SET Monthly Issue September 2011

| September 30, 2011

September 2011


Believe it or not, stocks rose this month.

In fact, all nine of the sectors we track posted gains since we published the August issue of Sector ETF Trader.

Obviously, it’s good to see stocks rebound after the beating they took in late July and early August.

But it’s not all good news…

According to the Economic Cycle Research Institute (ECRI), economic growth is still slowing. And leading indicators are still pointing down.

In other words, there’s no end in sight to the current slowdown.  At this point, I’d put the odds on the US falling into another recession at 50/50.

Here’s the key…

When we’re in an economic slowdown, like we are right now, the economy is much more vulnerable to shocks.

That makes policy decisions by government leaders around the world much more important.  One misstep by the Fed or the ECB could shock the system into recession.

But if policymakers are able to navigate the twists and turns successfully, we’ll likely see a growth revival early next year.

Unfortunately, I’m only giving policymakers a 50% chance of getting it right.  So, that’s where my 50/50 call on a recession comes from.

It’s also why the markets are obsessed with the debt crisis in the Euro Zone.  It’s a litmus test of how well policymakers are doing.  On days they seem to get a handle on the situation, stocks pop… and on days they seem clueless, stocks drop.

Truth is, until they find a solution to the debt crisis, there’s a greater risk of a systemic shock sparking a new recession.  Obviously, that’s not good news…

As a result, investors pulled money out of risky stocks and put it into safer US Treasuries.

Here’s the silver lining…

As Sam Stovall at Standard & Poor’s recently pointed out, the recent market action has pushed dividend yields up and treasury yields down.  Now, the 2.13% dividend yield on the S&P 500 exceeds the yield on a 10-year Treasury.

It’s a rare occurrence to say the least.  According to Mr. Stovall, “this has only happened 20 times since 1953.  And in the following 12 months, the S&P 500 rose by an average of 20%.”

The bottom line is there are risks to the economy and to stocks.  But there’s also evidence this could be a great buying opportunity.

So, we’re going aggressive with a cyclical ETF that should lead the market higher as economic growth revives.  But we’ll also control our risk by following our trading plan to buy the ETF under our buy up to price and selling when we reach our price target or stop loss.


Fasten your seatbelt!

The next few months are going to give investors the ride of their lives.  In other words, stocks are going to be volatile.

But here’s the key… Cyclical stocks are going to soar if the global economy avoids recession.

What’s more, there’s a catalyst that could spark a revival in tech spending even if the economy dips into a mild recession.

Macro/Economic Trend:  Beginning Of A New Cycle

Look, investors know tech stocks are cyclical.  But there’s another, even more important, cycle for tech… the technology adoption lifecycle.

The cycle illustrates how a new technology is typically accepted.


As you can see, technology is first adopted by a few innovators, then a few more early adopters, then the early majority and late majority, and finally the laggards.

Tech companies are masters of this cycle.  They time the release of new products so that they constantly have products in different stages of the adoption lifecycle.

I’m sure you’ve noticed how Apple (AAPL) rolls out a new iPhone every year… And how there are new versions of software as well as faster chips and the list goes on and on…

The bottom line is a tech company’s mastery of this cycle makes it less vulnerable to the business cycle. And more profitable…

The king of all product lifecycles is Microsoft’s (MSFT) operating system.

Remember, Microsoft Windows still has 86% of the PC market.  So, whenever this old industry giant puts out a new version of Windows it triggers a flurry of activity in the entire tech sector.

And guess what… MSFT just released “a pre-beta developer preview” of Windows 8.

That means were at the very beginning of a new technology adoption lifecycle!

What’s more, for the first time ever, Microsoft is allowing its operating system to run on chips based on ARM Holdings’ (ARMH) architecture as well as Intel (INTC) chips.

Simply put, this is huge development for semiconductor makers.  And it’s likely to spark a massive rally in the entire industry.  Let’s grab the SPDR S&P Semiconductor ETF (XSD) now to profit from the technology adoption lifecycle for the next generation of Windows.

Fundamentals:  A closer look at XSD

XSD tracks the S&P Semiconductor Select Industry Index.  It holds 53 of the top semiconductor chip makers.

The expense ratio is 0.35%.

The top five holdings and percentage weight for XSD are –

Company Name Ticker % Weight
NetLogic Microsystems NETL 2.98%
Rambus RMBS 2.42%
RF Microdevices RFMD 2.36%
Atmel ATML 2.34%
Fairchild Semiconductor FCS 2.31%

Technicals:  The charts lead the way

XSD has gone through a correction since peaking in February.  In fact, XSD is down more than 26% from it 52-week high.

But it’s bouncing back quickly.  It’s up more than 13% off the recent low set on August 9th.  Furthermore, XSD looks to have put in a triple bottom at $42.50.


This looks like a good low risk entry point to me.  Go ahead and grab your shares of XSD now before the Windows 8 technology adoption lifecycle sends semiconductor stocks soaring.

Trade Alert

Buy:  SPDR S&P Semiconductor ETF (XSD) up to $49.00
Recent Price:  $47.89
Price Target:  $64.00
Stop Loss:  $39.00

Remember:  We’re looking for Windows 8 technology adoption lifecycle to send semiconductor stocks soaring.  And the recent pullback looks like a great buying opportunity to me.  Look for XSD to jump higher as investors jump back on the semiconductor bandwagon.


Consumer Discretionary (+4.7%)

Consumer Discretionary stocks are a mixed bag.  High end retailers like Ralph Lauren(RL) who cater to a wealthier clientele are doing great.  Clearly, the rich have money and are willing to spend it.

And the deep discounters like Dollar General (DG) who cater to the opposite end of the spectrum are doing great as well.

But then there’s everyone in the middle like Target (TGT) and Wal-Mart (WMT) who are being pinched just like the middle class they depend on for sales.

Our SPDR S&P Retail Fund (XRT) is off to a good start since we re-recommended it last month.  In fact, XRT is above our buy up to price, so I’m moving it to a hold.

Consumer Staples (+4.4%)

Consumer staple stocks bounced back quickly from the panic fueled selloff.  The defensive sector offered a measure of protection from the market downturn.  But I was disappointed in how volatile the sector became when panic selling hit its peak in early August.

At this point, I’m steering clear of this defensive sector.

Energy (+0.2%)

Energy stocks haven’t bounced back the way I expected.  Investors are clearly worried the economic slowdown will cut into oil demand.  As a result, oil prices are hovering in the mid-$80 per barrel.  And until oil starts moving higher, energy stocks will have a hard time gaining traction.

Not surprisingly, our PowerShares S&P SmallCap Energy Portfolio (PSCE) is off to a slow start.  But that could change at any moment.  If oil can clear the $90 per barrel hurdle, we could see oil prices and energy stocks take off.

Financials (+0.9%)

Financial stocks… (sigh) where do I start?  Simply put, this sector is a mess.  The banking sector hasn’t even begun to recover from the 2008 financial crisis.  And now we’re staring at another recession.  I can’t imagine how banks will absorb another round of losses if things take a turn for the worse.  In other words… I’m staying away from financials.

Our iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ) is cruising higher once again.  I think the best is yet to come for REITs who specialize in multifamily housing.  Continue holding REZ…

Healthcare (+4.4%)

Healthcare stocks were put on the chopping block when Congress introduced $1.2 trillion in spending cuts.  The fear is the deficit reduction super committee will recommend steep cuts to Medicaid and Medicare.

As a result, healthcare industry lobbyists are hoping the super committee fails altogether.  They now believe the automatic cuts that will trigger if the super committee fails will be less harmful than anything the committee recommends!

Any way you slice it… it’s not good for healthcare companies.

Industrials (+1.8%)

Industrial production increased 0.2% in August… a positive surprise considering economists were expecting production levels to remain unchanged.  And it’s the fourth month in a row industrial production has ticked up.

Clearly, this report shows weak growth.  But so far, there’s no evidence of recession either.

Our Market Vectors Agribusiness ETF (MOO) is holding steady.  And grain prices remain at high levels.  Once farmers begin spending their profits (Oct – Dec) I’m expecting MOO to make a big move higher to finish out the year.  MOO fell below our buy up to price so feel free to buy the ETF up to $53.

Technology (+3.6%)

Tech stocks held up well and are bouncing back quickly.

And now, with the addition of a new technology adoption lifecycle for Windows 8, we have just the catalyst this sector needs.  In fact, I’m recommending the SPDR S&P Semiconductor ETF (XSD) this month to profit from the cycle… See the trade alert for more details.

Materials (+0.2%)

Materials stocks have stabilized after taking a beating last month.  But we’re seeing the price of many raw materials drop as economic growth cools.  As a result, the natural resource sector remains under pressure.

However, gold miners have been the exception to the rule.  Our Market Vectors Gold Miners ETF (GDX) shot up to a new peak gain of over 18% in the last few weeks.

While the miners continue to lag behind the physical metal, I believe we’ll see gold mining stocks play catch up as the stock market stabilizes.  Continue holding GDX for bigger gains.

Utilities (+7.2%)

Utilities are behaving like a defensive sector should.  They’re ignoring the market chaos and chugging along nicely.  Our Utilities Select Sector SPDR Fund (XLU) already erased all the losses it sustained in last month’s selloff.  If you haven’t already, go ahead and buy XLU up to $34.

Portfolio Changes

  • This month we’re buying XSD
  • Move Market Vectors Agribusiness ETF (MOO) to Buy up to $53.00
  • Move SPDR S&P Retail (XRT) to hold

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