SET Monthly Issue September 2014

| September 16, 2014

September 2014


Large cap stocks surged to new highs last week.  The S&P 500 touched 2,019.  That’s a solid 9.2% gain so far this year.

That’s clearly a bullish sign for stocks and our ETFs.

According to the AAII Investor Sentiment Survey, bullish sentiment toward stocks increased 1.9% from the previous week to 42.2%.  That’s above the 39.0% long-term average for bullishness.

But at the same time, it’s important to note that some of the market action reveals that investors are becoming more fearful…

During the last week, market momentum, stock price strength, demand for safe haven investments, demand for junk bonds, as well as put and call option volume, have reached levels that indicate investors are become very fearful.

Simply put, investors are saying they’re bullish on stocks.  But their actions indicate that fear of a correction, not fear of missing out on the next leg higher, is driving their actions.

That’s not completely unusual.  It’s called ‘climbing a wall of worry’.  And we’ll often see the market continue to move higher despite multiple concerns or headwinds.

One thing in particular that has me concerned is the strength of the US Dollar.

The US Dollar strength has created some volatility in the currency markets.  It’s hurting energy stocks, commodity stocks, foreign markets, gold, and just about everything except large cap US stocks.

If the US Dollar stabilizes, I think we’ll see investors’ risk appetite return.  Investors will turn from protecting the gains they already have and begin looking for the next way to make money.

And here’s one ETF that should be leading the way higher…


There’s little doubt about which sector has the best leadership right now.  Investors’ bullish outlook toward stocks can be traced back to the technology sector.

More specifically, the successful IPO of Alibaba (BABA) was a bullish catalyst.  The Chinese e-commerce company raised a record $21.8 billion in its IPO.  And Apple(AAPL) sold more than 10 million new iPhones in the first three days.

Needless to say, strong leadership from a bellwether like AAPL and the biggest IPO ever has set the stage for tech stocks to lead the market higher.

Macro/Economic Trend:  Finding Value In A Growth Sector

Traditionally, information technology has been thought of as a growth sector.  And for good reason… tech companies are often young and exciting with huge opportunities to grow their business, revenue, and earnings.

In order to get in on the action, investors typically have to pay a big premium to their current earnings.  But as the technology sector has matured, the older and bigger companies undergo an interesting transformation.

They start out as high flying growth stocks.  Then they reach a point where growth slows and they fall out of favor with growth investors.  Finally they turn into mature businesses that are often undervalued by the market.

Today, the technology industry is an exciting mix of older mature companies and young startups with amazing growth potential.

In today’s environment with a sluggish global economy, solid US growth, and a strong US Dollar, tech stocks strike the right balance to continue leading US stocks to new highs.

The ETF I like to profit from this important trend is the First Trust NASDAQ-100 Technology Sector Index Fund (QTEC).

Fundamentals:  A closer look at QTEC

QTEC tracks the NASDAQ-100 Technology Sector Index.  This index is designed to measure the stock performance of technology stocks in the NASDAQ-100.

It currently consists of 41 stocks.  The stocks are equally weighted.  The expense ratio is 0.60%.

The top five holdings and percentage weight for QTEC are –

Company Name Ticker % Weight
Adobe Systems ADBE 2.48%
Apple AAPL 2.47%
Cerner CERN 2.47%
NetApp NTAP 2.47%

Technicals:  The chart leads the way

QTEC is currently trading for $41.30.  It’s up 17.1% year-to-date and 27.7% over the last year.  It recently attempted to break out to a new all-time high.  But the move was sold by investors.

It’s now getting ready to test support of the uptrend that has been in place since May.


This should serve as a nice buying opportunity before QTEC breaks out above $42.00 and moves higher from there.

Trade Alert

Buy:  First Trust NASDAQ-100 Technology Sector Index Fund (QTEC) up to $42.00
Recent Price:  $41.30
Price Target:  $50.00
Stop Loss:  $37.50

Remember:  Technology stocks are riding high thanks to strong leadership and a good mix of young growth stocks and mature value stocks.  These characteristics can’t be found in any other sector and they’re the reason tech should lead the markets higher.


Consumer Discretionary (-0.3%)

The consumer discretionary sector was down slightly over the last month.  It was the first time in five months the sector didn’t post a monthly gain.

The sector should get a lift from falling gas prices.  Overall, consumer prices fell last month for the first time in 16 months because of cheaper oil prices.  The generally good data about consumer sentiment, jobs, and housing should continue to fuel more consumer spending.

However, it’s important to note that in inflation adjusted terms, US consumers still have a standard of living below what they were accustomed to prior to the 2008 financial crisis.  Until this loss is recouped, many people still feel like their quality of life is much less than before.

PowerShares Dynamic Media Portfolio (PBS) has just experienced a bearish breakout from a consolidation pattern.  Consumer stocks have been one of the weaker sectors as fear continues to be the predominate emotion driving investors actions. This weakness should be short-lived. Continue holding.

PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) is in the same boat as PBS… Continue holding.

Consumer Staples (+1.3%)

Consumer staples added 1.3% over the last month.  It’s not surprising to see this defensive sector perform well as fear dominates investors’ actions.

Our First Trust Consumer Staples AlphaDEX Fund (FXG) is attempting to break out to a new high.  But the breakout failed as fear overtook greed as the emotion driving the market action.  Nevertheless, I don’t expect the pullback to last long. Continue holding.

Energy (-4.4%)

Energy stocks often move in the opposite direction as the US Dollar.  And right now the US Dollar is ripping higher as investors come to grips with the latest economic data.

In short, the Fed looks like the most hawkish central bank around… at least compared to Japan and Europe.  And that’s sending the value of the US Dollar up and the value of commodities, like oil, that are priced in US Dollars down.

The overall fundamentals for the sector are strong.  But the currency volatility is a headwind that’s clearly hurting the sector.

Our Market Vectors Unconventional Oil & Gas ETF (FRAK) has gone through a significant pullback due to the aforementioned surge in the US Dollar.  The currency market needs to stabilize before we’ll see FRAK get back on track.  But that should happen sooner rather than later.  Grab your shares up to $32.00.

Our Guggenheim Solar ETF (TAN) is in a great position.  The simple fact is demand for solar panels is outpacing supply.  The end of the supply glut that derailed the industry two years ago is a positive step for the industry toward long-term profitable growth.  Continue holding for more upside.

Our Morgan Stanley Cushing MLP Hi Income ETN (MLPY) has been a strong performer over the last several months.  That’s the great part about mid-stream MLPs. They’re not dependent on the price of oil and natural gas.  They make their fee no matter what.  And there’s no doubt that the volume of oil and gas being produced in the US is growing.  Continue holding…

Financials (+2.9%)

Financials have enjoyed a nice uptick over the last month.  The combination of a strong US Dollar and the increase in the Fed’s target interest rate range has benefited the banks and other financials.

The Financial Select Sector SPDR Fund (XLF) hit a new 52-week high of $23.88 before pulling back over the last few days.  That’s a peak gain of 11.5%.  Continue holding.

Healthcare (+3.3%)

Healthcare was the strongest sector over the last month.  That gave our newest ETF a nice start.  The First Trust Health Care AlphaDEX Fund (FXH) hit a high of $57.46 before pulling back to $56.66… it’s still up a 2.6% in a month.  Healthcare’s bullish momentum is clearly outpacing other areas of the market.

Industrials (+0.2%)

Industrials were basically flat over the last month.  The sector is being pulled in opposite directions by the divergence in economic growth in the US versus everywhere else.  The US economy looks to be strong while China, Japan, Europe, and Brazil all look to have major hurdles to overcome.

Our Guggenheim Shipping ETF (SEA) has been hurt by the rise of the US Dollar.  The strong US Dollar makes commodities that are priced in US Dollars more expensive. That hurts the demand for commodities and hurts the demand for ships to move those commodities around the globe.  The currency markets need to stabilize in order for SEA to regain any bullish momentum.  That should happen sooner rather than later… Grab your shares up to $23.25.

Technology (+1.0%)

Tech stocks have been one of the brightest spots for investors this year.  And the ETF fund flows indicate that investors are still moving money into ETFs that focus on the tech sector.  Our Global X Social Media Index ETF (SOCL) covers the hottest and most volatile segment of the sector.  And now we’re adding to it with the First Trust NASDAQ-100 Technology Sector Index Fund (QTEC)… see Trade Alert for more details.

Materials (+0.4%)

Materials managed to post a modest gain over the last month.  That comes despite the headwinds from sluggish economic growth and a strong US Dollar.

Our iShares MSCI Global Metals & Mining Producers (PICK) has been hit hard by the strength of the US Dollar.  International metals and mining producers tend to perform poorly when the US Dollar is strong.  I think the US Dollar is overstretched to the upside and due for a correction.  That should help PICK bounce back.  Continue holding…

Utilities (+0.9%)

Utilities have bounced back over the last month.  The sector is clearly benefiting from the emergence of fear.  This safe haven investment typically does well when fear is the dominant emotion on Wall Street.  And right now fear is near the highest levels it has been in months.

Portfolio Changes

  • This month we’re buying QTEC.


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