SET Monthly Issue October 2013

| October 15, 2013

October 2013


A lot has been made of the government shutdown and looming debt ceiling lately.  The two are often tied together but they’re really completely separate issues.

The government shutdown is a headwind for the economy.  But it’s not the end of the world.  After all, there have been 18 of them since 1977 and we’ve managed to bounce back quickly in the past.

As for the debt ceiling, it has been raised 15 times over the last decade.  It’s only recently that some of the Washington stooges decided to use it as a weapon to try to exert the will of the minority over that of the majority.

Sooner or later, sanity will prevail. Even if it takes until after the debt ceiling has passed, the President or the Fed will prevent a default on the payment of government debts by one means or another.

No matter how perilous the noise out of Washington sounds, it simply must be ignored.

And for the most part, that’s exactly what investors are doing.  The pullback induced by the Washington shenanigans amounted to a 4.8% drop in the S&P 500.

That’s a mild pullback any way you slice it.  However, we’ll likely see increased volatility and a bigger pullback if the debt limit isn’t raised before the October 17th deadline.

Nevertheless, any selloff is unlikely to change one important fact.  The S&P 500 has made higher highs and higher lows in every year since the bottom in 2009.


In order for this trend to be broken, the S&P would need to drop below the 2012 low of 1,258.  That’s a 26.5% drop… simply put, the odds of that dramatic of a selloff during the final few months of 2013 are slim and none.

This trend is undeniably bullish and one I expect to continue in 2014.

With that in mind, let’s take a look at one ETF that stands to rocket higher in the weeks ahead.


I’ve made no secret of the fact that the lack of wage growth and income gains for middleclass America is a major concern.  And it’s a major roadblock to future economic growth.

As I pointed out last month, “Much of the increase in consumer spending over the last several years has been fueled by debt.  It often gets swept under the rug but the median US annual household income is 6.1% or $3,400 less than when than what it was in December of 2007.”

Needless to say, I’ve been on the lookout for signs of income growth.  And I found one from famed economist, David Rosenberg.

Mr. Rosenberg is the same guy that predicted a crash in the US housing market in 2006.  He made this bold call when the housing market was going bananas and nobody believed it could end badly.

Now he’s predicting wages will begin rising and rising quickly in 2014.  And just like his call on housing, nobody believes what he thinks is about to happen to wages… yet.

Macro/Economic Trend:  Wage Growth

The overriding mantra of companies since the Great Recession has been to produce more with few workers. And that’s worked well for years…

But productivity gains have steadily fallen.  In fact, productivity growth over the last year is 0.0%.

In short, companies are no longer able to produce more with the same amount of employees.  They must hire new workers in order to produce more.

It’s why we’ve seen unemployment fall over the last year even though economic growth has been sluggish.

Here’s the key… if economic growth ticks up to around 3% next year, unemployment will drop quickly.

Mr. Rosenberg thinks we could see job growth double from around 150,000 new jobs added every month, like we’ve seen since the end of the Great Recession, to around 300,000 new jobs per month!

Needless to say, I believe this is a major turning point for the economy.

If hiring is running at a pace of 300,000 new employees per month, wages are going to rise and rise dramatically.  That’s great news for the economy and the companies that make stuff that consumers buy.

More specifically, it means more money in consumers’ pockets to spend on small luxuries and entertainment.  Now is the time to buy PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ) – before job growth and wages take off and before everyone else jumps in.

Fundamentals:  A closer look at PEJ

PEJ holds 30 US stocks.  These companies design, produce, and distribute goods and services in the leisure and entertainment industries.

The expense ratio is 0.63%.  Its current dividend yield is 0.42%.

The top five holdings and percentage weight for PEJ are –

Company Name Ticker % Weight
Time Warner TWX 5.26%
Starbucks SBUX 5.17%
Liberty Media LMCA 5.12%
Chipotle Mexican Grill CMG 5.09% PCLN 5.05%

Technicals:  The charts lead the way

PEJ is currently trading for $31.75.  It’s up 38.6% year-to-date.  And it’s just below the 52-week high of $31.88.


As you can see, PEJ is in a strong uptrend.  It has set a series of higher highs and higher lows this year.  And the upward trending 50-day moving average has been a strong floor of support during the march up and to the right.

It has recently gone through a period of consolidation and bounced off of the 50-day moving average and begun moving higher.

Trade Alert

Buy:  iPowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) up to $32.75
Recent Price:  $31.75
Price Target:  $41.00
Stop Loss:  $29.00

Remember:  PEJ is in a strong uptrend.  A breakout above the recent high of $31.88 will likely lead to a quick move higher in the weeks ahead.  And the move should accelerate to the upside as jobs and wage growth accelerate in 2014.

Consumer Discretionary (+0.9%)

Consumer discretionary stocks are holding up well in the face of the uncertainty created by the dysfunction in Washington.  The delay in government economic data due to the shutdown has left investors in the dark.  But many industries are feeling the impact of the government shutdown.

Our iShares US Home Construction ETF (ITB) appears to have turned the corner after trending lower off the May high.  The recent rally pushed ITB above the important technical level around $21.50.  It had fallen below this support level in August.  And it reclaimed it after the Fed delayed the taper in September.  This bodes well for our homebuilder ETF. Grab your shares of ITB up to $23.00.

PowerShares Dynamic Media Portfolio (PBS) is off to a good start.  It was knocked down momentarily as fear over the debt ceiling gripped investors last week.  But it has bounced back quickly and is just under our $23.75 buy up to price.

We’re recommending the PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) this month… see Trade Alert for more details.

Consumer Staples (-0.9%)

Consumer staples stocks have been stuck in the mud since May.  They have tested and failed to break out above the May high on multiple occasions since going on an epic run higher to begin the year.  They are now just above support of the 200-day moving average.  But if hiring and wage growth pick up, they could see renewed investor interest and finally breakout to a new high.

Energy (+1.1%)

Energy stocks are on the upswing as optimism for global economic growth bodes well for demand for oil and other sources of energy.  The 1.1% gain over the last month is second best only to utilities.

Our mid-stream energy MLP ETF, MLPY, paid a $0.349 per share dividend on October 9th.  We’ve now collected 69 cents in dividends since we recommended it in April. That works out to an annual dividend yield of 7.8% on our original buy price of $17.64. Not too shabby…

Our First Trust Global Wind Energy ETF (FAN) is ignoring the mess in Washington and climbing up and to the right on the chart.  It hit a new high of $10.92 yesterday. It’s up 11.7% and just under our $11.00 buy up to price.

Financials (0.0%)

Financials have settled into a holding pattern.  They haven’t been able to breakout above the July high and we’re flat over the last month.

Our First Trust NASDAQ ABA Community Bank Index Fund (QABA) jumped higher over the last few days after a few banks reported 3rd quarter earnings with Net Interest Margins that came in better than expected.  If this trend holds up over the rest of the earnings season, QABA should be off to the races.

Healthcare (-0.1%)

Healthcare stocks lost some momentum this month after a strong 4.6% gain last month.  Obviously, the Republican led charge to defund the Affordable Healthcare Act is creating some uncertainty.  But there’s no way the White House will allow their strong-arm tactics to derail their signature piece of legislation.  Our Health Care Select Sector SPDR (XLV) is now just below the $51.98 high.  Continue holding for bigger gains ahead.

Industrials (+0.4%)

Industrial stocks have pulled back over the last few weeks.  But the pullback is still contained within the larger uptrend.  The bullish momentum is still driving this sector higher.  We’ll get a better picture about what the future holds once 3rd quarter earnings reports begin to roll in over the next few weeks.

iShares Transportation ETF (IYT) stands to benefit from the revival of global economic growth.  And judging by the 6.2% year-over-year jump in intermodal rail traffic, the biggest increase in six months, demand for transportation continues to grow.  That’s good news for the economy and transportation stocks as well.

Technology (+1.1%)

Tech stocks have consistently been one of the strongest sectors over the last few months.  That’s especially true of the two technology ETFs in our portfolio.

Guggenheim S&P 500 Equal Weight ETF (RYT) is up 10.3% and in a strong uptrend. And iShares PHLX Semiconductor ETF (SOXX) is up 17.9%.  The growth potential for both of these cyclical ETFs is off the charts.  Continue holding…

Materials (+0.2%)

Materials stocks managed to post a modest 0.2% gain over the last month.  And that’s despite the turmoil in Washington.  Investors are clearly gearing up for a year-end rally and basic materials are a big part of their plans.

Our Guggenheim Timber ETF (CUT) recently came up just short of our $25.50 price target.  But resource based ETFs are gaining momentum.  And our Timber ETF is at the head of the class.  Be ready to capture your profits on CUT as it makes another run at our $25.50 price target.

Utilities (+1.6%)

Utilities bounced 1.6% higher over the last month.  But the trend in this defensive sector isn’t pretty.  After setting a new 52-week high at the beginning of May, the sector has set lower highs on each consecutive bounce.  The good news is the long term uptrend is still in place.  The bad news is the pace of the gains is the slowest of all nine sectors we track.  Now that global growth is on the upswing, there are much better opportunities.

Portfolio Changes

  • This month we’re buying PEJ


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