SET Monthly Issue September 2015

| September 11, 2015

Is This A Peak For US Stocks Before They Roll Over?

It’s been a crazy rollercoaster ride for US stocks over the last month.  The S&P 500 had its first 10% correction in years.

Now the S&P 500 is down 7% over the last month.  And that’s after a 4.5% bounce off the recent low.

S&P 500

As you can see, the selloff sent the large cap index below the 200-day moving average.  This had been a critical support level.

Needless to say, this has done major damage to the multi-year bullish uptrend.

Now the S&P 500 is in no man’s land.  It’s well below the highs and the 200-day moving average.  But it’s also well above the next technical support levels.

In short, there’s a lot of uncertainty.  And many believe slowing global economic growth will cause US economic growth to peak and slow in the months ahead.

As such, we’re taking a conservative approach and buying a safe haven ETF this month.

Trade Alert: A Safe Haven

Market volatility and uncertainty are at their highest levels in years.  The VIX is holding around 25… the volatility index hasn’t held in this range for more than a few days since 2012.

Simply put, investors are very concerned about another big selloff.

Until there’s a catalyst to bring buyers back into the market, we’ll see volatility and uncertainty dominate the market action.

Macro/Economic Trend:  Slowing Economic Growth

Right now, slowing global economic growth is the biggest concern for investors.

And for good reason…

China has been the driving force behind global economic growth.  Their economy has been growing at better than 7% per year.  That’s the fastest growth rate among the world’s major economies.

But over the last few years, major cracks have developed in China’s economy.  There are bubbles in their real estate and stock markets and their industrial production recently fell 5.9% in August.

What’s more, the central government devalued their currency, the yuan, by 2% last month… a move that surprised just about everyone.  And many took it as a sign that the Chinese economy is in much worse shape than they are letting on.

And it’s not just China that has investors concerned… an oversupply of oil recently sent the price of oil plummeting below $40.00 per barrel and other commodities are following oil prices lower.

This has a negative impact on a wide swath of the global economy.  Many developing economies are heavily dependent on oil and other commodities.

Low oil prices are also having an impact on the US.  Many American companies have invested heavily in US unconventional onshore oil production in recent years.

Now these companies are being forced to scale back their operations.  They’re cutting jobs and many smaller companies are in danger of defaulting on the bank loans they took out to help fund these developments.

At this point, the economic data is signaling that the US economy may have reached a peak for the current business cycle.  When that happens, we typically see utilities stocks take the lead and perform better than other sectors.

I’m recommending the Utilities Select Sector SPDR $XLU.

Fundamentals:  A closer look at XLU

XLU tracks the Utilities Select Sector Index.  This Index includes electric utilities, multi-utilities, independent power producers & energy traders, and gas utilities.

It currently holds 30 stocks from the S&P 500.  It has an expense ratio is 0.15%.

The top five holdings and percentage weight for XLU are –

Company Name Ticker % Weight
Duke Energy DUK 8.78%
NexEra Energy NEE 8.48%
Dominion Resources D 8.04%
Southern Co SO 7.65%
American Electric Power AEP 5.19%

Technicals:  The charts lead the way 

XLU is currently trading for $41.36.   It’s at breakeven for the year.  It’s down 15.5% from the 52-week high.

Utilities Select Sector SPDR

Utilities stocks were bid up over the last few years.  But they weren’t immune to the recent market selloff.  Now, as investors reevaluate the future, there is an opportunity for XLU to lead the market higher.


Trade Alert

BuyUtilities Select Sector SPDR $XLU up to $42.50

Recent Price: $41.36

Price Target: $50.00

Stop Loss:  $39.00

Remember:  XLU is a safe haven investment.  It typically performs well in times of increased uncertainty and market volatility.  It has pulled back recently but should be among the best performing sectors until investors see a catalyst that compels them to become buyers again.

Sector Snapshots

Consumer Discretionary (-5.2%)

Consumer discretionary stocks were down over the last month.  But the 5.2% loss was better than most sectors in the marketwide selloff.

There have been some good economic data points for consumers like the unemployment rate falling to 5.1% and hourly earnings ticking up 0.3% in August.  But that hasn’t translated into increased consumer spending.

Our PowerShares S&P SmallCap Consumer Discretionary Portfolio $PSCD should be insulated from the weak global economy.  Smaller companies like those in PSCD are primarily focused on US consumers. Continue holding.

Consumer Staples (-6.8%)

Consumer staples are another safe haven sector.  But investors are still shying away from the sector.  This could be another sector we look closer at if the market uncertainty continues.

Energy (-8.0%)

The energy sector took another leg down this month.  Falling oil prices are clearly the driving factor.  The entire oil industry is under severe pressure from $40 crude oil.  There’s still more pain ahead for this sector.

Financials (-9.0%)

Financials were hit with the steepest losses among all US sectors last month.  The 9% drop in the financial sector is a clear reflection of the view that global economic growth is slowing.

Healthcare (-7.8%)

Healthcare stocks tumbled 7.8% over the last month as investors moved to lock in gains in the top performing sector over the last few years.

Biotech stocks endured a pullback as traders took profits and investors rotated into less risky sectors.  The good news is our ALPS Medical Breakthroughs ETF $SBIO is already moving higher again.  This volatile ETF should continue moving higher from here.

Our iShares US Medical Devices ETF $IHI found support around $115.00.  Many investors that had ridden medical devices higher over the last year took profits.  But the upside hasn’t been diminished… continue holding.

Industrials (-6.2%)

Industrials struggled to a 6.2% loss over the last month.  The sector is being plagued by the slowdown in global economic growth.

Our US Global Jets ETF $JETS is holding up well.  The airline industry is clearly being helped by falling oil prices.  But the hedges many airlines use to control their fuel expenses have limited the impact on their bottom line so far.  As these hedges roll off the books, the impact of lower fuel costs should help propel JETS to new highs.  Continue holding.

Technology (-5.6%) 

Technology has been a mixed bag… but concerns about the high valuations of tech startups have some investors on edge.  However, the old guard large cap tech companies are among the most cash rich and well positioned to sustain a downturn.

Materials (-6.4%)

Materials stocks moved to their lowest levels since 2013 on concerns about China and global economic growth.   The current environment of oversupply and a strong US Dollar isn’t conducive to rally among commodity prices or the companies that produce them.

Utilities (-7.0%) 

Utilities have pulled back over the last month along with the broad market.  But the sector is poised to become one of the best performing sectors in these times of heightened uncertainty and volatility.  We’re recommending the Utilities Select Sector SPDR $XLU this month… see page 4 for more details.

Portfolio Changes

  • This month we’re buying XLU.

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