SET Monthly Issue January 2014

| January 21, 2014

January 2014


After the last decade of dramatic ups and downs, the health of the world’s financial markets have been a central concern for investors.

And for good reason…

Simply put, there isn’t a good investment strategy when the financial system itself is unstable.

It’s that perception of unfairness and uncertainty created by the market instability during the financial crisis that has driven people out of the stock market.

According to Gallup, the percentage of US adults invested in the stock market in one way or another fell to just 52%.  That’s 13% lower than the highs of 2007 and the lowest level ever recorded since the survey began in 1999.


Here’s the thing…

Financial markets are healthier now than they’ve been for the last two decades.


As you can see, recessions and market disruptions have been preceded by drops below 0 on this index… making this a reliable leading indicator.  What’s more, the drops below 0 in 2010 and 2011 were met with QE actions from the Fed that counteracted the worsening conditions.

This index from Bloomberg indicates – there’s virtually no chance of a significant economic disruption for the foreseeable future.

In short, now’s the time to be invested in stocks, but right now fewer people than ever are invested in stocks.  That leads me to believe there’s still plenty of upside for stocks in the weeks and months ahead.


Forecasts are calling for new car sales to climb to their highest level since 2006.  A whopping 16.4 million new cars are expected to be sold in 2014.

Needless to say, auto sales are an important driver of economic growth.  They account for about one-quarter of all retail sales.

However, lackluster sales in the last month of 2013 have some investors worried.

Macro/Economic Trend:  Shake Off The Cold

New auto sales dropped 1.6% in December.  But the weak showing can be easily explained….

Auto dealers pulled sales forward in November with big discounts.  In other words, people who would have bought in December decided to buy in November in order to take advantage of special offers.

Then the “Polar Vortex” hit large parts of the country.  The frigid temperatures further cut into auto sales.  People simply chose to stay home instead of braving the snow and ice the blast of arctic air brought in order to buy a car.

But here’s the thing… these setbacks are only temporary.  The underlying fundamentals for more upside in auto sales are strong.

Don’t forget, the things that impact a consumer’s decision to buy a car are improving. Things like the job market, interest rates, and access to credit.  And they’re all expected to improve in 2014.

What’s more, the pent-up demand from consumers who held onto cars longer than usual because of the recession still hasn’t come undone.  And the inventory of used cars is so small that the price of used cars is elevated compared to new cars.

And last but not least, don’t forget about Europe.  The sluggish European economy has been a drag on car sales over the last few years.  Now that it has turned the corner, Europe could provide a big lift to car sales in 2014.

In short, the conditions are ripe for another year of auto sales growth.  The ETF I like to profit from the growth in car sales is the First Trust NASDAQ Global Auto Index(CARZ).

Fundamentals:  A closer look at CARZ

CARZ currently holds 38 stocks.  It tracks a modified market-cap weighted index of automobile manufacturers.  That means the weighting of each individual stock in the ETF is done according to the value of the company.

The expense ratio is 0.70%. And it has a dividend yield of 0.9%.

The top five holdings and percentage weight for CARZ are –

Company Name Ticker % Weight
Daimler DAI.GY 8.48%
Volkswagon VOW3.GY 7.88%
Ford Motor F 7.62%
Toyota Motor 7203.JP 7.52%
Honda Motor 7267.JP 7.40%

Technicals:  The charts lead the way

CARZ is currently trading for $40.11.  As you can see in the chart below, CARZ has been on the upswing.  Its 31% gain over the last year has outperformed the S&P 500 by 5.3%.


You’ll also notice CARZ has been in a consolidation phase over the last three months.

What’s more, the 100-day moving average has been a level of support during CARZ advance over the last year.  It recently pulled back to this level and has begun moving higher once again.

In short, CARZ is in a bullish uptrend.  It has gone through a period of consolidation. And it’s on the verge of making another run to the upside.

This is a bullish technical setup that should drive CARZ higher in the weeks ahead.

Trade Alert

Buy:  First Trust NASDAQ Global Auto Index (CARZ) up to $42.00
Recent Price:  $40.11
Price Target:  $55.00
Stop Loss:  $38.00

Remember:  The auto manufacturing industry has been on the upswing.  And the outlook for 2014 is even better. Grab your shares up to $42.00.  If something unexpected goes haywire, then cut your losses at $38.00 per share.  Otherwise, look for CARZ to make a run into the mid $50 per share over the next few months.

Consumer Discretionary (+0.3%)

Consumer Discretionary continues to be my favorite sector.  It has benefited from an improving job market, low interest rates, and improving consumer confidence.  We’re adding First Trust NASDAQ Global Auto Index (CARZ) into the mix this month… See Trade Alert for more details.

Our iShares US Home Construction ETF (ITB) is trending higher since the end of September.  According to one article I read, more people are planning to buy a home in the next six months than at any time in the last 36 years.  And expectations for people who plan to buy a new home are at their highest levels since 2006.  In short, this tells me homebuilders are about to go on another run.  Grab your shares of ITB up to $23.00.

PowerShares Dynamic Media Portfolio (PBS) media stocks have limped their way through the first few weeks of 2014 after an impressive 2013.  In fact, PBS was the top performing consumer discretionary ETF of 2013.  The recent pullback looks to be profit taking… pure and simple.  I still see more upside for PBS in the days and weeks ahead. Continue holding…

PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) continues its steady climb higher in a well defined price channel.  It should continue to outperform in the weeks ahead. Continue holding.

Consumer Staples (-0.4%)

Consumer staples haven’t been able to build any momentum after breaking out to a new high in October.  They’ve simple settled into a new (slightly higher) trading range. As earning season hits full stride, we should see our First Trust Consumer Staples AlphaDEX Fund (FXG) respond well.

Don’t forget, FXG is uniquely positioned as a consumer staples ETF with growth potential.  Grab your shares up to $36.00.

Energy (+0.2%)

Slumping oil prices have been a strong headwind for oil and gas stocks.  Even natural gas prices that have risen to their highest levels since 2011 haven’t been able to lift the spirits of oil and gas investors.

However, alternative energy has been on fire to start 2014.

Since we recommended buying the Guggenheim Solar ETF (TAN) last month, it has shot up an eye-popping 21.25%.  That’s a big move for an ETF in such a short time. And our other alternative energy ETF First Trust Global Wind Energy ETF (FAN) is now up 25%.

Needless to say, the outlook for alternative energy remains bullish.  Continue holding FAN and TAN for bigger gains.

Our Morgan Stanley Cushing MLP Hi Income ETN (MLPY) spun off another dividend recently.  We’ve now collected $1.02 per share since we recommended it last April and our total return is 12.8%.  Continue holding.

Financials (+3.2%)

The financials’ 3.2% gain over the last month was one of the top performing sectors last month.  It’s clearly an area of strength for the markets.  Today, banks know what the new rules and regulations are.  But they’re struggling to define how they’ll grow and succeed in the future.  If banking executives can lay out a clear vision for how the industry will change and grow, it should light a fire under financials in 2014.

Our First Trust NASDAQ ABA Community Bank Index Fund (QABA) is up 13% from where we recommended it.  And it holds a tremendous amount of upside potential… continue holding.

Healthcare (+5.8%)

Healthcare was the best performing sector over the last month.  Our Health Care Select Sector SPDR (XLV) is now up 18.5% and in a strong uptrend.  The sector is being lifted by a strong performance from the biotechnology industry.  This is a trend that should continue to run.

Industrials (+3.1%)

Industrials notched another solid month as expectations for accelerating global economic growth continue to run high.  Industrial production grew 3.7% in 2013 and is now nearly 1% above the previous peak.

Our iShares Transportation ETF (IYT) is now up 14% since we recommended it in September.  And with the current outlook, IYT should continue to perform well. Continue holding…

Technology (+3.5%)

The technology sector shot up 3.5% over the last month.  And our Guggenheim S&P 500 Equal Weight ETF (RYT) equal weighted ETF performed even better.  RYT is up 5.4% over the same time.  The equal weighting strategy RYT uses continues to outperform the market cap weighted alternatives.  Keep an eye on the RYT’s $80.00 price target… another surge like the one over the past month should be enough to push it through our target.

Materials (+4.0%)

Materials stocks rebounded with a strong 4.0% gain over the last month.  After underperforming in 2013, materials could be setting up for a bounce back year in 2014.

Utilities (+0.9%)

Utilities are in the consolidation phase of a long term uptrend.  The thing is this slow and steady sector doesn’t have much hope for upside.  The increases in energy efficiency, along with stiff regulations on pollution, will keep profits in check despite a strong economy.

Portfolio Changes

  • This month we’re buying CARZ.


Category: SET Monthly Issues

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