SET Monthly Issue May 2013

| May 21, 2013

May 2013


The S&P 500’s 28% year-to-date rally is impressive.

But it’s even more astounding when you dig a little deeper into the economic data.  In short, lackluster economic data doesn’t seem to support such a meteoric rise for stocks.

Yet, here we are with stocks at all-time highs.

It begs the question, how can stocks continue to outpace economic growth?

It’s simple… The Fed’s printing money.

All that money has to find a home somewhere.  And a lot of it is finding its way into stocks.

But that’s not the only reason… Stocks are also cheap.

Right now, the basket of S&P 500 stocks earns more than $100 per share and pays out more than $30 per share in dividends.

And the S&P is trading at a price to earnings multiple of just 14.  A PE of 14 is nowhere near the peak PE multiples of 30 or higher we’ve seen in past bull markets.

In fact, stock prices still need to double from where they are today in order to approach the lofty valuations of past bull markets.

But we don’t even need stocks to become expensive in order for them to continue going up.  You see, companies are repurchasing their stock by the boatload.  Over the last five years, they’ve bought more than $1 trillion of stock!

And they’re not slowing down…

According to Birinyi Associates, companies have authorized $286 billion in buybacks this year… an eye-popping increase of 88% over last year.  At this pace, stock buybacks will eclipse the record set back in 2007.

The massive amount of money going into stock buybacks is reducing the amount of stock.  And when there are fewer shares outstanding, then earnings per share can grow even if overall profits are stable.

In short, this market rally is far from over as long as the Fed continues to print money and companies are using their cash to buy back their own stock.

This month we’re recommending an ETF focused on one of the hottest sectors around!


Healthcare stocks have been hot this year.  And for good reason… the industry is choke full of blue-chip companies with recession proof businesses and solid balance sheets.

That’s the type of quality business that many investors have been flocking to lately.

It’s not surprising to see so many high quality companies in an industry where the US alone spends $3 trillion each year.  That’s a lot of dough to spread around!

Macro/Economic Trend:  Cutting Costs

There’s no doubt that healthcare is a massive industry.  And healthcare reform has been a disruptive force that held the industry back for years.

The heavy hand of the government made it difficult for investors to value healthcare stocks.  Slowly but surely it has become more clear how the industry will look after the reforms are implemented.

Now the majority of those concerns have been addressed.

The industry has incurred the costs of upgrading their technology and now they’re beginning to reap the rewards… lower costs.

In fact, lowering costs is a key focus of the healthcare industry today.

Needless to say, the combination of universal healthcare coverage and innovative new ways for healthcare companies to save on costs has investors feeling rather bullish about the sector’s future.

At this point it’s clear, healthcare stocks are still in the early stages of a multi-year rally.  And the Health Care Select Sector SPDR (XLV) is a great way to get exposure to the entire spectrum of health care stocks.

Fundamentals:  A closer look at XLV

XLV includes companies from pharmaceuticals, health care providers & services, health care equipment & supplies, biotechnology, life sciences tools & services, and health care technology.  It currently holds 55 stocks.

The expense ratio is 0.18% and its dividend yield is 1.66%.

The top five holdings and percentage weight for XLV are –

Company Name Ticker % Weight
Johnson & Johnson JNJ 13.14%
Pfizer PFE 11.02%
Merck & Co. MRK 7.30%
Gilead Sciences GILD 4.53%
Amgen AMGN 3.90%

Technicals:  The charts lead the way

XLV currently trades for $48.76.  It’s up 22% year-to-date and near the all-time high of $49.61.

Not surprisingly, XLV is in a strong uptrend this year.  The green line connecting the series of higher lows has been a solid floor of support.  As you can see, investors have been quick to step in and buy XLV on any minor pullback.


In fact, health care has shown a tremendous amount of relative strength this year.  It goes up when the market rallies.  But it barely dips at all when the majority of stocks are selling off.

That’s a potent combination!  And until this uptrend is broken, we should see XLV continue to lead stocks higher.

Trade Alert

Buy:  Health Care Select Sector SPDR (XLV) up to $50.00
Recent Price:  $48.76
Price Target:  $57.50
Stop Loss:  $46.00

Remember:  XLV is in a strong uptrend. Investors are stepping in to buy healthcare stocks whenever there is a minor pullback.  Grab this ETF now and let it run to new all-time highs.


Consumer Discretionary (+8.3%)

Retail sales rebounded from two months of declines with a 0.1% increase in April.  It was much better than that 0.6% decrease in retail sales that was forecast.  The American consumer is once again proving to be resilient and willing to spend money even though payroll taxes have gone up this year.

The soaring stock market and rising home values is boon for Americans that own a home and have money in the market.  And it’s being reflected in consumer sentiment that jumped to the highest level in six years.

Our iShares US Home Construction ETF (ITB) soared to a new high of $26.21.  ITB total return since we recommended it in January jumped to a gain of 18.8%!  The housing recovery is rolling along and builders are reaping the rewards.  Continue holding for bigger gains ahead…

Consumer Staples (+2.0%)

The defensive consumer staples sector had been one of the hottest sectors so far this year.  And it gained an additional 2% last month.  But it wasn’t anywhere near the best performing sectors over the last month.  This could be a sign that the long awaited shift from defensive to cyclical sectors is underway.

Energy (+6.8%)

WTIC oil prices have run from around $86 last month into the mid-$90s per barrel this week.  The surge in oil prices has fueled a surge in energy related stock this month.

But a quick look at a chart of crude oil over the last few years shows the technical outlook for oil isn’t so clear.  In short, oil price are consolidating in an increasingly tighter range.

This type of consolidation typically resolves itself in a violent and dramatic manner.  I wouldn’t be surprised to see a major $20 or $30 swing in oil prices in the near future.

The upswing in energy stocks has been great for the two energy related ETFs we recommended last month.  XES has quickly racked up a 12.5% gain while the less volatile MLPY has gained nearly 5%.

Financials (+8.2%)

Financials picked up steam last month.  The 8.2% surge was fueled by a shift away from defensive sectors and into cyclical sectors.  Our SPDR S&P Bank ETF (KBE) has seen a large amount of inflows in the last week.  KBE is now up more than 20% and quickly closing in on our price target.  Keep an eye on this ETF and be ready to capture your profits when KBE hits $29.

Healthcare (+1.7%)

Healthcare stocks took a bit of a breather last month.  They only gained 1.7%.  That’s the slowest advance this year.  That’s the best buying opportunity we’ve had for this red hot sector… so we’re recommending the Health Care Select Sector SPDR (XLV) this month… see page five for more details.

Industrials (+6.1%)

Industrial production dropped 0.5% in April but industrial stocks staged a 6.1% rally.

Why are industrial stocks rallying when industrial production is slowing?

Simple… the 0.5% drop is in the past but the leading economic indicators show economic expansion will continue and there’s the potential for economic growth to accelerate.

Our iShares Dow Jones US Industrial ETF (IYJ) hit a new high of $86.52.  Continue holding for bigger gains ahead.

Technology (+6.0%)

Tech stocks snapped back this month.  In fact, they broke out to new 52-week highs. And we’re seeing inflows into tech ETFs accelerate.  This is a sign that tech is on the verge of getting out of investors’ dog house… finally.

Our iShares Semiconductor ETF (SOXX) is now up 10% since February.  And almost all of those gains have come in the last few weeks.  SOXX is building bullish momentum and it’s on the verge of a major surge higher in the weeks ahead.

Materials (+6.6%)

Materials stocks and our iShares Basic Materials ETF (IYM) also benefited from the shift away from defensive sector and toward cyclical sectors.  A look at the chart of IYM shows that it has shot back up to resistance at $73.  If IYM can break out, it could build momentum and make a big run higher in the weeks ahead.

Utilities (-0.5%)

Utilities slumped to a 0.5% loss last month.  The loss was led by a 3.7% drop in utilities output in April.  We’ll likely see this defensive sector snap back this month.  But I think the days of utilities stocks leading the markets higher are over.

Portfolio Changes

  • This month we’re buying XLV.


Category: SET Monthly Issues

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