SET Monthly Issue June 2013

| June 18, 2013

June 2013


Over the last month, global financial markets have been embroiled in speculation about the Federal Reserve.

More specifically, investors want to know when the Fed will make a change to their current bond buying program.

Up until May 22nd, the general consensus was the Fed would continue to buy bonds at a pace of $85 billion per month through the end of the year and most likely well into next year.

Then Fed Chairman Bernanke threw a change-up right by investors.  He said the Fed could begin to taper off asset purchases within the next few months.

Here’s the thing…

He didn’t clarify under what conditions the Fed would begin to taper within the next few months.  And without the ability to gauge when the Fed would begin to taper created uncertainty.

As I’ve pointed out time and time again, investors hate uncertainty.

Thankfully, the FOMC is meeting this week.  And we’ll likely see this uncertainty addressed in the FOMC statement that will be released later this week.

In my opinion, the stock market reacted exactly how Bernanke hoped it would.  As soon as he said the Fed could begin to taper their asset purchases sooner than expected, the epic bull market in US stocks cooled off.

But at the same time, those comments also caused the interest rate on the 10-year Treasury as well as home mortgages to spike higher.  In fact, the interest rate on a 30-year fixed rate mortgage soared 21% from 3.42% to 4.16% over the last month.

Obviously, violent spikes in interest rates can be harmful to the economy.  And it can play havoc with interest rate sensitive sectors like real estate, home construction, banking, and capital goods.  Not to mention undermine confidence in the market.

Here’s the problem…

US economic data has been mixed between good and bad.  And the most promising data has been from interest rate sensitive sectors like home builders.  If rising interest rates pour cold water on these areas of the economy, it could have a negative impact on the entire economy.

What’s more, outside of the US the global economy is a mess.

Right now, China’s economy is slowing, Japan’s currency manipulation is causing the Yen and Nikkei to swing violently, most of Europe’s in a recession, and investors are fleeing emerging markets because they’re afraid higher interest rates will sink their fragile economies.

Here’s the bottom line, the world needs the US to keep interest rates low.  And the only way Bernanke can reassure investors that low interest rates aren’t going away is to backtrack on the possibility of tapering asset purchases sooner rather than later.

After that I think we’ll see investors accelerate their rotation out of defensive sectors and into cyclical sectors.  The ETF I’m recommending this month stands to be one of the biggest beneficiaries of this rotation.


It’s no secret, tech giant Apple (AAPL) is having a rough year.  In fact, after touching an all-time high of $705.07 per share, the stock has plummeted $275 to around $430 today.

The 40% drop in AAPL’s share price has been a tough pill to swallow for the investors that were used to seeing AAPL climb steadily higher.  The selloff in the largest tech stock has also been disastrous for market cap weighted tech ETFs as well.

As you know, market cap weighted ETFs invest more in larger companies and less in small companies in the index.  As a result, these tech ETFs were heavily invested in AAPL.

Amazingly, AAPL’s 13% weighting is still the largest holding in many market cap weighted tech ETFs after falling 40%.

And while you can’t cut AAPL completely out any tech ETF, you can minimize the impact it has on the ETF by using an ETF like Guggenheim S&P 500 Equal Weight ETF (RYT).  Let’s take a closer look…

Macro/Economic Trend:  Catch Up Time?

Defensive sectors led the stock market higher so far this year.  The influx of money into these dividend heavy stocks has pushed valuations up and yields down.

The relative underperformance in cyclical stocks has turned tech stocks into one of the best bargains around.  When the pendulum of investor sentiment swings back toward these cheaper stocks, they stand to be the next sector that outperforms.

What’s more, companies are ramping up their IT spending.

According to Gartner, IT spending is expected to grow 4.2% this year.  And the bulk of it will be spent on enterprise software, information technology services, and devices.

Here’s the bottom line…

The fundamentals of the tech sector are good if not fantastic.  But the investors’ perception of tech is bad because of AAPL’s poor performance.

Fundamentals:  A closer look at RYT

RYT tacks an unmanaged equal weighted index of the S&P 500 Information Technology Index.  It holds 70 stocks that each weighted 1.42% of the holdings.  It is rebalanced quarterly.

The expense ratio is 0.5%.

The top five holdings and percentage weight for RYT are –

Company Name Ticker % Weight
First Solar FSLR 2.75%
Advanced Micro Devices AMD 2.09%
Western Digital WDC 1.78%
Seagate Technology STX 1.77%
Micron Technology MU 1.71%

Technicals:  The charts lead the way

RYT is vastly outperforming the SPDR Technology Select Sector (XLK).  Since September when AAPL began falling, RYT has risen 15% while XLK has merely managed to break even.


In fact, RYT’s 15% gain year-to-date is outperforming the S&P 500.  That’s a world of difference from the underperformance of other tech ETFs like XLK.

The strong relative strength of RYT makes it a prime candidate to continue to outperform other tech ETFs and the S&P 500 going forward.

Trade Alert

Buy:  Guggenheim S&P 500 Equal Weight ETF (RYT) up to $66.50
Recent Price:  $64.40
Price Target:  $80.00
Stop Loss:  $58.00

Remember:  RYT is outperforming the S&P 500 and other ETFs focused on the tech sector.  If investor sentiment toward tech turns bullish, this sector has the potential to make a quick 25% surge in the weeks ahead.


Consumer Discretionary (-1.8%)

For the first time this year, consumer discretionary stocks declined in value between our monthly issues of Sector ETF Trader.  The sector lost 1.8% from May to June.

But the sector is quickly recovering after an upbeat retail sales report last week.  The report showed last month US retail sales rose at their fastest pace in three months.

Our iShares US Home Construction ETF (ITB) held up well as the stock market slumped last month.  And a report this week showed homebuilder confidence is now at a seven-year high.  Yet single family home starts are well below where they should be.  The lean inventory of new homes is allowing builders to increase prices and expand margins.  This is one ETF with lots of potential.  Continue holding for bigger gains ahead…

Consumer Staples (-2.0%)

Consumer staples stumbled to a 2% loss this month.  The search for yield that has fueled the rise in the sector came to a screeching halt as interest rates began to rise last month.  This is one overvalued sector I’m steering clear of for now.

Energy (-4.0%)

WTIC oil prices have been surging toward their highest levels of the year as the US announced they would begin arming Syrian rebels.  The conflict has become the front line of the conflict in the Middle East.  And oil traders are fearful the conflict could spill over into other oil rich nations in the region.

At this point, we’ll likely see crude oil prices take their next cue from the Fed and how the stock market reacts to the FOMC statement this week.

Right now we have exposure to this sector with SPDR S&P Oil & Gas Equipment & Services ETF (XES) and Morgan Stanly Cushing MLP High Income Index ETN(MLPY).  XES is currently up 6.5% and MLPY is up 3.3%.  Both ETFs are in an uptrend and have strong fundamentals.  Continue holding for bigger gains…

Financials (-2.2%)

Financials pulled back a bit this month.  But they’re still one of the strongest sectors around.  Market volatility is typically good for investment banks and credit card companies are benefiting from few delinquencies and charge offs.

What’s more, banks are quickly redeploying cash by increasing dividends and share buybacks.  Our SPDR S&P Bank ETF (KBE) came close to our price target before pulling back a bit this month.  Keep an eye on this ETF and be ready to capture your profits when KBE hits $29.

Healthcare (-0.5%)

Healthcare stocks were the best performing sector over the last month. Unfortunately, they were still down for the month.  We recommended the Health Care Select Sector SPDR (XLV) last month… so we moved into the right sector.

The relative outperformance of XLV last month is a bullish indicator.  Investors were clearly willing to hold onto their healthcare stocks when they were selling stocks in other sectors.  This type of relative strength typically spurs the sector to outperform to the upside when stocks begin moving higher.

Industrials (-2.3%)

Industrial production was unchanged in May.  It was the second straight lackluster report after it dropped 0.5% in April.

Here’s the thing… the slowdown in output in the second quarter was expected.  And everyone’s optimistic things will pick up in the second half of the year.

As long as optimism reigns, our iShares Dow Jones US Industrial ETF (IYJ) has the potential to outperform.

Technology (-2.5%)

Tech stocks – especially when you exclude Apple – are building bullish momentum.  In fact, we’re recommending Guggenheim S&P 500 Equal Weight ETF (RYT) this month… see Trade Alert for more details.

Our iShares Semiconductor ETF (SOXX) has been one of the top performing ETFs over the last month.  Investors are beginning to take notice of the earnings semi-conductor stocks are expected to rake in throughout the rest of 2013.  Continue holding for bigger gains…

Materials (-3.0%)

Materials stocks slumped to a 3% loss last month.  The combination of a weakening US Dollar and rising interest rates derailed commodity prices.

What’s more, investors are afraid rising interest rates will derail economic growth in emerging markets.  As you know, fast growing emerging markets consume massive amounts of raw materials.  So if emerging markets go in the tank, demand for materials will drop like a rock.

Our run with iShares Basic Materials ETF (IYM) has reached an end.  The weak global economy and slumping commodity prices are just too much for basic materials to overcome.  Sell IYM now for an 8.4% profit.

Utilities (-5.3%)

The bubble in utilities stocks burst this month.  (I never thought I would use ‘utilities stocks’ and ‘bubble’ in the same sentence!)  The 5.3% selloff was sparked by the Fed and the rise in the yield on the 10-year Treasury.  That quickly spilled over into an exodus out of overvalued dividend paying stocks.  At this point, utilities represent an intriguing value… I’ll be keeping an eye on how they react to the FOMC statement later this week.

Portfolio Changes

  • This month we’re buying RYT.
  • Sell IYM for a gain of 8.4%.

Category: SET Monthly Issues

About the Author ()

Comments are closed.