SET Monthly Issue July 2014

| July 15, 2014

July 2014


Over the last few weeks, violence has erupted around the world.

It’s horrible to see the death and destruction being caused by the fighting in Gaza and Ukraine.  The commercial jet that was shot down over Ukraine is a senseless tragedy.

The spotlight is now centered on these geopolitical events.  And it has created some volatility in the global financial markets.

Obviously, the headline risk will remain elevated until the conflicts in Gaza and Ukraine calm down.

The good news is there are hopes of a cease fire in the two conflicts.  And investors seem to be taking an optimistic view that they these situations won’t get worse before they get better.

One thing that’s helping to revive optimism among investors is corporate earnings.

The second quarter earnings season has started with a bang.  According to Bespoke, the early quarterly earnings data is the best in nearly four years.

Right now, geopolitics and corporate earnings are pulling at investors from opposite ends.

Earnings seem to have the upper hand for now.  If this continues, the S&P 500 should be pushing to new highs in short order.


Fed Chairwoman Janet Yellen shocked investors last week when she warned of a bubble in social media and biotech stocks.  Needless to say, it’s unusual for the Fed to weigh in on stock valuations.

Not surprisingly, the Fed’s ‘warning’ triggered a quick selloff among biotech and social media stocks.

But this is one warning that shouldn’t been followed…

Macro/Economic Trend:  Growing Digital World

First off, let’s take the Fed’s comments head on.

There’s no doubt the Fed is composed of many people that are well educated in finance and economics.  So they have a good understanding of the global economy.

But here’s the thing… Janet Yellen isn’t a stock picker.

The major premise of the Fed’s argument against biotech and social media stocks is their valuation.  In short, the stocks are expensive based on their current and projected earnings.

But I don’t think this is the case.  If anything, the high price to earnings multiples on these stocks reflect forward earnings estimates that are too low for these stocks.

In fact, I think social media stocks are among the most misunderstood stocks around. And for good reason… they’re relatively new.  There isn’t years of data for analysts to use in modeling the future growth of these companies.

One thing’s for sure, people are spending more and more time online these days. People are using the internet more than ever before to communicate and share as well as finding entertainment and buying products.

What’s more, there’s an entire generation of people that have grown up in the digital world.  They weren’t raised on television, newspapers, and radio.  They’ve had iPods, iPhones, and iPads virtually all of their life.  These consumers have completely different behaviors than previous generations.

Right now, this digital generation is the group of consumers social media and internet companies covet most.  According to a report from Barclays, they represent $339 billion of household income and $57 billion of disposable income.

The bottom line is this consumer group will accelerate the changes we’ve seen in the digital world.  And ultimately the companies that reach these people most often will be the biggest winners.

Don’t forget, social media sites make the majority of their money selling advertising. And the amount of revenue social media sites are currently expected to make from ad sales is expected to double from $4.6 billion in 2012 to $9.2 billion in 2016,

In my opinion, the earnings estimates and valuations of social media companies aren’t bullish enough.  In fact, I think we could see this play out over the next few quarters.

The ETF I like to profit from this is the Global X Social Media Index ETF (SOCL).

Fundamentals:  A closer look at SOCL

SOCL tracks the Solactive Social Media Index.  This index is designed to measure the stock performance of social media stocks.

It currently consists of 30 US and foreign stocks.  The expense ratio is 0.65%.

The top five holdings and percentage weight for SOCL are –

Company Name Ticker % Weight
Tencent BMMV2K8 11.63%
Facebook FB 11.40%
LinkedIn LNKD 9.20%
Sina SINA 6.06%
Google GOOG 5.28%

Technicals:  The charts lead the way

SOCL is currently trading for $19.13.  It’s down 10.7% year-to-date but it’s up 18.0% over the last year.  It’s currently 17.0% below the 52-week high and 20.9% above the 52-week low.


As you can see, SOCL has had a volatile year.  It clearly got ahead of itself in the second half of 2013 and the first quarter of 2014.

The three month correction from March through May alleviated these overbought conditions.  The correction was overdone and briefly broke support of the uptrend. But it quickly regained this important technical support.

Now it’s trading in line with the overall uptrend.  This uptrend line, along with the 200-day moving average, appears to be the most important support and resistance lines on SOCL’s chart.

A breakout above the 200-day moving average should trigger a move back to the highs we saw earlier this year.

Trade Alert

Buy:  Global X Social Media Index ETF (SOCL) up to $20.00
Recent Price:  $19.13
Price Target:  $23.00
Stop Loss:  $17.00

Remember:  SOCL enjoyed an amazing, but unsustainable, run in late 2013 and early 2014.  The correction in social media stocks has created a good buying opportunity for these high growth stocks.  I’m looking for the long term uptrend to continue and SOCL to move back toward the recent highs in the weeks ahead.


Consumer Discretionary (+1.9%)

The consumer discretionary sector added 1.9% over the last month.  However, it hasn’t built on the bullish momentum after breaking out to a new high.

The latest rally was derailed by a weaker than expected reading on the June retail sales.  Analysts were expecting retail sales to increase 0.6% but they only increased 0.2%.  The poor report was offset to some degree by positive revisions to the May and April data.

The good news is consumers are feeling more confident about the US economy than at any time in the last six years.  That bodes well for consumer discretionary stocks because consumers tend to spend more money when they have a positive view of the economy and their own finances.

iShares US Home Construction ETF (ITB) has been stuck in neutral so far this year. But that could be changing soon.  The latest reading on homebuilder confidence showed homebuilders are beginning to feel more optimistic.  One thing that’s helping is the return of the first-time homebuyer.  This could be the catalyst to jump start ITB. Continue holding.

PowerShares Dynamic Media Portfolio (PBS) has recovered the majority of the drop it had earlier this year.  PBS is now just 4% off the 52-week high.  What’s more, some of the stocks PBS holds have been heavily shorted by some hedge funds.  As these media stocks threaten to push to new highs, many hedge funds will be forced to unwind these bearish positions.  A short covering rally could cause PBS to revisit its 52-week highs in short order.  Continue holding.

PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) had its rally temporarily derailed by the weak retail sales report last week.  But the improving job market and consumer confidence should benefit leisure and entertainment in the weeks and months ahead.  Continue holding.

Consumer Staples (+0.2%)

Consumer staples have leveled off this month after a good run over the last five months.  This is an important earnings season for consumer staples to justify their recent price increase.  Our First Trust Consumer Staples AlphaDEX Fund (FXG) is up 13%.  If the stocks it holds can meet or exceed expectations this earnings season, it should continue moving higher from here.  Continue holding.

Energy (+0.1%)

Energy stocks have cooled off after a red hot start to the year.  This looks to be a bullish correction by time.  The sector hasn’t given back much of the gains it racked up over the first half of the year.  However, oil prices will play an important role in the sector’s performance.  The price of a barrel of WTIC oil has settled into a trading range between $100 and $105 per barrel.

Our Market Vectors Unconventional Oil & Gas ETF (FRAK) has pulled back off of its recent highs.  But we are still up 8% on this trade.  One thing hasn’t changed… US onshore oil and gas assets are among the mostly highly prized assets in the industry. And the recent data from oil services firms show the amount of drilling activity is ramping up.  That’s good news for FRAK… Continue holding for bigger gains ahead.

Our Guggenheim Solar ETF (TAN) continues to trade in a rather volatile fashion.  The stocks in this sector are a battleground for bullish and bearish traders.  Right now, TAN appears to be in a consolidation phase.  Don’t forget, TAN is up 54% over the last year!  So, that’s not unexpected.  I believe in the bullish case for solar.  We should see TAN continue moving higher after this period of consolidation ends.

Our Morgan Stanley Cushing MLP Hi Income ETN (MLPY) has been a strong performer over the last several months.  We’re currently up 21.5% and closing in on our $21.00 price target.  Continue holding…

Financials (+1.6%)

Financials continue to trend higher despite concerns about profitability at the largest US banks.  The new regulations aimed at preventing another financial crisis have clearly hamstrung profitability.

The Financial Select Sector SPDR Fund (XLF) is marching higher in a clearly defined uptrend.  We’re now up 6% on this trade.  Here’s the thing… as the economy improves, financial stocks will increase revenue and grow profits.  It’s not the explosive growth many saw before the crisis, but it’s good enough to make it one of the top performing sectors.  Continue holding.

Healthcare (+2.4%)

Healthcare stocks rose 2.4% over the last month.  However, the perceived overvaluation of biotech stocks continues to weigh on the sector.  It will be interesting to see how the Affordable Healthcare Act impacts earnings across the sector.  I’ll be keeping a close eye on healthcare this earnings season.

Industrials (-0.4%)

Industrials were the worst performing sector over the last month.  And they continue to lag the S&P 500.  The weak first quarter GDP report has clearly weighed heavily on this cyclical ETF.  But there are signs of an uptick in economic growth.  If the US economy can grow faster than the 2.0% to 2.3% it is expected to this year, we should see industrials take on a leadership role among sectors in the second half of the year.

Our Guggenheim Shipping ETF (SEA) that we recommended last month has pulled back off of its recent highs.  But remains in a solid uptrend.  Grab your shares up to $23.25.

Technology (+3.3%)

Tech stocks have posted back to back monthly gains of 3.3% over the last two months.  The sector is on the upswing thanks to solid leadership from old guard tech and a rebound in younger stocks still focused on growth.  In fact, I’m recommending the Global X Social Media Index ETF (SOCL) this month… see the Trade Alert for more details.

Materials (+1.5%)

Materials posted a 1.5% gain over the last month.  The sector has been in the middle of the pack among US sectors so far this year.  The cyclical sector is being held back by weaker than expected global economic growth.  We just haven’t seen the acceleration of economic growth many expected to see this year.

Nevertheless, our iShares MSCI Global Metals & Mining Producers (PICK) has been enjoyed a nice run to the upside since it broke out above resistance at $20.00 per share at the beginning of July.  The exposure to US and international stocks has been a big boost to PICK’s performance.  PICK is now above the $20.50 buy up to price so I’m moving it to a Hold.

Utilities (-0.3%)

Utilities came back to reality over the last month.  Simply put, this sector was overvalued and was due for a correction.  Going forward, the sector’s performance will be affected by interest rates, economic growth, and investor sentiment.  But right now the odds favor a deeper correction for this safe haven.

Portfolio Changes

  • This month we’re buying SOCL.
  • Move PICK from Buy to Hold.

Category: SET Monthly Issues

About the Author ()

Comments are closed.