SET Monthly Issue June 2014

| June 17, 2014

June 2014


June began with a sense of calm and quiet optimism.

Stocks were on the upswing as the S&P 500 hit a new all-time high of 1,955 on June 9th.

Investor sentiment was becoming more bullish.  The AAII Investor Sentiment Survey showed bullish sentiment reaching its highest point of the year during the same week.

And at the same time, volatility was low.  The VIX fell to its lowest level since before the financial crisis.

But it didn’t last long…

The calm was broken when members of ISIS, a group linked to Al-Qaeda, began taking over Iraq.  The Islamist militants are advancing across the country uncontested and taking over control of one city after another.

Needless to say, this is disturbing on many levels.

The ten years of war our men and women in the armed services spent securing the region seems to be coming undone virtually overnight.

In short, there’s now an Islamic State controlled by a splinter of al-Qaeda in the heart of the Middle East.

The destabilization of an already unstable region has the potential to expand across the Middle East.

As it relates to the global economy, the situation has a direct impact on the crude oil market. Iraq is the second largest OPEC oil producer.

If ISIS cuts off Iraq’s oil exports, we could see crude oil price spike by $20 or more per barrel very quickly.

Here’s the thing…

Crude oil is hovering around $105 per barrel.  But it’s widely believed that if oil prices climb to over $130 per barrel, it will damage the global economy.

Obviously this situation has the potential to have a far reaching impact.

Don’t forget that the stock market’s advance has been led by an uptick in cyclical stocks.  These stocks need economic activity to accelerate in order to generate the higher revenues and earnings necessary for them to justify a higher stock price.

But if oil prices climb much higher, the global economy will likely stall or even tumble into a recession.  And that will have a direct impact on cyclical stocks and the ETFs that hold them.

For now, crude oil prices are being held in check by hopes that the situation won’t spiral out of control and cause a major disruption to world oil supplies.  But we have seen oil prices reach their highest levels in months.

As a result, we have seen energy ETFs outperform over the last few weeks while every other sector has pulled back.

The way I see it, this situation will be contained before it impacts the more important oil fields in southern Iraq.  This situation will end up having a bigger impact on investor psychology than any real impact on the global economy.

So we’re using this pullback from the recent highs triggered by violence in Iraq to add another cyclical ETF…


One of the key elements to an accelerating global economy is the increased demand for raw materials.

Building blocks like coal, oil, natural gas, iron ore, and even agricultural products like grains are essential to any growing economy.  The faster the economy grows, the more of these raw materials are required.

More often than not, these places are long distances apart and separated by oceans. As a result, shipping fleets do the heavy lifting of transporting raw materials from the places they are produced to the places they are needed.

Obviously, these ships, tankers, and other specialized seafaring crafts that transport massive amounts of raw materials are key cogs in the economic engine.

Judging by one important index of shipping rates, it could be a great time to invest in shipping stocks…

Macro/Economic Trend:  Baltic Dry Index

The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange.

The index provides an assessment of the price of moving major raw materials by sea. Taking in 23 shipping routes measured on a timecharter basis, the index covers Handysize, Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore, and grain.

The BDI has tumbled to its lowest levels since last summer.  But here’s the thing…

We’ve seen a drop in the BDI during the summer months in four out of the last five years.  And the BDI has rebounded later in the year. If we see a similar rebound in the BDI this year, it should help push shipping stocks higher.

And that’s not the only thing shipping stocks have going for them…

Remember, shipping stocks consist of more than just dry bulk shipping.  There’s a huge segment of the shipping industry that transports liquids like oil and natural gas in the form of LNG too.

Shipping stocks that specialize in transporting oil and natural gas could actually benefit from political uncertainty in Russia and Middle East.  But more importantly, they have exposure to an industry with great long-term supply and demand fundamentals.

These two catalysts should help push shipping stocks higher.  The ETF I like to profit from this is the Guggenheim Shipping ETF (SEA).

Fundamentals:  A closer look at SEA

SEA tracks the Dow Jones Global Shipping Index.  This index is designed to measure the stock performance of high dividend paying companies in the global shipping industry.

It currently consists of 27 US and foreign stocks.

The expense ratio is 0.65%.  And it has a dividend yield of 1.69%.

The top five holdings and percentage weight for SEA are –

Company Name Ticker % Weight
Moeller-Maersk MAERSKB 20.19%
Nippon Yusen 9101 7.09%
Sembcorp Marine SMM 4.59%
Cosco Pacific 1199 4.30%
Teekay TK 4.24%

Technicals:  The charts lead the way

SEA is currently trading for $22.85.  It’s up 7.1% year-to-date.  It’s currently 2.1% below the 52-week high and 39.7% above the 52-week low.


As you can see, SEA has been in a strong uptrend.  It has undergone periods of consolidation and breakouts to new highs time and time again over the last few years.

SEA recently broke out to a new high, but the rally was cut short as stocks have retreated in the wake of the violence in Iraq.  Over the last week, SEA has pulled back to test the new support zone created by breaking above the old resistance level.

This type of breakout and pullback to support is a good time to buy.  As the ETF hits support, it will often rebound and set out on a strong move to the upside eclipsing the previous high.

Trade Alert

Buy:  Guggenheim Shipping ETF (SEA) up to $23.25
Recent Price:  $22.85
Price Target:  $27.50
Stop Loss:  $21.00

Remember:  SEA has a bullish technical and fundamental setup.  This type of situation can send ETFs moving higher in a hurry.  Grab your shares of SEA before it climbs above the previous high.


Consumer Discretionary (+3.0%)

Stocks in the consumer discretionary sector added 3% over the last month… but failed to break out above the previous high set back in March.

Once again, retail sales played an important part in the recent price action.  In May, retail sales rose 0.3%.  The increase in May was less than expected, but the report also revised the April sales higher from 0.1% to a gain of 0.5%.

The combination of April and May points to a consumer that’s willing to spend money. And as the economy continues to grow, we should see consumers loosen their purse strings.  That’s good news for consumer discretionary stocks.

iShares US Home Construction ETF (ITB) has carved out a base over the last year. If ITB can catch an upswing here, it could finally make the surge to the upside we’ve been waiting for.  The good news is homebuilder confidence hit a four month high.  The bad news is builders are still rather pessimistic as many consumers hold off on new home purchases.  If builders see an uptick in traffic at their developments, it could be just the catalyst ITB needs to get the technical move to the upside jump-started.  Continue holding.

PowerShares Dynamic Media Portfolio (PBS) has rebounded as expected over the last few weeks.  This ETF was clearly oversold.  If it can reclaim the 200-day moving average, we should see bullish momentum carry it back to the highs is short order. Continue holding.

PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) is moving higher as upbeat economic data sent consumer stocks higher over the last few weeks.  There’s little chance of broad economic recovery taking hold without an uptick in consumer spending.  And PEJ holds a basket of stocks that should lead the consumer discretionary sector higher.  Continue holding.

Consumer Staples (+1.6%)

Consumer staples have been on a great run over the last few months.  In fact, only energy stocks are outperforming them in the second quarter.  Our First Trust Consumer Staples AlphaDEX Fund (FXG) is up more than 14%.  And it should continue moving higher from here.  Continue holding.

Energy (+5.7%)

Energy stocks are red hot.  They led all sectors over the last month with a gain of 5.7%.  The sector is clearly benefiting from the rise in oil and natural gas prices due to the political uncertainty in Russia and Iraq.  But a rebound in solar stocks is helping to push energy stocks higher as well.

Our Market Vectors Unconventional Oil & Gas ETF (FRAK) is hitting new highs almost daily.  It’s currently up about 11% and it’s above our $32.00 buy price. Needless to say, the unrest in the Middle East isn’t going to bother the companies that are focused on US onshore oil and gas.  Continue holding for bigger gains ahead.

Our Guggenheim Solar ETF (TAN) is breaking out to the upside.  The price action for this volatile ETF has been extremely bullish over the last few days.  The fundamental story for solar is finally overcoming the bearish investor sentiment.  As the momentum traders jump onboard this trade again, we could see TAN back at the recent highs quickly.  Continue holding.

Our Morgan Stanley Cushing MLP Hi Income ETN (MLPY) continues to move higher. We’re now up more than 18% on this trade when you include the dividends we have pocketed over the last year.

Financials (+2.9%)

Financials broke out to a new high before the ISIS led takeover of Iraq grabbed the headlines.  This sector is full of stocks that could trip on a landmine, but holding an ETF of financials diminishes the risk any individual company poses.  And there’s little doubt that accelerating economic growth will lead to better profitability throughout the sector.

The Financial Select Sector SPDR Fund (XLF) reached a new post-financial crisis high of $22.93 a week ago.  And it should continue moving higher as the economy picks up steam in the second half of the year. Continue holding.

Healthcare (+2.1%)

Healthcare stocks rose 2.1% over the last month.  They have now erased all of the losses from the selloff in March and April.  Investors are clearly putting money back to work in healthcare stocks.

Industrials (+2.1%)

Industrials logged a healthy 2.1% gain over the last month.  But it wasn’t as good as it could have been.  The sector pulled back after making a new high before the Iraq crisis surfaced.  The surge sent our iShares Transportation ETF (IYT) through our $145 price target and we were able to close this trade out for a very profitable 23.7% gain.

There’s still more upside for industrials as economic growth accelerates.  We’re jumping back on the industrials bandwagon with the Guggenheim Shipping ETF (SEA) this month… see the Trade Alert for more details.

Technology (+3.3%)

Tech stocks are on the upswing thanks to solid leadership from old guard tech and a rebound in younger stocks still focused on growth.  The nice thing about tech stocks is they can do well in a slow or fast growing economy.

Materials (+2.0%)

Materials posted a 2.0% gain over the last month.  Our iShares MSCI Global Metals & Mining Producers (PICK) hasn’t jumped as much as US materials with the addition of the global stocks.  But this impact should be short lived.  I’m expecting foreign metals and mining stocks to be the best performers when global economic growth accelerates.

Utilities (+3.3%)

Utilities are up 3.3% over the last month.  It’s the fifth time in the last six months the sector has been up.  Clearly there’s some bullish momentum here.  The sector has been a favorite defensive choice for investors because utilities tend to be less volatile than cyclical stocks and they pay a nice dividend unlike Treasuries.  It’s not surprising to see utilities move higher as the situation in Iraq creates more risk.  But the upside on this sector appears to be limited at best.

Portfolio Changes

  • This month we’re buying SEA.


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