SET Monthly Issue November 2013

| November 19, 2013

November 2013


Janet Yellen is set to succeed Ben Bernanke as the next Chairman of the Federal Reserve.

Her discussion with the Senate last week as she seeks to advance her confirmation sent stocks to new highs.  The S&P 500 closed at an all-time high of 1,798 on Friday.

She said exactly what the markets wanted to hear…

In short, she said the private sector is strong, the benefits of QE outweigh the costs, a December taper isn’t likely, and she will continue to use monetary policy to promote financial stability and full employment.

In other words, it’s business as usual.

The Fed’s support along with rate cutting by the European Central Bank and better than expected economic data out of China are all good indications the global economy should continue to pick up steam… and that’s extremely bullish for stocks.

The only negative point the bears have left to cling to is calling the market a bubble.

Yet, stock market valuations based on price to earnings or price to book aren’t out of line.  In fact, they’re right at their 10-year averages.

With that in mind, I’ve got an ETF that’s a great way to profit from more upside in this bull market.


Throughout 2013, we’ve seen sector leadership change hands several times.  Just about every sector or industry has been hot at one time or another.

Recently we’ve seen the consumer staples sector break out of 5 month consolidation and make a new high for the first time since May.  I’m expecting consumer staples to continue leading the markets higher in the weeks ahead.

Macro/Economic Trend:  Mid-Cap Growth

Consumer staples stocks are typically thought of as less risky because they provide stuff people need.  After all, people aren’t going to stop buying toilet paper and toothpaste just because the economy is slowing down.

But within the realm of consumer staples stocks there is an element of growth that is often overlooked.  These are typically small- or mid-cap companies that provide a good or service that’s considered a consumer staple but the business is growing faster than overall consumer spending.

For instance, companies like GNC Holdings (GNC), Whole Foods Market (WFM), andGreen Mountain Coffee Roasters (GMCR) are considered consumer staples because of the type of products they provide.  But their business models are still focused on growth.

I believe this subset of growth oriented consumer staples stocks is uniquely positioned to benefit from the current economic conditions.

First off, consumer staples are benefiting from low inflation and stable commodity prices.  Rapidly rising inflation or commodity prices can quickly eat into profit margins. But with inflation in check and commodity prices trending lower, profit margin should expand or hold steady without the need to increase prices.

And more importantly, the improvement in the economy is creating jobs.  And more jobs mean consumers have more money to spend.  And they’re spending it on the hot new products that these growing consumer staples companies are making.

The consumer staples ETF that’s uniquely focused on these companies is the First Trust Consumer Staples AlphaDEX Fund (FXG).

Fundamentals:  A closer look at FXG

FXG currently holds 38 US stocks.  These stocks are selected from the Russell 1000 index based on enhanced index called the StrataQuant Consumer Staples Index.  This stock selection methodology results in a unique weighting of mid-cap growth and value stocks not seen in other ETFs focused on consumer staples.

The expense ratio is 0.70%. Its current dividend yield is 1.66%.

The top five holdings and percentage weight for FXG are –

Company Name Ticker % Weight
GNC Holdings GNC 4.90%
Ingredion INGR 4.67%
Tyson Foods TSN 4.66%
Safeway SWY 4.63%
The Kroger Co. KR 4.60%

Technicals:  The charts lead the way

FXG is currently trading for $34.91.  It’s up 38.8% year-to-date and at a new 52-week high.


As you can see, FXG is in a strong uptrend.  The 100-day moving average has been a strong level of support throughout the year long run up and to the rate on the chart.

You’ll also notice FXG has continued to make one new high after another this year.  It didn’t suffer through the 5-month long consolidation from May through October like other market-cap weighted consumer staples ETFs did.

This is a clear indication of relative strength of FXG.  And now that consumer staples are regaining momentum, I believe FXG should be one of the top performing ETFs in the weeks ahead.

Trade Alert

Buy:  First Trust Consumer Staples AlphaDEX Fund (FXG) up to $36.00
Recent Price:  $34.91
Price Target:  $42.00
Stop Loss:  $32.00

Remember:  FXG is uniquely focused on the growing consumer staples stocks.  It is outperforming other ETFs that focus on this sector.  And should continue to outperform as economic growth picks up steam in the weeks and months ahead.


Consumer Discretionary (+5.6%)

Better than expected gains in hiring and the downward trending jobless claims have reignited bullish optimism about the consumer.  Consumer discretionary stocks have shot up 5.6% since this time last month.

Our iShares US Home Construction ETF (ITB) has been trending higher since the end of September.  The recent report on homebuilder confidence held steady in November.  The reading of 54 is 20% higher than last year and indicates optimism among homebuilders.  Grab your shares of ITB up to $23.00.

PowerShares Dynamic Media Portfolio (PBS) hit a new high of $24.95 yesterday. That’s 10% above where we recommended buying it in September.  The charge is being led higher by internet companies like Yahoo! (YHOO) that recently hit a new 52-week high and Google (GOOG) that reported great quarterly earnings last month.

PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) is continuing to move higher as well.  We’ll continue to ride this uptrend.

Consumer Staples (+6.0%)

Consumer staples stocks finally broke out of the 5 month long slump and made a new high for the first time since May.  We’re recommending the First Trust Consumer Staples AlphaDEX Fund (FXG) to profit from more upside in this sector… see Trade Alert for more details.

Energy (+2.5%)

Energy stocks got the Buffett bump this month when Berkshire Hathaway (BRK.A) disclosed they had invested $3.45 billion in Exxon Mobil (XOM).  Warren Buffett has a knack for identifying undervalued stocks.  His vote of confidence has sparked a lot of buying interest in XOM.

However, the Oracle of Omaha isn’t the only well known investor weighing in on XOM. Famed short seller Jim Chanos thinks XOM is a value trap.  He notes XOM has not increased production in five years despite investing more and more money into their business.

The outcome of this heavyweight battle will likely shape the performance of the energy sector in 2014.

One thing’s for sure, the US energy revolution sparked by new drilling technology is stressing our energy infrastructure.  Massive investments are already underway.  And the MLPs that operate the vast majority of the pipelines and storage tanks are continuing to generate nice profits and generate solid income.  Continue holding theMorgan Stanley Cushing MLP Hi Income ETN (MLPY).

Our First Trust Global Wind Energy ETF (FAN) is consolidating after an 18% surge to the upside in September and October.  But there’s still more gains to come… continue holding.

Financials (+3.5%)

Financials have been showing some signs of strength lately.  But the sector is being held back by the stream of negative headlines involving the major banks and billions of dollars worth of fines dating back to the 2008 financial crisis.

Our First Trust NASDAQ ABA Community Bank Index Fund (QABA) is up about 7.5% from where we recommended buying it.  An uptick in economic growth could be just the thing to spark the next leg higher… continue holding.

Healthcare (+4.8%)

Healthcare stocks continue to charge ahead despite the unmitigated disaster of the rollout of Obamacare.  Our Health Care Select Sector SPDR (XLV) reached a new high of $54.52 yesterday.  That’s a 12.8% gain since we first recommended it.  The sector is benefiting from multiple catalysts that should continue to propel healthcare stocks higher.  The buyout mania among drug companies and biotech stocks is driving valuations higher and the free trade zone in China is a huge growth opportunity next year.  Continue holding for bigger gains ahead.

Industrials (+6.6%)

Industrials led all sectors with a 6.6% gain over the last month.  This sector is in prime position to benefit from accelerating global economic growth.  Last week’s US industrial production report showed manufacturing output increased for the third month in a row and is now up 3.3% from a year ago.

iShares Transportation ETF (IYT) is up 10% since we recommended it in September. The advance is being led by an uptick in rail traffic. Continue holding…

Technology (+4.9%)

The tech laden Nasdaq is now 40% high than the October 2007 peak.  And it’s on the verge of breaking 4,000.  The last time the Nasdaq was at these levels was in 2000 at the height of the dotcom boom.

And there are certainly some similarities with tech company IPOs, huge premiums on unproven stocks, and billion dollar buyouts of tech startups that don’t have any revenue.  But there’s no denying the growth potential of new technology.

Guggenheim S&P 500 Equal Weight ETF (RYT) hit a new high yesterday of $73.47. It’s up 14% from where we recommended it and in a solid uptrend.

iShares PHLX Semiconductor ETF (SOXX) came within 75 cents of our $70.00 price target.  It shouldn’t be long before it does… continue holding.

Materials (+4.6%)

Materials stocks had a strong showing with a 4.6% gain over the last month.  The sector is being led higher by stocks with exposure chemicals while being held back by stocks tied to industrial metals and mining.  Obviously, the uptick in economic growth bodes well for this cyclical sector.  But excess capacity throughout the sector could hold profits in check for some time.

Utilities (+3.7%)

Utilities have rebounded over the last month.  But they are still well off their best levels of the year.  I don’t see this defensive sector making a new high anytime soon.

Portfolio Changes

  • This month we’re buying FXG


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