SET Monthly Issue July 2015

| July 22, 2015

These Drugs Are Good For Your Portfolio

It’s been an interesting summer for the financial markets, to say the least.  There has been more than enough noise from China and Europe to last a lifetime.

Thankfully Greece has agreed to their creditors’ demands.  They’ve once again kicked the can far enough down the road that it’s no longer impacting the financial markets.

And fears that a bubble in Chinese stocks was about to burst have been put to bed as well.  The Chinese government stepped in to stabilize their stock markets.

In short, the Chinese government isn’t about to let the stock market fall apart.  They’re already dealing with issues from slowing economic growth and problems in their real estate markets.

As a result, investors are shifting their focus back to the US economic data and earnings season.

Last week was a mixed bag for economic data.

For instance, there were fewer jobless claims than expected, housings starts beat expectations, and industrial production and capacity utilization continued to accelerate faster than expected.

But at the same time, the US consumer is showing signs of weakness.  Economists were expecting the four month run of retail sales growth to continue in June.

But instead, retail sales unexpectedly dropped.  The data was disappointing even when stripping out the volatile auto sales numbers.  Experts were expecting retail sales to grow 0.5% in June but they actually came in 0.1% lower than what they spent in the previous month.

There are clearly some crosswinds in the US economic data that are creating uncertainty.  And the earnings reports didn’t do much to change that opinion.

We’ve seen strong earnings from internet companies like Google (GOOG) and Netflix (NFLX).  There was also some good news for the big banks like BAC, C, and JPM that reported earnings last week.

But Intel (INTC) gave disappointing guidance, even though it wasn’t as bad as some had expected.  And anything tied to an oil field is still looking for a bottom.

As a result, the S&P 500 is back near the high end of its trading range near 2,130.

S&P 500

One thing you’ll notice is that the S&P recently tested support of the 200-day moving average (MA).  Right now, the 200-day MA is the most important support.  And the 2,130 resistance is the most important resistance level for the large cap index.

A breakout through one of these technical levels will likely bring more traders into the market.  We could see bullish or bearish activity accelerate quickly depending on which one of these technical levels gives way first.

Recent history suggests that we’re more likely to see a bullish breakout in the near future.  And that would be great news for our ETFs.

Trade Alert: Medical Breakthroughs

Healthcare has been the strongest sector of the market over the last few years.  And it’s not showing any signs of slowing down.

The combination of macro trends like aging baby boomers, Obamacare, emerging markets, and M&A activity have laid the foundation for the strong performance.

Macro/Economic Trend:  On the Cutting Edge

But the real reason for healthcare’s success has been biotechnology.  The industry has been handily outperforming the market.  The strong performance of biotech stocks hasn’t let up.

And for good reason…

For one thing, merger and acquisitions activity is still going strong.  This helps support stock prices as rival companies combine or launch hostile takeovers.

But the biggest reason for the success of biotech has been more positive clinical trials that lead to more new treatments and products for these companies to sell.

In fact, new drug approvals hit an 18-year high in 2014.  They approved 44 new drugs last year.  And they’re already surpassed those numbers in 2015… and it’s only July!

In short, medical breakthroughs are coming at an astonishing pace.  We’re seeing cures for diseases like hepatitis and cancer remission rates that are mind-blowing compared to just a few years ago.

And for once, government is actually taking notice of this trend and doing something about it.  In short, Congress is looking at legislation to modernize the approval process to speed up the approval process for lifesaving treatments.

In short, the legislation will remove many of the things that slow the development of new drugs today.   And it would direct an additional $8.5 billion of government money into drug research.

If this legislation passes, it should directly benefit the smaller drug companies with treatments in clinical trials.  It will lower their cost of development and speed up the time for them to bring a new drug or treatment to market…. and even start making money on it.

I’m recommending the ALPS Medical Breakthroughs ETF $SBIO to get exposure to clinical stage biotechnology stocks with one or more drugs in Phase II or Phase III FDA clinical trials.

Fundamentals:  A closer look at SBIO

SBIO launched on December 31, 2014.  It tracks the Poliwogg Medical Breakthroughs Index.  It holds mid and small cap biotechnology and pharmaceutical stocks.  These stocks have a market capitalization between $200 million and $5 billion.

The index is a modified capitalization weighting methodology.  Each stock is weighted according to the total market value of their outstanding shares.  It is reconstituted semi-annually and rebalanced each quarter.  It also caps any stock weighting at 4.5%.  The expense ratio is 0.50%.

The top five holdings and percentage weight for SBIO are –

Company Name Ticker % Weight
Receptors RCPT 4.77%
Anacor Pharmaceuticals ANAC 4.74%
Horizon Pharma HZNP 4.25%
Akorn AKRX 3.76%
Acadia Parmaceuticals ACAD 3.65%

Technicals:  The charts lead the way 

SBIO is currently trading for $39.95.   It’s up an eye-popping 58% year-to-date and at a new all-time high.

ALPS Medical Breakthroughs ETF

Needless to say, new all-time highs are typically a good indication of bullish investor sentiment.  But keep in mind, these clinical stage biotech stocks can be volatile.

But there’s no doubt about it, the overall trend is moving higher.  

Trade Alert

BuyALPS Medical Breakthroughs ETF $SBIO up to $45.00

Recent Price: $39.95

Price Target: $80.00

Stop Loss:  $28.00

Remember:  SBIO is going to be volatile… that’s just part of the deal with developmental stage biotech stocks.  But the upside is this ETF can easily double from here over the next year.  Use caution when establishing your position.  You might even consider buying your shares in 2 or 3 steps over the next month.  We’re going to give this ETF some wide stops and a big upside target.

Sector Snapshots

Consumer Discretionary (+3.9%)

Consumer discretionary stocks are up nearly 4% over the last month.  The sector is performing well despite an expected slowdown in retail sales in June.

The sector clearly got a boost from the end of the uncertainty in Europe.  Investors’ risk appetites are growing and that’s good for consumer stocks.

The Market Vectors Gaming ETF $BJK made a new low a few weeks ago as the fears about Greek and China reached their climax.  These stocks are oversold and due to bounce back in short order.  Continue holding.

Our PowerShares S&P SmallCap Consumer Discretionary Portfolio $PSCD is steadily moving in the right direction.  It’s up about 4% and poised to rally as investors’ risk appetites grow.  Continue holding.

Consumer Staples (+5.1%)

Consumer staples broke out with a 5% gain over the last month after being range bound during the first half of 2015.  This sector is in the center of the debate about wage growth and consumer confidence.  But at the same time, it could be hurt as the Fed hikes interest rates and devalues the dividend payments.

Energy (-6.9%)

The energy sector is a mess… after a 7% selloff over the last month, it is on the verge of testing the December 2014 lows.  We wisely avoided jumping on this bandwagon.

I think there’s still more pain in store for the sector.  OPEC and now Iran are pumping massive amounts of oil into the market.  These are more than offsetting any slowdown in US oil production.

Financials (+2.0%)

Financials are getting a boost from better than expected bank earnings.  Our Financial Select Sector SPDR Fund $XLF made a new high of $25.50.  We’re up 20.9% so far including dividends.  Our price target is $29.00. Continue holding.

Healthcare (+3.6%)

Healthcare stocks got back to their winning ways with a 3.6% gain over the last month.  No surprise here… this sector has been leading the market higher with a 13.6% gain year-to-date.  Biotech stocks continue to be the catalyst for the strong performance.  We’re recommending the ALPS Medical Breakthroughs ETF $SBIO this month… see page 5 for more details.

Our iShares US Medical Devices ETF $IHI made a new high of $123.62.  That’s a new all-time high.  The recent breakout should set the stage for the next leg higher.  Continue holding.

Industrials (-1.0%)

Industrials have been a mixed bag.  There have been pockets of good performance but it has always been accompanied by weakness in others.

What’s more, the US Dollar is moving higher again.  That’s a headwind for earnings.

I’m still bullish on US Global Jets ETF $JETS.  Continue holding.

Technology (+2.9%) 

Technology had a good month…. It was driven mostly by recent earnings reports.

Our Market Vectors Semiconductor ETF $SMH hasn’t done well since the announcement of a few big mergers in late May.  This is the calm before the storm of the next product cycle.  Continue holding.

Our First Trust NASDAQ-100 Technology Sector Index Fund $QTEC is all about big tech companies.  It failed to break out above resistance at $45.00.  Since then, it drifted back to support near $41.00.  It’s beginning to move higher again over the last week.  Continue holding for the breakout above $45.00.

The Global X Social Media Index ETF $SOCL has been on a wild ride over the last month.  But through it all, we’re up about 5%.  This ETF has holdings like Google and Facebook that have been outstanding performers.  But these have been offset by some of the weaker performers in the industry.  Needless to say, this is a bit frustrating.   But I’m bullish on the overall trend for social media companies.  Continue holding for more upside.

Materials (-5.3%)

Materials took a 5.3% nosedive over the last month.  The strong US Dollar, weak commodity prices, and weakness in China have all contributed to the weakness in this sector.

Our Materials Select Sector SPDR $XLB has fallen back to technical support around $47.00.   There are clearly good values to be had in this sector.  But the lack of bullish sentiment is keeping a lid on the sector.  Continue holding but keep an eye on our stop loss at $46.00.

Utilities (+1.6%) 

Utilities are in a difficult situation.  Demand for electricity is slowing due to energy efficiencies and conservation efforts.  So there’s little room for growth.  What’s more, interest rates are actually up a bit this year.  So the dividends this sector generates have been devalued.

Portfolio Changes

  • This month we’re buying SBIO.

Category: SET Monthly Issues

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