SET Monthly Issue May 2015
Time For Liftoff?
So far 2015 hasn’t been a bad year for stocks.
The S&P 500 is at an all-time high of 2130 and up 4% for the year.
But the path here has been full ups and downs.
Many investors were positioned for the US economy to accelerate in Q1. Along with it were expectations for a Fed rate hike.
Neither of them has happened…
The US economy continues its slow pace of growth. Wage growth and inflation are nonexistent. And, the Fed rate hike continues to get kicked further down the road.
Not surprisingly, the divergence of reality and expectations created volatility earlier this year.
Now investors and the Fed alike are coming to terms with the fact that things haven’t improved enough to warrant an interest rate hike.
In other words, we’re looking at more of the same scenario we’ve had over the last year. That’s probably not enough to send the S&P soaring 30% higher like it did in 2013. But it’s good enough for the S&P to repeat the 12% gains from 2014.
The S&P 500 is at new highs. It appears that after a choppy five months to start the year, the market if finally ready to make a big move higher.
Right now the S&P is up 4%. So, I’m expecting the S&P 500 to tack on another 8% over the next seven months. That would push the S&P up to 2,300.
And here’s one ETF I expect to be leading the market during that run…
Trade Alert: Playing The Rebound In Oil
Two of the biggest changes to play out over the last few month have been the drop in the value of the US Dollar and the rebound in oil prices.
The US Dollar is down 5% while oil prices are up more than 30% over the last two months.
We’ve seen several instances where oil prices have crashed during an economic expansion. But buying energy stocks wasn’t the best way to profit from a rebound in oil prices.
In fact, energy stocks have continued to lag the S&P 500 for long periods of time after an oil price crash.
Macro/Economic Trend: Rising Earnings
The stock market’s bull market has been fueled by slow and steady economic growth, low interest rates, and most importantly… the ability of companies to generate earnings per share growth that outpaces revenue growth.
They’ve managed to do this through stock repurchases, cost controls, and mergers and acquisitions. Outside of a few innovative companies like Apple $AAPL, most companies aren’t doing anything new or dramatic to grow their business.
They’re simple taking advantage of low interest rates, high liquidity, and deploying capital to reduce the number of shares so the earnings they do make add up to earnings per share growth.
The drop in oil prices sent shockwaves of fear through earnings expectations and impacted the high yield bond market that has lent boatloads of money to the energy industry in recent years.
Now that oil prices have come off the lows, the fears of a collapse in high yield debt and earnings expectations for the S&P 500 are moving higher again.
But here’s the surprising thing…
Energy stocks aren’t the best way to play a rebound in oil prices after a crash. Energy stocks typically lag behind the market for months after a rebound in oil prices.
One area I expect to see rebound quickly is industrial production.
There’s typically a sharp drop off in industrial production that occurs when oil prices crash. It usually reaches a bottom about three months out from the bottom in oil prices.
Industrial production then stages a dramatic comeback fueling a strong rally in industrial stocks.
I’m recommending the Vanguard Industrials ETF $VIS to profit from the rebound in oil prices and a rebound in industrial production that happens three months following an oil market bottom.
Fundamentals: A closer look at VIS
VIS tracks an index of large, medium, and small US industrial businesses.
It has 350 stocks that are weighted according to market cap. The expense ratio is 0.12%. It has a 12-month dividend yield of 1.53%.
The top five holdings and percentage weight for VIS are –
| Company Name | Ticker | % Weight | |||
| General Electric | GE | 9.82% | |||
| Boeing | BA | 4.01% | |||
| United Technologies | UTX | 4.00% | |||
| 3M | MMM | 3.96% | |||
| Union Pacific | UNP | 3.80% | |||
| 5/4/15 | |||||
Technicals: The charts lead the way
VIS is currently trading for $109.68. It’s up 2.7% year-to-date and it’s up 8.3% over the last year.
VIS is 3.8% above the 200-day moving average, 1.36% above the 50-day moving average, and 1.12% above the 20-day moving average. It’s 0.8% below the 52-week high… all indications of a bullish uptrend.
You’ll also notice that VIS has struggled to make and hold new highs since February. This is consistent with the price action we often see during periods of an oil crash.
Trade Alert
Buy: Vanguard Industrials ETF $VIS up to $111.00
Recent Price: $109.68
Price Target: $122.00
Stop Loss: $104.00
Remember: VIS is in a bullish uptrend that has been losing momentum as oil prices have fallen and taken a toll on industrial production. Now that oil prices have bottomed, bullish momentum should accelerate and send VIS soaring higher in the weeks and months ahead.
Sector Snapshots
Consumer Discretionary (+1.1%)
Consumer discretionary stocks edged higher over the last month. The sector was up 1.1% despite sluggish retail sales, a drop in consumer confidence, and rising oil prices.
The one thing consumers are willing to spend money on is bars and restaurants. Our PowerShares S&P SmallCap Consumer Discretionary Portfolio $PSCD holds lots of these stocks. But the drop in the US Dollar has benefitted large caps at the expense of small cap stocks. Buy your shares up to $51.50.
Our PowerShares Dynamic Leisure & Entertainment Portfolio $PEJ has also pulled back from the recent highs, but should get a boost from increased restaurant spending in the coming weeks.
The Marked Vectors Gaming ETF $BJK is still in the process of forming a bottom. But the string of bad news that has hurt the industry over the past few years is beginning to subside. We’re in at a great price on this ETF and you can still establish a position below $41.00 if you haven’t already done so.
Consumer Staples (+0.7%)
Consumer staples took a backseat to discretionary stocks last month. The good news is our Guggenheim S&P Equal Weight Consumer Staples ETF $RHS is moving higher over the last week. Continue holding for more upside.
Energy (-1.8%)
The energy sector has slumped lower as oil prices have leveled off over the last few weeks. Nevertheless, the bottom for oil appears to be in. This will benefit the sector over the long haul. But there’s still some pain for the earnings to be figured out.
Our Guggenheim Solar ETF $TAN is looking quite strong. It’s up 42.5%. Continue holding for more upside.
Financials (+2.5%)
Financials have benefited from the rebound in oil prices. There has been lots of money lent to the energy sector over the last few years. Many were beginning to fear these loans wouldn’t be repaid after oil prices crashed. Now that oil prices have rebounded, some of those fears have been alleviated. Our Financial Select Sector SPDR Fund $XLF is up 17.2%. Continue holding.
Healthcare (+1.3%)
Healthcare stocks moved higher over the last month. This resilient sector is benefiting from powerful macroeconomic and cyclical trends. Our iShares US Medical Devices ETF $IHI is up 2.8%. Continue holding.
Industrials (+1.4%)
The weakening of the US Dollar and a rebound in oil prices bodes well for the industrial sector… we think it will be among the leading sectors in the weeks and months ahead.
As a result, we’re recommending the Vanguard Industrials ETF $VIS this month… see page 5 for more details.
Technology (+3.2%)
Technology stocks are another sector that has historically done well after an oil crash bottoms during a period of economic growth.
Our Market Vectors Semiconductor ETF $SMH is up 7.7%. M&A activity and strong earnings continue to lift this sector. Continue holding.
Our First Trust NASDAQ-100 Technology Sector Index Fund $QTEC is all about big tech companies. It’s currently butting up against resistance at $45.00. A breakout above this level should trigger the next leg higher.
The Global X Social Media Index ETF $SOCL is up 7.0%. It initially fell after several social media companies had disappointing Q1 earnings. Social media remains bit of a mystery in terms of a business model three years after Facebook $FB became a public company. That uncertainty creates volatility and opportunity. Continue holding for more upside.
Materials (+2.6%)
Materials sector is another sector that typically performs well after an oil crash has bottomed. So far this year, materials are outperforming the S&P 500… and I expect big profits to be made in the Materials Select Sector SPDR $XLB. Continue holding.
Utilities (-0.6%)
Utilities stocks haven’t been able to rebound despite the time from for the Fed’s first interest rate hike being pushed out. The period of outperformance for this sector appears to be long gone.
Portfolio Changes
- This month we’re buying VIS.
Category: SET Monthly Issues
