SET Monthly Issue March 2015

| March 18, 2015



The S&P 500 made a new high at the end of February. But stocks have been moving lower over the last few weeks.

It’s important to note that the 3.5% pullback in the S&P has taken place within the upward trending price channel.

In other words, the recent pullback hasn’t changed the direction of the long term trend. This has simply been a pullback in a bull market.

However, the pullback has been driven by changing market fundamentals. I see three things weighing on investors and keeping the stock market held in check…

First off, we have interest rates.

Falling unemployment and higher wages are the leading edge of inflation. So, the Fed is preparing to hike interest rates in order to keep inflation near their target of 2%.

This will be the first time the Fed has raised short term interest rates since 2006. But it’s no secret that the Fed is getting closer to raising interest rates.

As a result, investors are front running the move by the Fed. Investors are already flooding out of interest rate sensitive investments like utilities. And they’re moving into sectors that perform better in a rising interest rate environment.

Secondly, there’s the US Dollar.

The US is the only country that’s willing to let our currency appreciate. Just look around the globe and you’ll see that the US Dollar is appreciating in value relative to every other major currency.

This is due to a host of economic conditions and central bank actions aimed at keeping their currency cheap relative to the US Dollar.

The strong dollar is typically a good sign for the US economy. It draws in foreign capital that is put to work in the US economy and helps drive economic growth.

The flip side to the strong dollar is that it depreciates the value of the earnings that companies make in foreign currencies. In other words, a strong US Dollar hurts earnings growth and stock performance.

And the third thing weighing on investors is falling oil prices.

The surge in US oil production coupled with a slowing demand has created a glut of oil. In fact, the largest US storage facility in Cushing, Oklahoma is 70% full.

And the reduction in drilling rigs has failed to slow the rate of oil production in the US.

If storages reach capacity, we’ll inevitably see oil prices fall even lower.

The combination of falling oil prices, a strong US Dollar, and rising interest rates is a very different environment than we have been in the last few years.

For the most part, oil prices, the value of the dollar, and interest rates have been stable over the last three years. The stability has given investors confidence and helped push all sectors of the market higher.

Now that things are changing, there will certainly be changes made to the investments that they’re willing to hold. The money flows that accompany these changes typically drive sector performance.

Our trade this month is one we expect to see a strong influx of money from these asset flows.


So far this year, small-cap growth stocks have been the top performing area of the market. And this trend is one we expect to continue.

But we don’t stop there…

After digging through the fund flow data, we indentified small-cap consumer discretionary stocks as one area of the market investors are quickly moving into.

Macro/Economic Trend: Follow The Money

For the first time ever, Americans spent more at bars and restaurants than they spent at grocery stores. January spending at restaurants jumped 11.3% year-over-year to $50.475 million while grocery store spending was $50.466 million.

Needless to say, we know where Americans are choosing to spend the money they’re saving at the gas pump.

Restaurants are doing better right now than they have at any time in the last decade.

What’s more, restaurants are insulated from the impact of the US Dollar. They’ll benefit from a further drop in oil prices. And a rise in interest rates makes these stocks even more attractive to investors.

Here’s the thing…

There’s not an ETF dedicated to restaurants. But the PowerShares S&P SmallCap Consumer Discretionary Portfolio $PSCD is as close as you can get.

About 30% of the stocks in $PSCD are restaurant, leisure, and hotel stocks. And PSCD has enjoyed a strong inflow of $18.65 million over the last 30 days.

Fundamentals: A closer look at $PSCD

$PSCD tracks an index of consumer discretionary stocks in the S&P SmallCap 600.

It has 95 stocks that are weighted according to market cap. The expense ratio is 0.29%. It has a 12 month dividend yield of 0.66%.

The top five holdings and percentage weight for $PSCD are –

Company Name Ticker % Weight
Jack In The Box JACK 3.48%
Cracker Barrel Old Country Store CBRL 3.43%
Buffalo Wild Wings BWLD 3.35%
Wolverine World Wide WWW 2.87%
Pool POOL 2.83%

Technicals: The chart leads the way

$PSCD is currently trading for $53.11. It’s up 4.7% year-to-date and it’s up 9.96% over the last year.

In other words, $PSCD has underperformed the S&P 500 over the last year by 4%, but so far this year, it has outperformed the S&P 500 by 3.5%. This is one ETF that clearly has bullish momentum on its side.

PowerShares S&P SmallCap Consumer Discretionary Portfolio

$PSCD has set a series of higher highs and higher lows over the last four months. The upward sloping 50-day moving average is now a strong support level that should continue to provide an upward lift to the ETF.

Trade Alert

Buy: PowerShares S&P SmallCap Consumer Discretionary Portfolio $PSCD up to $55.00
Recent Price: $53.11
Price Target: $66.50
Stop Loss: $48.00

Remember: $PSCD is in an uptrend and benefiting from the three things driving market action… oil prices, US Dollar, and interest rates. The strong inflow of money over the last 30 days is a clear indication small-cap consumer discretionary stocks are one destination investors are looking to put money to work in. These trends should drive $PSCD toward $66.50 in the weeks and months ahead.


 Consumer Discretionary (+1.5%)

Consumer discretionary stocks had another strong month after jumping 7.5% higher last month. This is one sector that’s benefiting in the current market environment. We’re recommending the PowerShares S&P SmallCap Consumer Discretionary Portfolio $PSCD this month… see Trade Alert for more details.

Our PowerShares Dynamic Leisure & Entertainment Portfolio $PEJ just hit a new high of $38.60. We’re now up 22.5% on this trade and closing in on our $41.00 price target.

The Market Vectors Gaming ETF $BJK has pulled back and it failed to break out of the long-term downtrend. Nevertheless, I believe gaming stocks are setting up for a bullish reversal… it just hasn’t happened yet. Use this pullback to establish your position below $41.00 if you haven’t already done so.

Consumer Staples (-1.3%)

Consumer staples have pulled back as dividend stocks lost ground over the last few weeks. Investors are clearly front running an interest rate hike by the Fed and scaling back on their exposure to dividend stocks. Our Guggenheim S&P Equal Weight Consumer Staples ETF $RHS has pulled back with the sector. But RHS should rebound as consumer related stocks continue to move higher.

 Energy (-7.8%)

The energy sector sold off again as the supply glut of crude oil filled storages to near capacity. There’s likely much more pain ahead for stocks tied to oil and gas production. But once the buying opportunity appears, we’ll be sure to be there.

Our Guggenheim Solar ETF $TAN is up 28.5% this year. It’s dealing with overhead resistance at the previous high around $45.00. But the bullish fundamentals should continue to propel $TAN higher in the weeks ahead.

 Financials (+0.8%)

Financials have been outperforming the S&P 500 over the last few weeks. That’s good news for our Financial Select Sector SPDR Fund $XLF and the overall market. We’re up about 15.5% and on our way toward the $29.00 price target. Continue holding.

 Healthcare (+3.8%)

Healthcare stocks are back in a familiar position… they’re once again one of the top performing sectors. Last month’s trade, iShares US Medical Devices ETF $IHI, is up 2.7% and above our $120.00 buy up to price. Continue holding.

 Industrials (-0.3%)

Industrials floundered over the last month as a strong US Dollar and sluggish global economic growth weighed down the sector.

No other sector is more susceptible to the strong US Dollar hurting earnings growth as the large multi-national companies in the industrial sector. I don’t see industrial stocks taking the lead until global economic growth accelerates or the US Dollar weakens.

 Technology (-1.6%)

Large cap tech stocks pulled back from their recent highs. But the bullish fundamentals remain intact. Right now business and consumer confidence is running high… that means both are willing to spend money. And one of the first places they typically spend money is technology.

Our Market Vectors Semiconductor ETF $SMH is up 6%. And the uptrend should continue as demand for all shapes and sizes of semiconductors grow. Continue holding for more upside.

Our First Trust NASDAQ-100 Technology Sector Index Fund $QTEC ran into resistance at the previous high. $QTEC pulled back but found support at the uptrend and has begun moving higher again. Once it clears this overhead resistance, it should make its way toward our $50.00 price target in short order.

The Global X Social Media Index ETF $SOCL is still in the process of forming a base. But the recent price action is indicative of a bullish reversal. Grab your shares up to $20.00.

 Materials (-3.3%)

The bull market in the US Dollar and a sluggish global economy are headwinds for the materials sector. And there’s no sign that either of these are changing anytime soon.

 Utilities (-2.1%)

Utilities stocks continue to fall as investors dump dividend stocks ahead of the Fed’s first interest rate hike in nearly a decade. We’ll likely see selling continue up until the Fed announces the first rate hike. Then we’ll likely see some investors come back… but until then, there’s no reason to own utilities.

Portfolio Changes

  • This month we’re buying $PSCD.
  • Move $IHI to hold.
  • Move $RHS to buy.
  • Move $BJK to buy.

Category: SET Monthly Issues

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