SET Portfolio Update April 2009

| April 7, 2009

April 7, 2009

Just a month or so ago, investor negativity was so thick you could feel it.  Every headline seemed to send the market further down.  But things started to change over the last month.

As I noted in the March issue, negative news out of GE actually sent the stock price up. This isn’t an isolated incident either.  The market has shaken off quite a bit of negative news lately.

For instance, the market shrugged off the forced resignation of General Motors CEO, Rick Wagoner.  And when the White House was reminding everyone that GM may end up in bankruptcy, all we had was a mild pull back.  Nothing like the avalanche of selling that took place on similar news just a short time ago.

The other thing I noted in the last issue was March’s consumer confidence report.

The positive surprise from this leading economic indicator seems to be contagious.  We saw the new and existing home sales come in better than expected.  And the ISM Index and ISM Services Index, which measure the purchases in the manufacturing and services industries, both beat estimates.

But it’s not all rosy.

Even though they were better than expected, they’re still not good.  They’re still indicating the economy is contracting.  Add in the lagging indicators like unemployment that continue to come in worse than expected and it’s safe to say we still have a ways to go before we see economic growth.

So what does it all mean?

It looks like all the great economic minds got a little too down on the economy.  It’s not uncommon for these guys to miss the mark.  That’s the problem with any statistical measurement.  The economy doesn’t move predictably in the short term.  And it causes economists to think things are better than they are when times are good and worse than they are when times are bad.

In my opinion, we’re still in the same boat we were a few months ago.  We still face a worldwide recession, a broken financial system, uncertainty from government intervention, and risks from deflation in the short term and inflation in the long term.

The only difference right now is investor sentiment, which we know can turn on a dime.

In fact we’re right back where we started on February 9th.  That’s the week we started four straight weeks of losses.  Then we had four straight weeks of gains starting on March 9th.  That all ads up to a net move of zero over the last eight weeks.

Take a look at this chart of the DOW over the last eight weeks and you’ll see a very definitive ‘V’.


The good news is a ‘V’ shaped bottom is a chart pattern we often see when a trend reverses.  But that doesn’t mean we go straight up from here.

Most bear markets of this magnitude require at least one retest of the lows before a new bull market can emerge.  If this holds true the Dow could be stuck in a range between 6500 and 8300 for the next few months.

Putting it all together we can say the market is in a bottoming phase.  The leading indicators are starting to come in a little better than expected.  Investor sentiment is improving.  And the charts show a solid bottom even if it needs to be retested before we break out to a new bull market.

We’re looking to add a couple of cyclical ETFs later this month.  They typically lead the market as we start to come out of a recession.

Now on to the updates…

Position Updates

. . . .SPDR S&P Biotech (XBI) – Buy up to $51.50

XBI got off to a decent start.  It moved up to $50.60 before running into resistance at its 50-day moving average.  XBI has since pulled back on mixed news coming out of the industry.  One of the stocks in XBI, Celegene (CELG), issued a warning that first quarter profits and earnings were lower than expected.  This is an unusual occurrence in the Biotech sector and it’s caused these stocks to trade erratically.  But the good news is earnings season is kicking off this week.  We should see a rebound if the other Biotech stocks haven’t suffered the same fate.

. . . .Market Vectors Gold Miners (GDX) – Buy up to $35.50

GDX got off to a great start for us.  The March 18th FED announcement sent investors scrambling to buy gold.  And our ETF shot up almost 15% on the announcement (it peaked at 27+% for those of you who got in on March 18th).

The news out of the FED shocked the markets.  They’ll be buying an additional $1.1 trillion in treasuries and mortgage backed securities.

When the Fed buys on the open market, it dramatically increases the money supply.  Make no mistake about it; this is a drastic step.  I’ve even heard it called the FED’s nuclear option.  Clearly they’re pulling out all the stops. But the key is how an increased money supply can trigger inflation.  And gold demand snaps higher in times of uncertainty and inflation.

Now for gold itself.  On March 30th gold broke below its six month uptrend on the daily charts.  We could see it fall in the short term.  However, gold should find support a few points below current levels.  Both the 200-day and 50-week moving averages have converged just below and should prevent prices from moving much lower.

As such we’re keeping GDX as a buy.  This pullback serves as a good opportunity for anyone who wasn’t able to buy the ETF before it shot well past our buy price the day after we recommended it.

Action To Take

•  No changes right now.  We’ll keep you updated…

Category: SET Portfolio Updates

About the Author ()

Comments are closed.