SET Monthly Issue March 2011

| March 15, 2011

March 2011


I have to admit something… And I’m not proud of it.  I’m thoroughly entertained by Charlie Sheen.

Have you heard the things the movie and television star has said lately?

It’s been hard to miss… He’s dominating the entertainment headlines lately.  And I can’t get enough.  I even started following him on Twitter…

Here’s what’s so odd.  Normally I could care less about Charlie Sheen or any entertainment news for that matter.  But somehow I’ve gotten wrapped up in this drama.

This story has everything.  Drugs, sex, violence, and even a nasty child custody battle.  And to top it all off, we have a front row seat to a very public feud with fat-cat TV executives cast as our anti-hero’s evil villains.

Of course, what makes this story a blockbuster is Charlie Sheen’s charismatic personality.  Even the apparent manic behavior makes the guy seem more likeable.

And through it all, he let’s all of the criticism slide right off his back.  I’ve never seen anything like it!

Or have I?

Could it be that the stock market is walking arm in arm with a manic Charlie Sheen?

The similarities are more than a little eerie…

They’re both at the top of their game.  Sheen is the highest paid actor on TV.  The S&P 500 is up more than 90% in the last two years.

Sheen’s stardom rose to new heights despite admitted drug use.  And the S&P 500 continues to go up with the help of ‘stimulants’ from the Fed’s quantitative easing.

Now Sheen’s life and the stock market have both gone through a series of dramatic events.  Charlie’s are of a personal nature.  But the global financial markets have endured a number of equally troubling events.

Political unrest in oil producing regions of Africa and the Middle East… $100 per barrel oil… Skyrocketing food commodity prices… European sovereign debt crisis… Rising interest rates… Earthquakes, tsunamis, and nuclear meltdowns in Japan… And that’s just to name a few!

Yet both Charlie and the market keep saying they’re “WINNING”.

Now I’m no psychologist, I don’t have a clue how Charlie Sheen’s life will play out.  But I’ll keep tuning in to find out what’s happening…

On the other hand, I firmly believe the market will continue its winning ways.  The economy is recovering nicely and getting stronger.  The leading economic indicators show the economy should be stronger in the months ahead.  And corporate earnings are growing at a robust pace.

But in the short-term, I think the bad news has reached a tipping point.  It’s time for a market correction.

The good news is it shouldn’t last very long.  And we’ve been locking in winners on the way up.  This pullback will look like a great buying opportunity once it’s in the rearview mirror.

As the pullback unfolds, it’s time to play defense.  With that in mind, we’re getting back into one of my favorite defensive ETFs this month…


It’s no secret gold is a safe haven.  It shines brightest when things are at their worst.

In the short run, gold tends to do well when uncertainty and volatility increase.  In the long run, it prospers as a hedge against inflation and currency devaluation.

With short term and long term threats beginning to mount, it’s time for gold mining stocks to shine.

Macro/Economic Trend:  Higher Gold Prices Ahead

Gold has had a great run.  The price for a single ounce of the shiny metal is currently around $1,400.  In fact, gold prices have more than doubled in the past 27 months.

But it has the potential to go much higher.

Right now uncertainty is rising.  There’s political unrest in Africa and the Middle East… Earthquakes, tsunamis, and nuclear meltdowns are rocking Japan… Inflation is accelerating in developing markets… And the Fed continues to devalue the US Dollar by printing more and more money…

Clearly there are more than enough catalysts for gold prices to move higher.  That’s great news for the gold miners.  Higher gold prices mean higher revenues and profits.

As such, rising gold prices make gold mining stocks the clear cut winners.

And higher gold prices are exactly what I see down the road… Investors are going to pour into safe haven assets like gold and gold mining stocks as a hedge against uncertainty and inflation.

Simply put, I’m expecting the Market Vectors Gold Miners ETF (GDX) to go on a big run.

Fundamentals:  A closer look at GDX

GDX holds 31 companies engaged in acquisition, production, and exploration of gold properties.

The expense ratio is a very manageable 0.54%.

The top five holdings and percentage weightings are –

Company Name Ticker % Weight
Barrick Gold ABX 17.1%
Goldcorp CG 11.9%
Newmont Mining NEM 8.70%
AngloGold Ashanti KGC 6.03%
Kinross Gold AEM 5.80%

Technicals:  The charts lead the way

As you see from the chart below, gold mining stocks had a great second half of 2010.
GDX surged from the low $40s to more than $60.

But since November, gold and gold mining stocks have gone through a period of consolidation.  The good news is GDX’s uptrend is still intact.


You can see the upward trending 200-day moving average is a key support zone. Every time GDX hits the 200-day moving average it bounces off and moves higher.

I’m expecting GDX to test support at the 200-day moving average and then continue its long term uptrend.

Trade Alert

Buy:  Market Vectors Gold Miners (GDX) up to $58.00
Recent Price:  $54.59
Price Target:  $70.00
Stop Loss:  $50.00

Remember:  GDX is impacted by volatility in gold and oil prices.  Any changes to these volatile commodities will be reflected in this ETF.  GDX is testing support at the 200-day moving average.  I’m expecting this key support level to hold and GDX to resume its long term uptrend.

Consumer Discretionary (-1.4%)

Retail sales jumped 1% in February.  That’s the biggest monthly increase since a 1.6% gain in October.  And even more impressively, it’s the eighth gain in as many months.

The bottom line is consumption continues to accelerate even though gas prices are rising.  That’s a good sign consumers can withstand $100 oil and still power the economic recovery forward.

We’ve already locked in gains on our consumer discretionary ETFs.  I’ll look to get back into the sector down the road.
Consumer Staples (+0.5%)

Consumer staples are flexing their muscles this month.  The defensive sector is holding up much better than cyclical sectors.  The bad news is… staples are already at an all time high.  That means the sector needs to clear a major technical hurdle before moving higher.  The upshot is consumer staples should continue to underperform more cyclical sectors near-term.  I’m steering clear for now…

Energy (+1.3%)

Energy stocks made a big surge early in the month.  But they’ve given back a big chunk of those gains in the last week.

The sector is clearly being driven by oil prices.  And oil prices in turn are being driven by speculation, headlines, and fear.  Political unrest in Libya and other oil rich countries in the region have clearly put a $15 to $20 fear premium in oil prices.  That was all it took to send oil prices over $100 per barrel.

Now the earthquake and ensuing tsunami in Japan are wreaking havoc on financial markets.  What’s more, explosions at Japanese nuclear reactors are decimating stocks tied to uranium and nuclear power.

The good news is… nuclear powers loss is alternative energy’s gain.  Our Market Vectors Global Alternative Energy ETF (GEX) is off to a solid start.  Go ahead and buy GEX up to $22 if you haven’t already.

Financials (-3.2%)

Financial stocks took a step back this month.

Former chairman of the FDIC, Bill Isaac, is echoing what I’ve been saying all along… Wall Street banks won the financial crisis.

They avoided any major regulatory changes; they can still take huge risks; and they’re still too big to fail.  In other words, they’re free to take huge risks and make a ton of money.  But when the $#&% hits the fan, its tax payers who will get stuck holding the bag.

For better or worse, that’s great news for our SPDR KBW Bank ETF (KBE).  I’m expecting big gains from banking stocks in the weeks and months ahead.

Our iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ) is looking strong.  Demand for apartments continues to outpace new supply.  That’s a good sign residential REITs profitability will increase.  Continue holding REZ for bigger gains ahead.

Healthcare (+1.0%)

Healthcare stocks continue to be left behind.

Confusion and uncertainty reign as investors grapple with the ever-changing regulatory landscape.  Will President Obama’s healthcare bill stick or will it be found unconstitutional by the courts?

Without a clear understanding of the rules, it’s hard to make predictions about the sectors future.  Until we get some clarity, I’m steering clear of healthcare…

Industrials (-3.1%)

Industrials suffered their first setback in seven months.  But I’m not worried…

Demand for industrial equipment isn’t going away anytime soon.  And demand for transportation services will only get stronger as the economic recovery picks up steam.

Bottom line… I’m expecting industrial stocks to lead the market’s next leg higher. Continue holding the iShares Dow Jones US Industrial Sector Index Fund (IYJ) and the Market Vectors Agribusiness ETF (MOO).

Technology (-4.1%)

Tech stocks are taking it on the chin this month.

Just last week an analyst at Wells Fargo downgraded the entire semiconductor industry.  The downgrade clearly took the wind out of the industry’s sails.  Now the uptrend that’s been in place since September is breaking down.  When the leading sectors begin to breakdown, it’s a clear sign there’s a market correction coming.

The good news is tech stocks should recover and retake their leadership position after the correction.  Our iShares S&P North American Technology-Software Index Fund (IGV) and the PowerShares S&P SmallCap Technology Portfolio (XLKS) should be just fine.  Continue holding IGV and buy XLKS up to $33 if you haven’t already.

Materials (-4.9%)

Materials recorded their first monthly downturn in seven months.

It’s never a good sign for the market when the market leaders begin to show weakness.  Clearly the one-two punch of higher oil prices and the disaster in Japan are too much for the market to overcome right now.

But with every crisis there’s a silver lining.  And the silver lining to this crisis could be that gold prices breakout of their five month lull.  Higher gold prices will certainly benefit the gold mining stocks.  This month we’re recommending the Market Vectors Gold Miners (GDX)… See the trade alert for more details.

Utilities (+1.6%)

Utilities continue to trade in a tight range.

The defensive sector is struggling to gain a foothold with investors.  We’ll keep utility stocks on the back burner for now.

Portfolio Changes

  • This month we’re buying GDX


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