikes

The chaos surrounding the residential real estate market has created an environment we haven’t seen in nearly twenty years.  And it’s great news for landlords of multifamily housing units.

Let me explain…

In the wake of the 2008 financial crisis, lending for new multifamily commercial real estate projects dried up.

Developers broke ground on just 114,000 new units in 2010.  According to David Crowe, chief economist for the National Association of Home Builders, “It doesn’t even replace all the multifamily units lost last year to the wrecking ball or natural disasters.”

In short, there’s a supply crunch brewing.

But that’s not all… There’s also pent up demand.

So far the economic recovery hasn’t produced many jobs.  As a result, many would- be renters who couldn’t find a job have opted to live with family or friends.

That means the household formation rate is lagging behind historical averages.  But as soon as job creation accelerates, all of the pent up demand will be unleashed on the rental market.

Here’s where it gets really interesting.

Right now occupancy levels are already high.  In other words, landlords don’t have any vacant apartments to meet the coming demand.

Remember, 900,000 homes were foreclosed on in 2009.  Another 1.2 million were foreclosed on in 2010.  And even more foreclosures are expected in 2011!

All of those previous home owners are now renters.  And they’re taking up all of the space that should be available for new households.

The bottom line is there’s a severe supply and demand imbalance.

Now rents are starting to climb.  They’ve already gone up 4% on average in the last year.  But in some markets they’ve gone up 7% to 8%.

Industry insiders are comparing the market to 1992.  The last time we came out of a severe recession with these fundamentals, rents shot up at a double digit clip for the next few years.  I think we’ll get a similar result this time around.

When rents start going up 10% or more every year, the residential REITs who manage all of the apartment buildings are going to make a killing.

One ETF set to profit from the tidal wave of rising rents is the iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ).

Fundamentals:  A closer look at REZ

REZ holds 36 residential REITs.  The REITs specialize primarily in multi-family housing, long-term care facilities, and self-storage complexes.

The expense ratio is 0.48%.  And the dividend yield is 3.46%.

The top five holdings and percentage weight for REZ are –

Company Name Ticker % Weight
Equity Residential EQR 9.89%
HCP HCP 9.48%
Public Storage PSA 9.04%
AvalonBay Communities AVB 6.53%
Ventas VTR 5.70%

Technicals:  The charts lead the way

REZ is in a strong uptrend.

Take a look at the chart.  You can see the red uptrend has been a solid support level for more than a year.


REZ has also formed a “cup with handle” chart pattern over the last few months.  This is a bullish continuation pattern.  The pattern will be completed when it breaks the $40.76 high it set back in November.  Once it does, REZ could move higher in a hurry.

With a solid support level of the long term uptrend and the completion of a bullish continuation pattern, REZ looks like it’s ready to pop.

Trade Alert

Buy:  iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ) up to $41.00
Recent Price:  $39.52
Price Target:  $50.00
Stop Loss:  $36.00

Remember:  REZ is in a strong uptrend.  And it’s in the process of completing a bullish cup with handle continuation pattern.  Once it clears the November high, it should be off to the races.


Consumer Discretionary (+1.5%)

Consumer discretionary stocks have slowed down over the last month.

Concerns about higher gas prices at the pump have certainly tempered expectations. And the recent economic reports haven’t helped either.  Initial jobless claims came in hotter than expected this month.  And both consumer sentiment and retail sales came in weaker than expected.

So far stocks are shrugging off the weaker than expected economic reports.  But we’ll need to see those numbers get back on track if consumer discretionary stocks are going to continue their bullish momentum.

Despite all that, our position in iShares Dow Jones U.S. Consumer Services Sector Index Fund (IYC) continues to hit new highs.  Our peak gain so far is nearly 17%.  Hold tight for now.

Consumer Staples (-0.1%)

Consumer staples continue to lag behind the more cyclical consumer discretionary stocks.  The good news is… the sector is trending higher along with the overall market.  The bad news is… the sector is nearing its all time high set back in December of 2007.  This technical hurdle could prove to be a strong resistance level going forward.

Energy (+7.2%)

Energy stocks surged another 7% this month.

Oil is now firmly above $90 per barrel.  Demand for oil is accelerating as the economic recovery picks up steam.  The charge is being led by emerging markets.  They are showing the biggest percentage increases in consumption.

OPEC seems to be waiting for $100 oil before they raise production.  So barring any unforeseen shocks, we’ll probably see $100 oil soon.

Our PowerShares S&P SmallCap Energy Portfolio (XLES) continues to move higher. Our peak gain is 23% so far.  And $100 oil should send XLES through our $39 price target. Hold tight for bigger gains ahead.

Oil & gas companies aren’t the only ones benefiting from higher energy costs.  So are the alternative energy companies.  We’re recommending the Market Vectors Global Alternative Energy ETF (GEX) this month… See Trade Alert 1 for more details.

Financials (+7.7%)

Financial stocks have really picked up steam over the last month.  The results were buoyed by the large bank stocks.  Industry bellwether JP Morgan (JPM) reported 4th quarter net profits jumped 47%.

That’s great news for our SPDR KBW Bank ETF (KBE).  We hit a peak gain of more than 19%.  But there’s still plenty of upside, hold tight for further gains ahead.

We’re also making a change with our other financial ETF this month.  Go ahead and sell the iShares Dow Jones U.S. Real Estate Index Fund (IYR) for gains of better than 20%.  We’re going to replace it with the iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ).  I like the upside in residential REITs going forward… See Trade Alert 2 for more details.

Healthcare (+1.6%)

Healthcare stocks continue to lag behind more economically sensitive sectors.

And like it or not, the Republican bill to repeal the “job-killing healthcare bill” only serves to heighten uncertainty in the sector.

The good news is our First Trust Biotechnology Index Fund (FBT) cleared our $40 price target today.  Congratulations to everyone locking in their 24% gains!

Industrials (+4.0%)

Industrials continue to rocket higher.

Altogether, industrial sector earnings are expected to be up big in the 4th quarter. Analysts are expecting 45% year-over-year growth.  That’s enormous growth any way you slice it!  And growth is expected to continue at a slightly slower pace throughout 2011.

Our iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ) is off to a good start.  We’re up better than 3% in the first month.  And our Market Vectors Agribusiness ETF (MOO) has fared even better.  MOO has shot up more than 10% so far! Hold tight for bigger gains ahead.

Technology (+4.3%)

Tech stocks are up big once again.

Strong sales on everything from enterprise software and networking equipment to tablets and smartphones are driving stocks higher.

Our SPDR S&P SEMICONDUCTOR ETF (XSD) blew through our $57 price target on January 6th and hasn’t looked back.  Congratulations to everyone locking in gains of 28% or more on XSD!

Our iShares S&P North American Technology-Software Index Fund (IGV) is looking good as well.  IGV is up 16% so far.  Continue holding for bigger gains ahead.

Materials (+3.3%)

Materials locked up another solid month of gains.

Strong demand for commodities from emerging markets is supporting higher prices.  Not surprisingly, we saw precious metals take a back seat to industrial metals and chemical companies this month.  But I’m expecting gold to regain its “mojo” soon.

Our First Trust ISE Global Platinum Index Fund (PLTM) is up more than 17% so far. But it still has plenty of upside.  Platinum’s dual role as both a precious and industrial metal should continue driving prices higher.

Utilities (+1.9%)

Utilities continue to trade in a tight range.

The defensive sector is struggling to gain a foothold with investors.  We’ll keep utilities stocks on the back burner for now.

Portfolio Changes

  • This month we’re buying GEX & REZ.
  • Sell iShares Dow Jones Real Estate Index Fund (IYR) for a 20% gain.
  • Sell SPDR S&P Semiconductor ETF (XSD) for gains of 28% or more.
  • Sell First Trust Biotechnology Index Fund (FBT) for gains of 24%.


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