SET Monthly Issue March 2014
March 2014
Tensions are running high as Russian troops remain in control of the Crimea region of Ukraine.
Russian President Putin hasn’t given any indication he’s going to back down. Now there’s the very real possibility of UN and US sanctions against the former Super Power.
There’s no doubt about it, these sanctions will be felt not only in Russia, but around the globe.
Russia is a major exporter of oil and natural gas. If the UN moves to cut off these exports, it will drive up energy prices in countries that import Russian oil and natural gas.
That’s bad news for two of the world’s largest economies… Japan and Germany. They both import lots of oil and nat gas from Russia.
Needless to say, a slowdown in the 3rd and 4th largest economies will be a major drag on the global economy as well.
This is truly a game of Russian roulette that has the potential to hurt not only Russia but the entire global economy.
It’s not surprising to see stocks in Russia, Germany, and Japan taking the biggest hit from these developments.
And US stocks aren’t immune either. After reaching a new all-time high of 1,883 on March 7th, the S&P 500 dropped 1.5% last week.
Predictably, investors are being drawn towards safe haven assets like Treasuries, bonds, gold, and utilities the longer the situation in Ukraine is drawn out.
Here’s the thing…
There’s no way to predict or time the situation in Russia. We simply stick to our game plan.
Remember, we have price targets and stop losses for a reason. And there’s little doubt the rally in safe haven assets will come undone quickly if and when the situation is resolved.
Here’s the bottom line…
The situation in Ukraine is clearly having a negative impact on stocks. But we can’t simply run away and hide every time there’s uncertainty. We hope for the best and prepare for the worst. And above all, we stick with our game plan.
Biotechnology stocks have been one of the best performing industries over the last few years. And they’re continuing to rack up solid gains again in 2014.
The strong performance isn’t lost on ETF investors. More than half of the money flowing into sector ETFs this year has gone into healthcare related ETFs.
Macro/Economic Trend: Earnings Growth, M&A, and Product Launches
The strong performance of biotech stocks is being driven by several factors.
First off, earnings growth in the biotech industry is outpacing earnings growth of the S&P 500 by a wide margin. Amazingly, biotech industry earnings have nearly doubled in the last year.
Needless to say, earnings growth is a key fundamental behind ETF performance.
Secondly, mergers and acquisitions are driving up valuations. Since 2009, there have been more than 400 biotech related M&A deals every year.
Big biotech companies and pharmaceutical companies have generated a mountain of cash in recent years. And they’re buying up smaller companies with promising research to add new drugs to their pipeline.
Right now, big pharma companies are desperate to add new drugs to their pipeline. They have to replace several very profitable drugs that will lose their patent protection in the next few years. And the best part is their buying binge is likely to intensify as these patent expirations near.
Last but not least are the new product launches…
We’re in an unprecedented era of research and development. Years of research are bearing fruit in the form of new drugs and treatments for diseases and ailments.
The acceleration of the pace of biotech innovation bodes well for biotech stocks. The more often a new drug or treatment is developed and approved – the faster the profits will grow.
The ETF I like to profit from the high flying biotech industry is the PowerShares Dynamic Biotech and Genome Portfolio (PBE).
Fundamentals: A closer look at PBE
PBE is a smart beta ETF that holds 30 US biotech stocks. The stocks are selected for the index by evaluating a variety of investment criteria. The ETF and index are rebalanced and reconstituted quarterly.
The expense ratio is 0.63%.
The top five holdings and percentage weight for PBE are –
| Company Name | Ticker | % Weight |
| Biogen Idec | BIIB | 5.13% |
| Sigma-Aldrich | SIAL | 5.09% |
| Alexion Pharmaceuticals | ALXN | 5.09% |
| Amgen | AMGN | 5.05% |
| Regeneron Pharmaceuticals | REGN | 4.99% |
Technicals: The charts lead the way
PBE is currently trading for $44.44. It’s up 20% year-to-date and 5% below the 52-week high of $46.98. As you can see in the chart below, PBE has exploded to the upside in 2014.
The recent pullback has pushed PBE back to the previous low around $44. This level of support is holding. And there are several key short term technicals that indicate this is a good buying opportunity.
In short, PBE should move higher from here.
Trade Alert
Buy: PowerShares Dynamic Biotech and Genome Portfolio (PBE) up to $47.00
Recent Price: $44.44
Price Target: $58.00
Stop Loss: $42.00
Remember: PBE has pulled back from the recent highs and found support at around $44.00. This biotech ETF has more than 30% upside as biotech stocks build on their bullish momentum.
Consumer Discretionary (+1.7%)
Consumer Discretionary stocks enjoyed a nice run in February. The sector reached a new high on March 7th before falling back over the last week. Overall the sector is 1.7% higher than it was a month ago.
Investors are clearly concerned about the impact economic sanctions against Russia will have on the global economy.
Despite those concerns, it’s difficult to overlook the upbeat unemployment reports. The latest report showed the US added 175,000 jobs in February. Needless to say, the more jobs the US economy creates, the more money consumers have to spend.
iShares US Home Construction ETF (ITB) has fallen back to $24.53 after reaching a new high of $26.56 at the end of February. What’s more, today’s reading on homebuilder confidence missed expectations. The cold weather and lack of skilled labor is clearly impacting their outlook. But with the spring selling season just around the corner, we could see confidence rise quickly. Continue holding.
PowerShares Dynamic Media Portfolio (PBS) recently made a new high of $26.89 and it’s currently trading for $25.88. The pace of the rally has certainly slowed from the strong performance it had in 2013, but the uptrend is still in place. Continue holding.
PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) is trading just below the recent high at $35.30. These economically sensitive stocks stand to benefit from faster economic growth in the months ahead. Continue holding.
Consumer Staples (+2.4%)
Consumer staples have benefited from the flight to safety over the last week. The sector has enjoyed a solid 2.4% uptick over the last month.
Our First Trust Consumer Staples AlphaDEX Fund (FXG) made a new high on March 6th. And it’s currently just below that at $36.56. Clearly the strength in consumer staples is helping FXG. Continue holding.
Energy (+0.9%)
Energy stocks have been a mixed bag lately. Overall, the sector climbed 0.9% higher over the last month. The International Energy Agency recently boosted its forecast for world oil demand. But it wasn’t enough to move WTI crude oil prices.
Alternative energy stocks are a different story altogether…
Our Guggenheim Solar ETF (TAN) reached a new 52-week high of $49.30. It has pulled back a bit to $47.53. TAN is up 38% from where we recommended it in December.
First Trust Global Wind Energy ETF (FAN) reached a new high as well. At a recent price of $12.15, we’re up 25%. Keep an eye on FAN as it approached our $12.75 price target.
Our Morgan Stanley Cushing MLP Hi Income ETN (MLPY) is steadily churning high in a long-term uptrend. Our total return including dividends is 8.5%. Feel free to buy MLPY up to $18.50 if you don’t already own it.
Financials (+1.8%)
Financials rebounded with a solid 1.8% gain over the last month. The opportunity for financials to adjust to the new regulatory environment and increase ROE bodes well for the sectors performance in the months ahead.
The Financial Select Sector SPDR Fund (XLF) is off to a solid start with plenty of upside. Grab your shares up to $22.25.
Our First Trust NASDAQ ABA Community Bank Index Fund (QABA) has enjoyed a nice run over the last month. And it’s been virtually unaffected by the flight to safety over the last week. QABA made a new high of $37.55 last week. We’re currently up more than 16%. Continue holding.
Healthcare (+1.4%)
Healthcare has been the sector of choice for ETF investors. More than half of the money that has flowed into sector ETFs has been into healthcare related ETFs.
The hottest industry in the healthcare sector is biotechnology. We’re recommending the PowerShares Dynamic Biotech and Genome Portfolio (PBE) this month… see Trade Alert for more details.
Industrials (+1.2%)
Industrials bounced back to gain 1.2% over the last month. They latest report on industrial production showed and unexpected increase last month. The data showed a strong reversal after sliding 0.2% lower in January. This is evidence the slowdown in economic activity was merely a blip on the radar, not the start of major slowdown.
Our iShares Transportation ETF (IYT) made a new 52-week high on March 7th. And it’s held up well during the weakness over the last week. The wild card is Russia. If economic sanctions are imposed, it could trigger a selloff. Continue holding…
Technology (-0.1%)
The technology sector was the only sector that didn’t have a month over month gain. It ticked down 0.1%. But there’s a silver lining. Historically, tech is one of the stronger performing sectors in a maturing bull market. And after a five year bull market, it’s hard to deny the bull market isn’t nearing maturity.
Materials (+2.5%)
Materials are benefiting from US Dollar weakness. The greenback has been trending lower versus other major currencies over the last few months. But the sector is facing strong headwinds from slowing economic growth in China. In recent years, China’s voracious appetite for basic materials has been one of the strongest drivers of demand. But as their economy has shown signs of weakness, materials like copper have fallen to their lowest levels in years.
Utilities (+2.2%)
Utilities are enjoying a nice run for two reasons. The defensive sector is benefiting from the flight to safety because of the Crimea situation. And Warren Buffett mentioned he could target utilities as potential takeover targets.
- This month we’re buying PBE.
Category: SET Monthly Issues
