SET Monthly Issue January 2013

| January 15, 2013

January 2013


Happy New Year!

Investors aren’t wasting any time this year.  A river of cash the size of the Amazon is flowing into stocks.

According to fund watcher Lipper, investors poured a whopping $18.3 billion into stock funds during the first full week of trading in 2013.  It was the fourth largest influx of cash into equity funds since they began tracking fund flows back in 1992.

Not surprisingly, $10.8 billion of the new inflows went into ETFs.  The massive inflow of cash into stock funds is a clear indication retail investors are feeling bullish.

And for good reason…

Last year was full of challenges – the European sovereign debt crisis and recession, slowing economic growth in China and other emerging markets, US Presidential elections, the fiscal cliff, and to top it off, a hurricane flooded Wall Street!

Amazingly, the S&P 500 still managed to advance 13% last year despite these challenges.

Today, the European sovereign debt crisis appears to be in check thanks to the efforts of the European Central Bank.  And the European economy is expected to return to growth sometime this year.

Economic growth in China is on the upswing.

What’s more, the US economy is steadily growing and adding more jobs.  And despite the partisan grandstanding by Congressional leaders about the budget, deficits, and the debt ceiling, they’ve always come to a compromise to avoid dealing the economy any unnecessary harm.

And perhaps just as importantly, the Fed’s committed to boosting economic growth. They’re keeping short term interest rates low and buying treasuries and mortgage backed securities.  In light of the recent developments around the world, it’s no wonder retail investors are jumping into this market with both feet.

The bullish momentum the influx of new cash has generated has been great for the ETFs we already own.  And it bodes well for one industry in particular…


It’s no secret the US housing market is on the upswing.

We collected gains of 22% and 25% trading homebuilder ETFs last year.  But you might be surprised by how much room the sector has to run.

Macro/Economic Trend:  Housing Starts Will Double In 2013

I don’t think anyone will dispute the fact that new home construction is a vital part of the economy.  It’s usually one of the first parts of the economy to recover after a recession.

Typically, the money homebuilders put into the economy in the early stages of economic recovery provides a much needed boost to GDP and jobs growth.

But when the US recession ended in 2009, the housing market was such a mess that homebuilders didn’t start building.  In fact, housing starts continued to slump for another two years.

The lack of new investment in housing is one of the big reasons why the economic recovery over the last few years has been so weak.

Finally, in 2012 the tide began to turn.  The number of new single family housing starts jumped 24% from 430,600 to 535,000.

And this is just the tip of the iceberg…

Going back to 1959, the US has averaged 1.5 million new home starts per year.  Put simply, history shows us that the US needs that many new residential structures to be built every year.

But last year homebuilders only started construction on 770,000 residential structures when you include multifamily.  That’s simply not enough new homes to keep pace with the demographic trends and household formations.

In other words, housing starts are going to double from 770,000 to 1.5 million.And I think there’s a good chance they’ll do it this year!

Obviously, a dramatic increase in the number of new housing starts bodes well for the entire economy.  But it’s going to be a windfall for homebuilders.  And the iShares US Home Construction ETF (ITB) is a great way to get exposure to the industry.

Fundamentals:  A closer look at ITB

ITB tracks an index of companies that are constructors of residential homes.  It currently has 29 holdings.

The expense ratio is 0.47%. And it has an annual dividend yield of 0.62%.

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

Company Name Ticker % Weight
Lennar LEN 10.26%
PulteGroup PHM 10.00%
DR Horton DHI 9.17%
Toll Brothers TOL 8.26%
NVR NVR 7.34%

Technicals:  The charts lead the way

ITB has had an amazing run over the last several months.  Going back to October of 2011, ITB has surged 160% from under $9 per share to around $22 today.


It goes without saying ITB is riding high on bullish momentum.  You’ll also notice that ITB recently broke out of a trading range.  It had been stuck around $20 from September through the end of the year.

This is a clear indication the bullish momentum should carry it higher in the weeks ahead.

Trade Alert

Buy:  iShares US Home Construction ETF (ITB) up to $23.00
Recent Price: $22.06
Price Target: $27.50
Stop Loss: $19.50

Remember: ITB is in a long term uptrend and recently broke out from a period of consolidation. This should reignite the bullish momentum that has fueled a massive rise in the ETF over the last year.


Consumer Discretionary (+4.6%)

Retailers are coming off of the sugar high of the holiday shopping season.  There are conflicting reports about how much consumers spent overall during the holiday shopping season.

We do know online holiday spending reached a record high $42.3 billion.  It’s a clear indication that online sales are the fastest growing area of the sector.

And it’s great news for our First Trust Internet Index Fund (FDN).  It has broken out to a new all-time high and should continue to soar as online sales growth outpaces traditional brick and mortar retailers.  FDN is above our buy up to price so I’m moving it to a hold.

Consumer Staples (+0.2%)

Consumer staples had a bit of a lackluster month.  But our Consumer Staples Select Sector SPDR (XLP) still managed to move beyond our buy up to price.  So let’s move it to a hold.  Going forward, I think we could see consumer staples companies expand margins as economic growth continues to steadily grow and inflation remains tame. Continue holding for bigger gains.

Energy (+3.4%)

It didn’t take commodity traders long to send WTIC crude oil prices to their highest levels in months after politicians avoided the fiscal cliff to start the year.  But they haven’t become outright bullish with the negotiations for fiscal cliff part 2 and the debt ceiling yet to come.  We’ll likely see volatility increase in crude oil prices until a solution can be reached.

Our SPDR S&P Oil & Gas Equipment & Services ETF (XES) is attempting to break out to the upside of long term consolidation.  In fact, the recent surge pushed XES past our $36.00 buy up to price. Continue holding…

Our ALPS Alerian MLP ETF (AMLP) was bouncing up and down like a yo-yo ahead of the fiscal cliff.  Now it’s once again on the upswing with the drama of the fiscal cliff and the uncertainty surrounding the fate of dividend tax rate increases.  AMLP is currently below our $16 buy up to price so feel free to buy at these levels.

Financials (+6.6%)

Financials jumped higher to start the year.  The sector’s most promising industry continues to be the large money center banks.  This year should mark a turning point for them… revenues should finally stabilize after years of decline.  Stable revenue, along with massive stock buybacks, should be enough to produce double digit earnings growth.  Our SPDR S&P Bank ETF (KBE) has surged 6% since we recommended it last month.  It quickly shot past our $24.50 buy up to price so we’re moving it to a hold.

What’s more, our residential REIT fund, REZ, is on the upswing as well.  The bottom line is a recovery in the housing market doesn’t preclude an increase in rents.  Don’t forget the small number of residential starts has dramatically depressed supply.  And at the same time, the steadily improving job market should generate more demand for apartments.  Continue holding REZ for bigger gains ahead.

Healthcare (+3.2%)

2013 should be a relatively uneventful year compared to the last few years and what lays ahead in 2014.  But one thing’s for sure, demand for pharmaceuticals isn’t slowing down.

Our iShare Dow Jones U.S. Pharmaceuticals Index Fund (IHE) has rebounded in a big way over the last month.  And despite the lackluster performance over the last few months, it’s still in a long term uptrend.  IHE recently moved beyond our $90 buy up to price so we’re moving it to a hold.

What’s more, our First Trust NYSE Arca Biotechnology Index Fund (FBT) is hitting new highs as well.  At a recent price of $49.36, we’re up 9% from when we recommended it in October.  It’s also above our $47 buy up to price.  Continue holding for bigger gains.

Industrials (+4.3%)

Industrials are benefiting from the rebound in new home construction.  And the demand for building products should continue to be one of the bright spots for the sector going forward.  As such, we’re recommending the iShares US Home Construction ETF (ITB) this month… see trade alert for more details.

Our Market Vectors Agribusiness ETF (MOO) recently reached a new high of $55.00.  That’s good enough for a gain of 14% since we recommended it in July.  And with the spring planting season just around the corner, I’m expecting MOO to continue hitting new highs.  Continue holding…

Technology (+2.5%)

Tech stocks continue to battle strong headwinds from the weak performance of Apple(AAPL).  The consumer electronics giant’s stock has been in a virtual free fall since reaching $700 in September.  The stock fell to $500 earlier this week for the first time since February.  If tech has any hope of getting back on track, APPL simply must regain some of the momentum that fueled its rise over the last four years.

Materials (+6.5%)

Materials stocks are on the upswing to start the year.  Just as we predicted, the US housing market and a revival of Chinese economic growth is fueling investors’ animal spirits.

Our iShares Basic Materials ETF (IYM) has soared from $66.98 when we recommended it to $71.51… a gain of 8%.  What’s more, we collected an 80 cent per share dividend last month.  This looks like the beginning of major uptrend so buckle your seat belts. We’re in for an exciting ride!

We’ve also doubled down on the most exciting industry in the materials sector… our recent recommendation of the Guggenheim Timber ETF (CUT) quickly soared past our $21.00 buy up to price.  Continue holding for bigger gains ahead.

Utilities (+0.3%)

Utilities face a tough road ahead.  The current regulatory environment will likely prevent any major mergers like the ones that helped fuel the sectors strong performance over the last few years.  Plus, we could see some utilities reduce their dividends this year.  I’m steering clear of this sector for now.

Portfolio Changes

  • This month we’re buying ITB.


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