SET Monthly Issue January 2016

| January 19, 2016

Has The Bear Market Already Started? 

Stocks are off to a dreadful start in 2016.  The S&P 500 is down 11% from the 52-week highs.  It’s not even close to the 20% drop needed to be an official bear market.

Yet, you can’t read, watch, or listen to anything about the financial markets without hearing about how stocks are headed for a bear market.

Here are some reasons why the bears could be right… 

Oil and China pose the greatest risks to stocks.

The price of a barrel of oil fell below the lows from 2009.  It fell below $30 for the first time since 2003.

The massive drop in price is sending shockwaves through the energy, industrial, and financial sectors that made huge investments when a barrel of oil was selling for around $100.

China’s stock market is already in a bear market.  In fact, the Shanghai Stock Exchange has shed more than 40% of its value since topping out in June.

Economic data show that growth is continuing to slow in China. They had been the major growth engine in the global economy for the last decade.

Now they’re not… and investors are struggling to pinpoint what will replace China as the next catalyst for the global economy.

What’s more, the recent price action of the S&P 500 only strengthens the bears’ argument.  The S&P 500 is in the midst of its 2nd 10% correction in the last five months.

We don’t see multiple corrections of this magnitude in such a short period of time very often.  The last time it happened was 2008… right at the beginning of the last bear market.

And here’s another ugly data point for the S&P 500.

The 10-month moving average just crossed below the 20-month moving average.  The last it happened?  Yep, it was 2008.

S&P 500

About half of the stocks that make up the S&P 500 are down 20% from their 52-week highs.  The materials and energy sectors are already down more than 20% and in bear market territory.

The financial and industrial sectors aren’t doing much better.  They’re both down more than 15% and could easily fall into bear market territory.

And to make matters worse, the Fed seems oblivious to it all.  They haven’t backed off their calls for four interest rate hikes in 2016.

Once again, the Fed finds themselves on the wrong side of the economic data.  Their forecasts that extrapolate what has happened in the recent past are wrong so often that it’s mindboggling why anyone pays any attention to them.

The increased risk from China and falling oil prices, in combination with the Fed that is no longer going to support the market with free money, has crippled investor psychology.

As I’ve talked about time and time again, investors are driven by emotions.  We often see their investment decisions driven by fear or greed.   More often than not, they’re either overly optimistic or way too pessimistic.

Right now fear is dominating the recent market action. 

Needless to say, that’s a difficult environment for us when we are scheduled to recommend an ETF every month that only profits when the underlying stocks go up.

But there is hope.  Earnings season is getting into full swing this week.  We’ve seen profit estimates slashed for the S&P 500 over the last few months.  Here’s one ETF with the potential to beat those lower estimates and move higher in the weeks and months ahead.

Trade Alert: This Baby Was Thrown Out With The Bath Water

Falling oil prices are going to hurt earnings in the energy sector.  But the correction has taken the vast majority of the market lower… even sectors that benefit from lower oil prices.

Macro/Economic Trend:  This Sector Benefits From Low Oil Prices

The consumer staples sector is composed of 40 stocks from the S&P 500 that make things like food, beverages, tobacco, and household items.

These are items that consumers can’t or won’t go without.  After all, there are some things that just need to be done no matter what.

These stocks are non-cyclical.  The health of the economy doesn’t have a big impact on how much stuff consumer staples sell.

What’s more, the companies typically make boatloads of cash.  And they do a good job of returning it to shareholders in the form of dividends and stock repurchases.

Falling oil prices are having an impact on consumer staples in two ways.

First off, lower oil prices mean cheaper gas prices.  The money consumers save at the pump can be saved or spent elsewhere.  And some of those savings at the pump will end up being spent on the items consumer staples companies sell.

The other way lower oil prices help consumer staples companies is by making it cheaper to transport their goods.  This ripples through the entire lifecycle of the product from the fields, to manufacturing, to shipping the finished product to warehouses and retailers.

In short, consumer staples are good investments in times of fear and uncertainty.  And they also benefit from lower oil prices.

I’m recommending the Consumer Staples Select Sector SPDR $XLP.

Fundamentals:  A closer look at XLP

XLP tracks an index of 40 consumer staples stocks that are in the S&P 500.   It has an expense ratio is 0.14%.  And it paid a 2.6% dividend over the last 12-months.

The top five holdings and percentage weight for XLP are –

Company Name Ticker % Weight
Procter & Gamble PG 11.70%
Coca-Cola KO 9.32%
Philip Morris International PM 7.67%
CVS Health CVS 6.13%
Altria Group MO 5.81%

Technicals:  The charts lead the way 

XLP is currently trading for $48.86.   It’s down 4.8% after it made a new high at the end of 2015.  That’s quite a bit better than the S&P 500 that is down 11% from the 52-week high and down 7.8% year-to-date.

What’s more, XLP is in an uptrend off the August lows.  And it’s holding above the 200-day moving average.

Consumer Staples Select Sector SPDR

Needless to say, the bullish technical setup for XLP is unique among ETFs after multiple 10% corrections in the last five months.

XLP should see a rebound in the coming weeks after testing support of the 200-day moving average.

Trade Alert

BuyConsumer Staples Select Sector SPDR $XLP up to $49.50

Recent Price: $48.86

Price Target: $52.00

Stop Loss:  $47.75

Remember:  The market turmoil has sent consumer staples lower in 2016.  But it is holding above key technical support of the 200-day moving average and the uptrend off the August lows.  This is a great setup that should send XLP higher as the market rebounds from oversold levels.  But the upside is limited by the bearish investor psychology.  We’ll look to capture a quick profit on this trade in a difficult market.

Sector Snapshots

Consumer Discretionary (-8.5%)

Consumer discretionary stocks are down 8.5% over the last month.  Our Market Vectors Retail ETF $RTH is down but holding above our $70.00 stop loss.  Continue holding.

Consumer Staples (-2.6%)

Consumer staples and down over the last month.  But the sector is doing much better than cyclical sectors with exposure to oil prices.  In fact, we’re recommending the Consumer Staples Select Sector SPDR $XLP this month… see page 5 for more details.

Energy (-9.8%)

Energy stocks have been routed as oil prices have plunged below $30.00.  Our Vanguard Energy ETF $VDE hit the $82.50 stop loss in the first week of January.  This kept our losses contained as the sector has continued to spiral downward the last few weeks.  Obviously, I was too early with this trade.  But I believe that my thesis will play out in the future.  We’ll continue to monitor the sector for a better opportunity to re-enter this trade in the future.

Financials (-8.3%)

Financials are being sold off.  And it could get worse as loans made to the oil industry go bad in the months ahead.

Healthcare (-5.1%)

Healthcare stocks are down 5.1% over the last month.  The sector has given back the gains it had racked up over the last two months.  And it’s being led by a selloff in the riskiest parts of the sector like biotechnology.

As a result, our ALPS Medical Breakthroughs ETF $SBIO fell below our $28.00 stop loss.  Our stop loss served us well.  The ETF has continued to drop in price after breaching $28.00.

Our iShares US Medical Devices ETF $IHI is showing relative strength to the S&P 500.  The gains have been bigger on good days and the losses have been smaller on bad days.  A market rebound from oversold levels should send IHI higher in the weeks ahead.

Industrials (-7.3%)

Industrials stocks are down 7.3% as slowing global economic growth and falling oil prices hurt manufacturing.  And the strong US Dollar continues to be a headwind for international sales.  Needless to say, industrials will have a hard time finding their footing in the current market environment.

Technology (-8.3%)

Technology stocks were derailed by a revenue miss from Intel $INTC and a weaker forecast for 2016 than the market expected.  The doom and gloom has taken its toll on momentum stocks.  Our PureFunds ISE Cyber Security ETF $HACK that was full of momentum stocks that have fallen out of favor hit our $25.00 stop loss in the first week of the year.  Once again, our stop loss has saved some additional pain as the ETF has continued to move lower after falling below $25.00.

2016 still holds promise for internet stocks.  Our First Trust Dow Jones Internet Index Fund $FDN is flirting with its own stop loss.  But could be saved by earnings season… continue holding.

Materials (-11.1%)

Materials stocks are being routed by the slowdown in China and the drop in oil prices.  There’s too much supply as capacity was ramped up over the last decade. And there’s little hope that the global economy accelerates in the first half of 2016.  A turnaround is still out of reach for the materials sector.

Utilities (+4.4%)

Utilities was the only sector to log a gain over the month.  The 4.4% gain has been fueled by expectations the Fed won’t be able to raise interest rates again due to the slowdown in the economy.  We’re up 8.4% on our Utilities Select Sector SPDR $XLU investment since September when including dividends.  That’s fantastic in the current market.   Continue holding.

Portfolio Changes

  • This month we’re buying XLP.
  • VDE, HACK, and SBIO were sold at the stop loss.

Category: SET Monthly Issues

About the Author ()

Comments are closed.