SET Monthly Issue July 2012

| July 17, 2012

July 2012


Second quarter earnings season is under way…

We’ll finally see how the debt crisis in Europe and the slowdown in China are impacting corporate profits.

Obviously, earnings are the key to the markets next move.  If they’re better than expected, we’ll likely see stocks rally.  If they’re weaker than expected, we’ll likely see them take a step back.

Don’t forget, last year the S&P 500 was in nearly the same position going into second quarter earnings season as they are today.  Unfortunately, earnings fell flat on their face last year and the S&P plummeted 10% in a week.

Avoiding a repeat of last year’s disaster is the biggest concern investors have going into this quarter’s earnings season.

So far the few big names like Alcoa (AA), JPMorgan (JPM), and Wells Fargo (WFC) that have reported haven’t disappointed.

But keep in mind, AA and JPM earnings estimates were dialed back before they reported.  So they merely cleared this lowered bar.

The good news is merely meeting these lowered estimates could be enough to put the bulls in control of the market.

One more thing I’m watching closely is investor sentiment.

We usually see investor sentiment reach extremely bullish levels when we’re near a market top and extremely bearish levels when we’re near a market bottom.

In other words, it’s a good contrarian indicator.

It usually pays to be bullish when the majority of investors are bearish and bearish when the majority of investors are bullish.

Over the last year, investors have become much more bearish on the market.  And when we’ve reached these extreme levels of bearishness before, it’s led to big market rallies.

This month we’ve found two ETFs that are running on fundamentals outside of the macroeconomic tug-o-war playing havoc with many industries and sectors today.  And we believe they will soar whether the broad market is sinking or soaring.


Knee-high by the fourth of July is an old farmers saying.

It means if corn stalks have grown to knee-high by the fourth of July, farmers can expect a good harvest this year.

The catchy phrase may not be as useful as it once was.  Advancements in corn breeding have dramatically improved the plant’s genetics.

Today’s corn plants are more drought resistant and capable of producing corn in less than ideal growing conditions.  And they regularly stand much taller than knee high by this time of year.

Macro/Economic Trend:  Thirsting For Profits

This year, corn plants improved genetics are being put to the test.

High temperatures and drought are abusing crops in the Corn Belt.  And growing conditions are rapidly declining.

This week 31% of the crop is in good or excellent condition.  That’s down 9% from last week and a 35% decline from last year at the same time.

Here’s the thing…

Poor growing conditions cause the plants to produce less corn.  And the USDA has drastically slashed their estimates for corn yields this year.

What’s more, Asian demand for corn is expected to jump this year.  Chinese imports are expected to jump 60% from 5 million tons to 8 million tons.  And Japanese imports are expected to edge up from 15.5 million tons to 16 million tons.

With demand soaring and expectations for a bumper crop fading fast, corn prices have skyrocketed from $5.50 per bushel in June to $7.76.  And corn prices are now 13% above where they were at the same time last year.

Simply put, high corn prices are good for the entire Agricultural Business ecosystem.

When crop prices are high, farmers buy more fertilizer, seed, and equipment.  And theMarket Vectors Agribusiness ETF (MOO) gives a great way to profit from all of the money farmers will be spending to reap the rewards of high crop prices.

Fundamentals:  A closer look at MOO

MOO holds 49 US and international stocks.  The companies must make at least 50% of their revenues from agriculture to be included in the index.

The expense ratio is 0.53%.

The top five holdings and percentage weight for MOO are –

Company Name Ticker % Weight
Monsanto MON 8.38%
Potash Corp POT 8.22%
Syngenta SYNN 6.86%
Deere & Co DE 6.56%
Mosaic MOS 5.00%

Technicals:  The charts lead the way

MOO currently trades for $49.19 per share.  It’s up 24% from the 52-week low of $39.60 and down 11% from the 52-week high of $55.86.

Last month, MOO tested the December 2011 low.  And it’s been soaring higher ever since.


As you can see, MOO has put in a series of three higher highs and three higher lows. That’s good enough to consider MOO in a new uptrend.

What’s more, MOO has also recently broken out above the key 200-day moving average.  Breaking through this long term moving average to the upside often brings more buyers to the table.

I’m expecting MOO to race back to its 52-week highs over the weeks ahead.

Trade Alert

Buy:  Market Vector Agribusiness ETF (MOO) up to $50.50
Recent Price:  $49.19
Price Target:  $56.00
Stop Loss:  $44.50

Remember:  Soaring corn prices are a great indication of future demand for Agribusiness products.  And MOO is in a strong uptrend off the June lows.  Grab your shares of MOO today for an opportunity to pocket some quick profits.


We love our pills.

Too much cholesterol in your blood… we’ve got a pill for that.  Your kid can’t sit still in class… we’ve got a pill for that. Love life not as ‘firm’ as you want it to be… we’ve got a pill for that.  Life got you feeling depressed… don’t worry, we’ve got a pill for that too.

Americans’ love of prescription drugs has turned pharmaceutical companies into some of the most profitable businesses in the world today.  And it’s only the tip of the iceberg…

Macro/Economic Trend:  More Pill Poppers

As I’m sure you’ve heard, the Supreme Court recently upheld the controversial individual mandate in President Obama’s landmark health-care law.

The court decided the requirement for nearly all Americans to have health insurance was lawful under Congress’ taxing authority.  The ruling has cleared the way for the embattled health care reform legislation to take full effect in 2014.

One thing’s for sure, there will be a lot more people with health insurance soon.

Obviously, when individuals have health insurance, they’re more likely to seek medical treatment.  And that means doctors will be prescribing more pills than ever.

According to the Centers for Disease Control and Prevention (CDC), over the last 10 years, the percentage of Americans who took at least one prescription drug in the past month increased from 44% to 48%.  The use of two or more drugs increased from 25% to 31%.  The use of five or more drugs increased from 6% to 11%.

Amazingly, 9 out of 10 older Americans reported using at least one prescription drug in the last month.  And aging baby boomers are flooding into their prime pill popping years.

Last year alone, Americans spent $320 billion on prescription drugs.  And worldwide, people spent $950 billion on pills.  And that number is expected to increase to $1.2 trillion by 2016.

That’s great news for big pharma, and the iShare Dow Jones U.S. Pharmaceuticals Index Fund (IHE) is a great way for us to profit from this trend.

Fundamentals:  A closer look at IHE

IHE is a market cap weighted index.  It holds 38 of the largest name brand and generic drug makers.

The expense ratio is 0.47%.  And the dividend yield is 1.4%.

The top five holdings and percentage weight for IHE are –

Company Name Ticker % Weight
Johnson & Johnson JNJ 9.30%
Pfizer PFE 8.82%
Merck MRK 8.23%
Abbott Labs ABT 7.18%
Bristol-Myers Squibb BMY 5.71%

Technicals:  The charts lead the way

IHE is currently trading for $88.22 per share.  It’s up 46% from its 52-week low of $60.26 and right near its 52-week high of $88.39.

IHE has been on a roll.  It’s simply continued to move higher no matter what the broad market has done.

As you can see, IHE is in a strong uptrend.  It’s set one new high after another for nearly a year.  And it’s not showing any signs of slowing down.

This is one uptrend that will take a lot to break.

However, IHE is near the upper end of its upward trending channel.  Investors who want to squeeze a bigger return out of this trade may want to hold out for a pullback to the lower end of the channel.

A good entry point would be around $86.  Just be aware, IHE may not pull back and you could miss out on this trade altogether.


Trade Alert

Buy:  iShares Dow Jones U.S. Pharmaceuticals Index Fund (IHE) up to $90.00
Recent Price: $88.22
Price Target: $105.00
Stop Loss: $80.00

Remember:  IHE is in a strong uptrend with solid fundamentals.  You can try to squeeze a bigger profit out of IHE by waiting for a pullback to $86.  But you’ll still grab a nice profit by buying IHE up to $90 per share.


Consumer Discretionary (-0.2%)

Retail sales have declined for three months in row.  It appears negative headlines and a weak labor market is causing consumers to be more cautious with their spending.

However, initial jobless claims came in better than expected last week.  In fact, it was the best reading since March of 2008.  Hopefully this is more than an anomaly due to the 4th of July holiday last week.

Our SPDR S&P Retail Fund (XRT) slid back after the weak retail sales report.  But we’re only down a few points from where we recommended it.  As we move into the heart of the earnings season, we’ll likely see earnings and management forecasts drive the sectors next move.  Buy XRT up to $62.50.

The SPDR S&P Homebuilder ETF (XHB) is holding steady.  And the housing market is showing signs of recovery.  After seven ugly years, home prices are starting to rebound in some of the nations hardest hit markets.  As home prices increase, it will be easier for builders to turn a profit.  And that’s good news for XHB…

Consumer Staples (+2.4%)

Consumer staple stocks were among the best performing stocks again last month.  All of the uncertainty in the world today is causing investors to gravitate toward safe haven sectors like staples.

I’m keeping my eye on this sector for an opportunity to re-enter it down the road.

Energy (+2.1%)

Energy stocks are finally rebounding after a few rough months.  As usual, the upswing is being led by higher oil prices.

The move in oil is directly tied to the US Dollar.  These two have been moving in an inverse relationship for months.  And the recent weakness in the dollar has helped WTIC oil prices jump $10 per barrel over the last few weeks.

Our First Trust ISE Revere Natural Gas Index Fund (FCG) is performing nicely as well.  We hit a peak gain of 8% this month.  And there’s plenty of room for FCG to run as natural gas prices continue to rebound from multi-year lows.

The ALPS Alerian MLP ETF (ALPS) is off to a fantastic start.  It’s up more than 5% to $16.41 in the last month.  It’s also moved beyond our $16 buy up to price so I’m moving it to a hold.

Financials (+2.4%)

Financial stocks are bouncing back.  The rally is being led by two things.  The risk of Europe causing a financial system meltdown has subsided, at least temporarily.  And, better than expected earnings from WFC and JPM are giving investors hope the banking sector won’t fall flat on its face this earnings season.

It’s time to ring the cash register on our iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ).  It hit our $50 price target today.  REZ has gone up from $39.52 to over $50 today and we’ve collected $1.78 in dividends as well.  That’s gives us a total return of more than 33%.  Congratulations on a successful trade.

Healthcare (+3.1%)

Healthcare stocks are benefiting from the Supreme Court’s decision to uphold the individual mandate.  If nothing else, it removes some of the uncertainty from investing in the sector.  That alone will likely bring new investors into the sector.

Our PowerShares S&P SmallCap HealthCare Portfolio (PSCH) trade is off and running.  It’s already soared past our buy up to price.  And it’s reached a peak gain of more than 9% already.  Continue holding PSCH for bigger gains ahead.

What’s more, we’re adding the iShare Dow Jones U.S. Pharmaceuticals Index Fund (IHE) this month… see Trade Alert 2 for more details.

Industrials (-0.9%)

Industrial stocks are facing stiff headwinds from slowing economic growth.  Until we see signs of growth accelerating, manufacturing stocks will have a hard time moving higher from here.

However, airline stocks continue to move against the grain.  They’ve managed to move higher while the broad industrial sector is slipping lower.  Our Guggenheim Airline ETF (FAA) has shot past our buy up to price and is in a strong uptrend. Continue holding for bigger gains ahead.

In addition, we see soaring crop prices driving up sales and earnings of Agribusiness companies.  We’re recommending the Market Vectors Agribusiness ETF (MOO)… see Trade Alert 1 for more details.

Technology (-0.5%)

Technology stocks are in desperate need of a solid earnings season.

The entire sector has been plagued by fear of weakening business tech spending and slowing retail sales.  But strong earnings this quarter and a few upbeat forecasts could easily change that.

Our iShares S&P NA Technology-Software Index Fund (IGV) looks to be putting in a new base.  IGV has spent the last few months consolidating near the June lows.  But it hasn’t broken through support around $57.50.  As long as this level holds, we’ll likely see IGV bounce back quickly.  Continue holding IGV…

Materials (-0.2%)

Materials stocks have traded in a tight range over the last few months.  It’s a big relief after the sharp selloff we saw in May.  But it’s nothing to get excited about. Weak demand and over-supply of many materials will continue to hold this sector back.

Not only that, gold prices are also mired in a trading range between $1,550 and $1,650.  And gold miners are seeing rising production costs eat into their profitability.

All things considered, I’m steering clear for now.

Utilities (+1.1%)

Investors continued to show utilities stocks some love this month.  The sector climbed higher as wary investors sought out safe havens from the negative news headlines in Europe and China.

We closed out our position in XLU last month for a 15% gain.  But we could get back into utilities down the road if the right opportunity comes along.

Portfolio Changes

  • This month we’re buying MOO and IHE.
  • Sell iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ) for a 33% profit.
  • Move Guggenheim Airline ETF (FAA) to hold.
  • Move ALPS Alerian MLP ETF (ALPS) to hold.


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