SET Monthly Issue March 2012

| March 20, 2012

March 2012


This marks the third month in a row that we’re talking about the amazing rally happening in the markets.  It just doesn’t want to stop!

If you aren’t aware, this rally’s been running since October of last year.  In that time, the Dow Jones has climbed over 2,400 points and now trades over 13,200.  That equates to over 22% tacked onto the average in just five short months!

Even better, the NASDAQ surged higher by 659 points in the same time frame.  That’s an even more impressive 27% gain for the tech heavy average.

There’s no doubt this rally is on fire and is showing no signs of stopping…

Last month I talked about breakthrough levels on the indexes.  Well, all three major indexes have broken through and continue to trade at new 52-week highs.  More importantly, they’ve closed above these levels day after day… signaling the bulls aren’t done just yet.

So what’s keeping the rally moving?

There are two major factors, but the most important is the continued improvement of US economic data.  Last month we saw unemployment improve and PPI numbers surge higher.

This month’s employment picture has continued improving.

And healthy employment is critical to any economy.

For example, unemployment fell from 8.5% to 8.3%.  And with jobless claims also continuing their steep decline, we may see unemployment back down to the mid-seven handle by the end of 2012.

In addition, the average workweek climbed for the first time in the past four months… reaching 33.8 hours.  That’s a strong indicator of labor market conditions. Basically, a rising workweek tends to be an early signal that employers are preparing to increase their payrolls.

And that translates to more income to spend on goods and services…

While healthy employment remains a keystone of the US economy, a critical measure of the economy’s health is CPI, the Consumer Price Index.  You see, CPI is the headline figure when quantifying inflation.  Basically, the higher the CPI reading, the more inflation that’s in the economy.

While that might sound bad, it’s actually a good thing to have inflation in a recovering economy.  It simply means we’re back on the path to growth, versus recession and deflation.  And for the past four straight months, we’ve seen CPI remain above 2.1%!

As a comparison, CPI was just 1.1% a year ago.

The second factor keeping the rally intact is the recent restructuring of Greek sovereign debt.  Earlier this month, roughly 95% of Greek bondholders agreed to take a 74% loss on their investments in a bond swap designed to save Greece.

A fear of Greek default and the collapse of the EuroZone were looming in the distance for many investors.  And now that these issues have been put to rest for the moment, a path higher for stocks has been cleared.

The bottom line…

Expect the stock market to continue its surge higher from here.  While we may see a pullback with a poor piece of economic data, I fully expect to see stocks much higher at the end of 2012.

As a result, I’ve picked out two ETFs set to capitalize on improving employment and higher consumer prices.  And the first one, we’ve recently taken a profit on…


There’s no denying it, the housing market has finally put in a bottom.  For years now, we’ve been listening to the pundits and experts argue it out…

“We’ve hit a bottom” – “No, we have much farther to go” – “We’ve hit a bottom again” – “No, we’re not there yet”

And while the experts can argue all they like, no one can dispute the numbers.

You see, building permits are rising, housing starts are growing, new home sales are increasing, pending home sales are improving, and most importantly, monthly supply is decreasing.

One thing’s for sure, we’ve seen this sector put on a huge rally in previous years.  And now that we’ve put in a bottom, the housing market is headed higher from here.

Macro/Economic Trend:  Improvements In Employment Will Drive Housing

There’s no doubt a clear connection can be drawn between the housing market and the unemployment rate.  You see, as more and more people gain employment, the demand for housing rises.

In fact, it’s looking like Warren Buffet may get paid off on his bet I told you about last year.  If you don’t recall the bet, Mr. Buffet revealed a bet on CNBC he made with world famous economist, Peter Orszag.  He bet a recovery in the housing market would drive unemployment under 8%, all before November elections in 2012.

And we’re seeing that recovery in housing right now.  Better still, it’s happening in some of the hardest hit metro areas during the bust…

The Wall Street Journal came out with a report last week showing the housing market in Phoenix has bottomed.  The WSJ report cited The Cromford Report, showing themonthly inventory of homes in Phoenix has fallen from nearly 55,000 at its height in 2007/2008… all the way down to 24,648 in February.

It’s the lack of inventory that should be noted here, as that will drive both homeowner renovations and new home construction.

Adding to the case for a housing bottom is S&P’s Case/Schiller report for the fourth quarter last year.  The report showed a 2% increase in home prices in Phoenix.

The bottom line…

The housing market is turning higher.  With employment on the rise and CPI numbers gaining traction… we appear to be at the very beginning of a much larger housing recovery.

So, how can you profit from a recovering housing market?

The best play in the housing market is the SPDR S&P Home Builders ETF (XHB).  This ETF is a basket of companies best positioned to benefit from a rally in homebuilding.

If you were a subscriber back in December, you’d know we bought and sold this ETF for a lightning-fast 25.8% gain.

The rational was crystal clear.  When an investment gains 25.8% in under two months, it’s time to cash in for a profit.

However, it appears to be in the early innings of a recovery, and many of the stocks in the XHB are breaking out to new highs.  So we’re getting back in for the next leg up.

Fundamentals:  A closer look at XLI

XHB holds 33 of the top US homebuilding companies.

The expense ratio is 0.35%.

The top five holdings and percentage weights for XHB are-

Company Name Ticker % Weight
USG Corp USG 4.14%
Masco Corp MAS 3.73%
Owens Corning OC 3.73%
Ryland Group RYL 3.59%
Bed Bath & Beyond BBBY 3.56%

Technicals:  The charts lead the way

It’s easy to see, XHB is in a very strong uptrend…


Since October, XHB has rallied almost without stopping.  With three minor pullbacks, the ETF surged over 71% off its October lows.  Obviously, we’re seeing an uptrend is firmly in place.

In addition, XHB is trading well off its 50-day moving average of $19.71.  In fact, all three of the last minor pullbacks have bounced straight off the 50-day average.  It offers us a very finite indicator of support.

Expect to see XHB continue rallying into the warmer building season.  If the housing market continues its current trend, we’re certain to see XHB much higher from here.

Trade Alert

Buy:  SPDR S&P Home Builders ETF (XHB) up to $22.25
Recent Price:  $21.54
Price Target:  $30.00
Stop Loss:  $18.50

Remember:  XHB is in a strong bullish uptrend.  The US housing market is in the early stages of a recovery.  As the home building and home remodeling industry picks up, stocks in the XHB are set to profit.  Buy XHB up to $22.25.


Retail shoppers have been busy since the holiday shopping season ended.  It seems as though the recession has created a lot of pent up demand.  I myself, have been holding off on extraneous purchases… waiting for the recovery to take hold.

Well, based on the reports from retailers, it appears the recovery is well under way…

Wal-Mart (WMT), Macy’s (M), Home Depot (HD), and Saks Fifth Avenue (SKS) all reported sales increases for their fourth quarters in January.  What that tells us is consumers from every different economic status are spending, top to bottom.

Macro/Economic Trend:  Employment And Confidence Will Drive Consumer Spending

Last month, The Commerce Department announced retail sales rose by 1.1% in February… the biggest gain since September 2011.  Interestingly, they also upwardly revised the previous two months of readings as well.  It’s pretty clear, actual spending data remains strong.

But that’s not all…

Employment is steadily improving.  And there’s no doubt, when people regain income, they tend to spend it.  Below are the latest trends noted by The Conference Board.  They’re the publisher of the Consumer Confidence Index.  Take a look…

Source: The Consumer Confidence Board

You can clearly see, things continue looking up for employment and consumer spending.

In coming months, I fully expect to see this trend continue.

Here’s the deal…

Once a meaningful recovery starts, it takes a significant event(s) to derail it.  And in an election year, you can bet the incumbent party will do whatever is necessary to make sure this recovery takes hold.  That bodes well for employment and consumer spending.

To profit from the continued increase in consumer spending, let’s buy SPDR S&P Retail ETF (XRT).

Fundamentals: A closer look at XRT

XRT holds 96 retail stocks.  The ETF tracks the S&P Retail Select Industry Index.  It’s an equal weight index.  That means all 96 stocks have an equal impact on the ETF.

The expense ratio is 0.35%.

The top five holdings and percentage weight for XRT are –

Company Name Ticker % Weight
Trip Advisor TRIP 1.18%
Officemax OMX 1.17%
Rite Aid RAD 1.16%
Cabelas CAB 1.16%
Office Depot ODP 1.15%

In addition, XRT has an estimated 3-5 year EPS growth of 14.14%.  And the ETF also has a dividend yield of 0.82%.

Technicals:  The charts lead the way

Since last summer’s bottom, retail stocks have been on the rise.  There’s no question we’re looking at a strong uptrend here.

As you can see, XRT has added over 33% since last August.  And each time the ETF traded just below the trend line, it quickly bounced higher.


Adding to the bullish momentum, XRT is trading above its 50-day moving average of $57.42.  It’s obvious the momentum looks very strong in this ETF right now.

Trade Alert

Buy:  SPDR S&P Retail ETF (XRT) up to $62.00
Recent Price:  $61.15
Price Target:  $73.00
Stop Loss:  $50.00

Remember:  With an election year in progress and economic data already improving, I expect consumer spending will pick up even more and add to the bottom line of retail stocks.  2012 looks to be a breakout year for US equities and XRT is positioned to benefit.  Go ahead and buy XRT up to $62.00.


Consumer Discretionary (+4.1%)

Consumer spending numbers have bounced back nicely.  And retail sales in February are up by 1.1%… the best in five months.

In fact, the consumer discretionary sector is up 16.1% since mid-December.

I’m expecting this trend to continue…

We were hoping for a pullback before buying this sector.  However, it looks like that might be a while before a correction happens.  We’re recommending the SPDR S&P Retail Fund (XRT) this month… see Trade Alert #2 for more details.

Consumer Staples (+1.7%)

As we’d expect, stocks in the consumer staple sector are posting modest, but steady gains.

In fact, the sector has added roughly 2.0% in each of the past three months.  If you look at recent Consumer Price Index (CPI) data, you’d see prices are steadily climbing, which is bullish for this sector.

With CPI on the rise, we’re sure food prices will also continue to gain.  As a result, ourPowerShares Dynamic Food & Beverage (PBJ) is still growing… up by 3.6% since we rolled out the trade.  Continue holding for steady gains.

Energy (+0.3%)

Energy stocks have seemed to cool off lately.  West Texas Intermediate is back down around $105.  As a result, energy stocks appear to be consolidating.

The Saudi government recently announced they can increase oil output by 25%.  Just the announcement alone was able to drop the price of oil.  If they were to actually increase output, crude prices may fall even farther.

With energy prices uncertain, we’re going to sit back and watch this sector for now.

Financials (+6.9%)

There’s no doubt, financial stocks are one of the top two performing sectors so far this year.  After the Fed released US bank stress test results, a number of major financial institutions rallied.

In addition, the housing market has seen a recovery take hold.  In the process, ouriShares FTSE NAREIT Residential Plus Capped Index Fund (REZ) has given us a 19.3% gain.  Continue holding REZ for much bigger gains ahead.

Our SPDR S&P Insurance ETF (KIE) is off to a great start, turning in a 1.9% gain in just a month’s time.

With another earnings season just around the corner, I anticipate great results from insurance carriers.  There’s been mild weather throughout the US and very few catastrophes.  Also, there’s a great chance reserve investments have done very well.

We’ve moved KIE from a buy to a hold as our $42.00 buy up to price was eclipsed. Continue holding for even more gains.

Healthcare (+1.3%)

Healthcare continues to lag behind the major averages.  In fact, if it weren’t for a big pop in the biotech and pharmaceutical industries early this year, the sector would be much lower.

With a number of other sectors rallying now, we’re staying out of healthcare.

Industrials (+3.6%)

Industrials have cooled off just a bit since last month, but have still turned in nice gains.  In the process, XLI is that much closer to regaining its 10-year high.

There’s no question that demand for industrial goods and services are set to remain high for some time.  As the current recovery takes hold, infrastructure and capital expenditures will drive these stocks even higher.

Continue to buy the Industrials Select Sector SPDR ETF (XLI) for bigger gains.  Buy XLI up to $38.25.

Technology (+4.8%)

The technology sector remains red hot in 2012.  And the XLK keeps making new 52-week highs in the process.

Better still, technology has posted three straight months of hefty gains.

With companies like Apple (AAPL) consistently making new highs, we may see this sector continue its rally.  Remember, the big cap tech companies often lead the industry up and down.

As for our trade, the iShares S&P NA Technology-Software Index Fund (IGV) also continued to make new highs over the past month.  In fact, IGV reached $65.77 just yesterday.  With another strong tech earnings season around the bend, we’re sure to see IGV continue making new highs. Hold tight for more gains.

Materials (-0.7%)

The materials sector was flat to slightly down over the past month.  And much of the weakness can be traced to precious metals.

Near the end of February, gold traded as high as $1,788 an ounce.  But over the past few weeks, the precious metal has fallen down to trade as low as $1,643.

In addition, traders are seeing China’s latest round of economic data as negative, citing a slowdown in growth for 2012.

The materials sector may see gains in some specific areas, but overall they look like they’ll struggle to make significant progress.  Let’s continue to avoid materials.

Utilities (-0.8%)

Right now, the utilities sector is lagging the overall market.  Unfortunately, theUtilities Select Sector SPDR Fund (XLU) is lower by 2% so far this year.

When looking at the sector rotation model, we appear to be at the top in utilities sector.  However, the XLU is trading just below its 50-day moving average of $34.91. With such a huge rally happening in the broad stock averages, utilities may see some gains if a correction materializes.

With that said, if XLU strays much farther below the 50-day average, we’ll move our capital into a better performing sector.  For now, continue to hold XLU.

Portfolio Changes

  • This month we’re buying XHB and XRT
  • Move KIE from a Buy to a Hold


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