SET Monthly Issue January 2015

| January 20, 2015

January 2015


Stocks are off to a slow start in 2015 thanks to an increase in uncertainty.

The uncertainty stems from a breakdown of many foundational beliefs.  These are foundational beliefs that businesses have been built on and investments have made because of.

For instance, the expansion of US oil production was built on the belief that Saudi Arabia wouldn’t let oil prices fall below $100 per barrel.

For years, the Saudis would restrict supply whenever supply exceeded demand.  This kept oil prices high.

This knowledge gave US oil producers the incentive to ramp up oil production.  They believed oil prices wouldn’t fall because the Saudis wouldn’t allow them to.

That belief has been shattered.

Now Saudi Arabia and the rest of OPEC are willing to let oil prices fall in order to protect market share.

As a result, oil prices are expected to hold between $20 and $50 per barrel for years to come.

Obviously any businesses built on or investments made on the belief that oil could be sold for $100 per barrel are in big trouble right now.

Another belief many investors and businesses held was that the Swiss franc would be pegged to the euro.

Last week the Swiss National Bank sent shockwaves through financial markets when they removed the EUR/CHF 1.20 floor.  In short, the move by the SNB will allow the Swiss franc to trade freely against the euro.

As a result, the Swiss franc rallied about 30% versus the euro.

Needless to say, businesses built on and investments made on the belief that the Swiss franc would continue to be pegged to the euro are suffering right now.

Right now these two explosive events alone are creating lots of uncertainty.  But they’re not the only things creating uncertainty.

The International Monetary Fund recently made the steepest cut to its global-growth outlook in three years.  They’re now expecting the world economy to grow 3.5% in 2015.  That’s down from their 3.8% projection in October.

According to the IMF, the US is expected to be the best market.  But it’s hard to believe that US economy is immune from slowing growth in the rest of the world.

So there you have it… slowing global economic growth, a major disruption in the currency markets, and oil prices coming unhinged due to Saudi Arabia refusing to cut production to support oil prices.

With so much uncertainty, it’s no surprise that the S&P 500 has stumbled to a 1.7% loss out of the gates in 2015.  Let’s take a look at one ETF that should do well in this uncertain climate.


According to the latest data, the drop in oil prices means consumers are paying less for gas at the pump.  On average, every person in America is saving about $7.50 each week on gas compared to this time last year.

Now that might not sound like a lot.  But consider this… that’s $2.4 billion each week consumers have to spend on things other than gasoline.

We believe the vast majority of those savings will be spent on consumer staples.

Macro/Economic Trend:  Lifting Up The Bottom

There’s no doubt that the economic recovery in the US has been more beneficial to those in the upper income bracket than to those at the bottom.

Income inequality in the US has skyrocketed since the 1970s.  And the trend has been amplified in the years after the financial crisis because of weak gains in wages and the strong performance of the stock market.

During this time, the cost of essential items like energy, food, housing, medical care, and education have continued to climb faster than wages have grown.

The causes of income inequality are not well understood.  And they are hotly debated in many circles.

But one thing’s for sure, people in lower income brackets spend a larger portion of their income on fuel for the cars and energy to heat their homes.

As a result, the drop in oil prices should have a bigger impact on lower income consumers.  The impact of lower oil prices is already translating into stronger sales for companies like Monster Beverage (MNST).

This macroeconomic trend is one that should continue to propel consumer staples higher through 2015.  The ETF I like to profit from this trend is the Guggenheim S&P Equal Weight Consumer Staples ETF (RHS).

Fundamentals:  A closer look at RHS

RHS tracks an index of equally weighted consumer staples stocks in the S&P 500.

It has 40 stocks that all have an equal weighting at the time the index is rebalanced. The expense ratio is 0.40%.  It pays a dividend of $0.38.

The top five holdings and percentage weight for RHS are –

Company Name Ticker % Weight
Constellation Brands STZ 2.94%
Hershey HSY 2.69%
Monster Beverage MNST 2.69%
Kraft Foods KRFT 2.67%
Dr Pepper Snapple DPS 2.67%

Technicals:  The chart leads the way

RHS is currently trading for $106.03.  It’s up 1.89% year-to-date and it’s up more than 20.0% over the last year.

Consumer staples have been in a steady uptrend over the last few years.  RHS has set a series of higher highs and higher lows.


We believe this trend is poised to continue into 2015.

Trade Alert

Buy:  Guggenheim S&P Equal Weight Consumer Staples ETF (RHS) up to $108.00
Recent Price:  $106.03
Price Target:  $122.00
Stop Loss:  $97.50

Remember:  RHS is in a strong uptrend.  And the recent drop in oil prices is boosting disposable income for those in lower income brackets.  These savings are destined to be spent quickly on consumer staples and help drive stronger than expected sales and profit growth.


Consumer Discretionary (+0.1%)

Retail sales unexpectedly declined in December.  The poor performance is largely due to a drop in sales of gas due to cheaper gas prices.  But there’s reason to believe it’s just taking consumers a little while to believe cheap oil is here to stay.  We should see an uptick in consumer spending accelerate from here.

Our Market Vectors Retail ETF (RHT) is up 12.5% to $70.97.  That kind of performance is a clear indication investors are expecting big things from consumers despite the recent slump in retail sales.  Continue holding…

PowerShares Dynamic Media Portfolio (PBS) and PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) are two consumer ETFs we’ve been holding onto for a while now.  Recently PEJ has begun to outperform PBS due to their different holdings.  Right now PBS is up 9.1% while PEJ is up 14.5%.  In other words, leisure and entertainment stocks are outperforming media stocks… the good news is both should do well as consumer spending accelerates going forward.  Continue holding.

Consumer Staples (+3.5%)

Consumer staples have been a rock solid investment over the last few years.  And the recent drop in oil prices should provided a huge benefit to these companies on many levels.  We’re recommending the Guggenheim S&P Equal Weight Consumer Staples ETF (RHS) to take advantage of this great investment… see Trade Alert for more details.

Energy (+2.5%)

The energy sector has bounced back a bit after being decimated the last few months. There’s clearly more pain for the sector as oil prices are now projected to remain below $50 per barrel for some time.

This will end up being a boon for the biggest oil and gas companies.  They will swoop in and buy up assets at rock bottom prices at sometime in the future.  But for now, there’s no reason to try catching this falling knife.

Guggenheim Solar ETF (TAN) is undervalued.  The growth opportunities are simply not reflected in the current share price.  At some point, investor sentiment toward the industry will turn back in our favor.  Continue holding.

Financials (-1.8%)

Last week all three of the big banks missed earnings estimates for the first time since 2011.  JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) all reported earnings per share below expectations.

Needless to say, that’s not the start we were expecting for our Financial Select Sector SPDR Fund (XLF).  XLF has pulled back after the poor earnings but remains 10% above our buy price.

The good news is lower oil prices should drive stronger than expected economic growth.  The bad news is the drop in long term interest rates are pressuring net interest margins.

Large financial institutions are clearly having troubles adapting their business model to the new regulatory environment.  But I still believe they will eventually make them and produce bigger profits.  Continue holding…

Healthcare (+3.3%)

Healthcare stocks continue to be a rock solid investment.  Our First Trust Health Care AlphaDEX Fund (FXH) reached a new high of $62.18 and pushed our peak gain to 12.6%.  This smart-beta ETF continues to shine and has tremendous upside. Continue holding.

Industrials (+0.2%)

Industrials have been hit hard by uncertainty due to slowing global economic growth. The weak growth in China and Japan, as well as the near deflationary environment in Europe, are major headwinds for this sector.  The international exposure of this sector is clearly offsetting any positive impacts the drop in oil prices is providing.

Technology (0.0%)

Tech stocks were flat over the last month.  But expectations for a strong 2015 are growing despite the slowdown in the global economic growth.

Our Market Vectors Semiconductor ETF (SMH) has been in a bullish consolidation pattern after a strong surge to finish 2014.  Grab your shares of SMH up to $55.00 before the next leg higher.

Our First Trust NASDAQ-100 Technology Sector Index Fund (QTEC) is dedicated to the biggest and best tech companies in the world.  All signs point to 2015 being another banner year for these tech stocks.  Continue holding…

Our Global X Social Media Index ETF (SOCL) is showing the first signs of a bullish reversal.  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 (+2.8%)

Materials stocks continue to battle a strong US Dollar and weak global economic growth.  But the uptick in uncertainty has helped fuel a surge in gold and gold mining stocks over the last few weeks.  But I’m not willing to make any big commitments based on a small uptick in gold prices.  I’ll continue to steer clear of materials stocks for now.

Utilities (+6.8%)

Utilities have been moving higher along with bonds as inflation expectations fell off a cliff over the last few weeks.  Breakeven rates on 2-years through 30-years are back at their lowest levels since 2009.

Portfolio Changes

  • This month we’re buying RHS.


Category: SET Monthly Issues

About the Author ()

Comments are closed.