SET Monthly Issue March 2010

| March 16, 2010

March 2010


The bull market’s taken off again.  Key sectors are breaking out to new highs.  Clearly this bull has more room to run!

But if you’re only watching the broad market indexes, you might have missed it.  That’s because the Dow and the S&P 500 haven’t eclipsed the highs they set back in January.

The markets trading volume’s been lower than average lately too.

It’s one of the reasons why the recent run snuck up on many investors.  The low volume and broad market indexes lagging the leading sectors makes this rally a “stealth” rally.

A stealth rally occurs when the majority of investors don’t believe the market should go higher.  But they’re also not fearful enough to sell their stocks.

Despite what the majority of investors believe… money is still being made.

Over the latest run, the big movers were biotech, industrials, technology, financials, and consumer discretionary stocks.

It’s been great news for our ETFs.  The biggest winner by far is First Trust Biotechnology Index Fund (FBT).  It shot right through our price target.  It’s up over 25% in less than two months!

During the last month, we’re also seeing small and mid-cap stocks outperform large caps.

Right now the riskiest stocks are leading the market.  The cyclical small cap stocks who benefit the most from an improving economy are leading.  It’s telling me the economy is getting strong and the bull market still has room to run.  This month I’ve got two ETFs that should lead the way.


Agriculture is a commodity driven industry.  When commodity prices are high or rising, it’s a boon for the businesses supporting production.

One of the main catalysts of rising commodity prices is inflation.  And just this week, news out of China indicates inflation is beginning to show up in the form of rising housing prices and increasing wages.

Central banks around the world are facing a double-edged sword.

They know keeping rates too low for an extended period of time leads to inflation. They also know if they raise rates too quickly there’s a good chance the economy could take the dreaded “double dip”.

The general consensus among the world’s central bankers seems to be erring on the side of inflation over a double dip recession.

Now that we’re beginning to see the first signs of inflation, commodity driven stocks like agribusiness should lead the markets higher.

Macro/Economic Trend:  Supply and Demand

We’ve already talked about how inflation causes commodity prices to rise.  But an even bigger driving force behind commodity prices is supply and demand.

It’s Macroeconomics 101.

When supply is greater than demand… prices fall.  When demand is greater than supply… prices rise.

In the world of agriculture, there are two catalysts driving demand higher.

The two driving forces are an increasing world population and developing countries expanding wealth.

An increasing world population is simple enough to understand.  More mouths to feed require more food.

The other is the expanding wealth of developing countries giving rise to a large middle class.  This new middle class is eating more and adopting a westernized diet.

A western diet is high in meat.  And it takes around 10 pounds of grain to make 1 pound of red meat.  So as diets around the world shift toward one high in meat, the demand for more grain will rise as well.

Supply must increase to meet demand, or prices rise.

The problem is there’s a fixed amount of land with the right conditions for growing crops.  And the vast majority of land available for growing crops is already in use.

The only way to increase supply is to squeeze more production out of the land already in use.  In Ag terms, that means increasing yields.

And the best way to increase yields is the technology agribusiness companies provide.

Agribusiness companies make everything from state-of-the-art machinery to bioengineered seeds.

And here’s the best part.  American producers have already embraced the technology, but it’s just beginning to gain acceptance worldwide.

The wave of worldwide acceptance is being led by China.  In fact, China recently approved its first bioengineered corn seed for commercial use.

This is a global trend just getting underway.  And right now the growth estimates for many of the leading companies aren’t factoring in the explosion in profits they’ll see as more bioengineered seed is approved for commercial use worldwide.

The ETF I like to profit from the global implementation of bioengineered seed is Market Vectors Agribusiness Fund (MOO).

Fundamentals:  A closer look at MOO

MOO holds stock in 46 companies across five sub-sectors.  They include agriproduct and livestock operations, agricultural chemicals and equipment, and ethanol/biodiesel.

The expense ratio is 0.59%.

The top five holdings and percentage weight for MOO are –

Company Name Ticker % Weight
Mosaic MOS 8.32%
Wilmar International WIL 8.16%
Potash POT 8.11%
Syngenta SYT 7.69%
Monsanto MON 6.72%

Technicals:  The charts lead the way

MOO is in a long term uptrend since November 20th 2008.  Take a look at the chart. You’ll see it has set a series of higher highs and higher lows.

In fact, MOO’s trend is one of the longest and strongest uptrends in the market.

When the entire market pulled back from January 11th to February 5th, MOO didn’t break the support line of the uptrend.


MOO has bounced back nicely over the last month.  The 20-day moving average recently crossed the 50-day moving average to the upside.  This is a good sign MOO’s bullish momentum is back and should continue.

Trade Alert

Buy:  Market Vectors Agribusiness Fund (MOO) up to $46.50
Recent Price:  $45.07
Price Target:  $56.00
Stop Loss:  $39.50

Remember:  MOO has made a nice run over the last month.  It’s run into a bit of short term resistance around $45.  The rally’s now a little overbought.  But an ETF in a strong uptrend can stay overbought for an extended period.  I wouldn’t be surprised to see MOO consolidate over the short term before heading higher again.


It’s well documented that small and mid-cap stocks outperform large cap stocks during the recovery phase of the economic cycle.  And cyclical sectors like technology outperform defensive sectors like consumer staples.

As year two of the recovery gets started, I’m expecting market gains to continue.  But at a slower pace than the first year.  In order to squeeze the maximum potential out of the market, we need more small and mid-cap stock exposure.

This is often easier said than done with ETFs.

The majority of ETFs are market cap weighted.  So the big behemoths control a large percentage of the ETF.  For example, Microsoft (MSFT) makes up 11% of the iShares US Technology Sector Index Fund (IYW).

And the smallest companies who are most likely to increase in price receive a tiny .01% weighting.  Even if one (or even ten for that matter) of these small stocks double in price, it’s not going to have a meaningful impact on the ETF.

In order for the smaller stocks to have a meaningful impact on the ETF, we need an ETF that doesn’t use market capitalization to determine the stocks weighting.

The ETF I’ve found to harness the power of the small and mid-cap tech stocks is Rydex S&P Equal Weight Technology (RYT).

Macro/Economic Trend:

Technology is the engine driving the economic expansion and productivity gains over the last 25 years.  This trend’s showing no signs of changing anytime soon.

Companies, big and small alike, must keep up with the latest technologies if they’re going to be competitive.

But over the last two years, the recession caused business spending on technology to fall dramatically.  Companies were focused on cutting costs and saving money to keep their doors open.

Now business spending on technology is growing again.  In fact, Goldman Sachs (GS) recently increased their 2010 global IT spending forecast from 2% to 4%.  And Forrester Research said they expect US IT spending to increase by 6.6%.

And to add a little more fuel to the fire, Cisco Systems (CSCO) CEO John Chambers said in an interview he thinks business IT spending has entered the “second phase of recovery”.  And he expects tech company sales to increase “across the board in all geographies and all segments”.  (I don’t know how you can get much more bullish than that.)

Fundamentals:  A closer look at RYT

RYT is an equal dollar weighted index.  It invests an equal amount of money in 74 tech stocks.  The holdings are rebalanced on a quarterly basis.

The aspect that really drew me to this ETF is the equal dollar weighted index.

This method puts a bigger emphasis on small and medium-sized companies than a market cap weighted index does.  And the smaller companies are where you’ll see the biggest gains over the next year!

The expense ratio is 0.5%.

Right now the top five holdings and percentage weight for RYT are –

Company Name Ticker % Weight
JDS Uniphase JDSU 1.86%
Novell NOVL 1.82%
Lexmark International LXK 1.80%
Tellabs TLAB 1.78%
Sandisk SNDK 1.74%

Technicals:  The charts lead the way

RYT has made bigger gains than other technology ETFs over the last month.  That means RYT is showing relative strength.  And relative strength is one the best predictors of future success.

Take a look at RYT’s chart.  You can see it recently passed the highs it set back in early January.  RYT is now breaking out to its highest price in 17 months.


In the last week, the 20-day moving average crossed the 50-day moving average to the upside.  A moving average crossover is a good indicator bullish momentum is increasing.

Trade Alert

Buy:  Rydex S&P Equal Weight Technology (RYT) up to $48.15
Recent Price:  $46.73
Price Target:  $56.50
Stop Loss:  $42.00

Remember:  RYT is in a bullish technical uptrend with a great fundamental story.  It’s also had a big run over the last month to breakout above the previous high.  Right now, technology stocks (as well as the entire market) look a little overbought.  But the fact that RYT just broke out to a new high should help minimize any short term pullback.


Consumer Discretionary (+10.1%)

Retail sales gains and optimism about the housing market boosted the consumer discretionary sector this month.  Our SPDR S&P Homebuilders ETF (XHB) is up about 10%.

February retail sales posted a surprising gain recently.  My gut feeling is these numbers are being helped out by homeowners who quit making their mortgage payment as well as those who have already traded in their large mortgage payment for a lower rent payment.  This is a trend I expect to continue.  It’s good news for the retailers but bad news for the mortgage holders.

Consumer Staples (+3.9%)

The consumer staples gains are back to lagging the broad market gains.

As the economic recovery becomes more mature, the rapid market gains we saw for much of ’09 will slow.  This should cause the staples to begin to rise at a pace closer to the overall market in 2010.  But that doesn’t mean they’ll be a market leader anytime soon.

Energy (+5.2%)

Oil continues to trade in a range from $70 to $84.  Until the massive supply of oil is drawn down, oil will be stuck in the current range.  Despite the lack of improvement in oil prices, we’re starting to see producers indicate they’re increasing production levels. This could cause supplies to increase and drive prices down again.  I’m staying away from the energy companies for now.

Financials (+11.5%)

Financials are rallying hard this month.  That’s a big change for a sector that’s been generally flat for the last six months.

Despite the recent rally, I’m bearish on financials, especially the banks.  They face headwinds from government regulation, rising interest rates, and bad loans.  Sooner or later the “extend and pretend” shell game will come to an end.  When it does, more banks are going out of business.

Healthcare (+3.1%)

The political theater surrounding healthcare reform has played in a way that I’ve often remarked, “You can’t make this stuff up.”  Now it looks like President Obama is throwing all of his political power into strong-arming House Democrats into signing a bill to match the Senate’s version.

Regardless of the outcome of healthcare reform, our biotech trade was a resounding success.  The First Trust NYSE Arca Biotechnology Index Fund (FBT) shot up more than 25% in less than two months.  We knew M&A activity was going to pick up and a few of FBT’s holdings received buyout offers that sent shares sky-high.

Industrials (+10.2%)

The US manufacturing sector is experiencing strong growth.  According to the Institute for Supply Management, executives at manufacturing companies expect the economy to continue improving.  Their optimism is being fueled by increasing demand for products.  Keep an eye on your Vanguard Industrials ETF (VIS).  It’s closing in on our price target fast.

Technology (+6.5%)

Business IT spending is picking up steam.  I think the small and mid-cap tech stocks give us the best opportunity for big gains.  We’re recommending the Rydex S&P Equal Weight Technology (RYT) this month… see Trade Alert 2 for more details.

Materials (+7.5%)

Basic materials stocks continue to run after bouncing back from oversold levels last month.  Now it looks like inflation could start reappearing in countries like China where economic growth is strongest.

We’ve got plenty of exposure to different commodity driven stocks that should do well if and when inflation fears take off.  Our Market Vectors Junior Gold Miners (GDXJ) will be the biggest beneficiary from inflation fears.

We’re also getting back into another commodity driven ETF this month too.  We pocketed a 31% gain on the Market Vectors Agribusiness Fund (MOO) a few months ago.  Now after a pullback, I think it’s time to get back into MOO at the lower price.

Utilities (+3.6%)

Utility stocks are slowly starting to regain their momentum.  The snowstorms on the east coast put utilities rally on ice.  The storms caused significant damage to infrastructure and knocked out power to customers up and down the coast.  However, I still think utilities have a good chance to outperform the market this year thanks to their hefty dividend yield.

Portfolio Changes

  • This month we’re buying MOO and RYT…
  • First Trust Biotechnology Index Fund (FBT) hit our price target.  Sell for a 25% gain!


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