SET Portfolio Update August 2009

| August 4, 2009

August 4, 2009

Did the case for a “V” shaped recovery just get stronger?

I think so.  I’ll tell you why in a minute.

But first, let’s take a look at what happened in the markets over the last month (because it’s been great for our ETFs).

Last month the market was sitting at a crossroads.  There was a clear divergence between the tech stocks and the blue chips.  An ominous head and shoulders pattern was forming on the chart of the S&P 500.  And we we’re heading into the thick of the 2nd quarter earnings season.

Who would win out?  The bulls or the bears?  It was basically a coin flip.  What we got was the best case scenario.

The tech companies delivered in a big way.  Positive earnings surprises and increased optimism across most of the tech industry tilted the game in favor of the bulls.

The earnings sparked a rally in the NASDAQ.  Eventually it spilled over into the rest of the market.

The ultimate confirmation came as the S&P 500 closed above the June high on July 20th, nullifying the head and shoulders pattern.  And like we said last month, a failed head and shoulders pattern is often a bullish continuation pattern.  This rally certainly fits the bill.

Now as we head into post-earnings season, the attention will once again shift back to economic data.  And right now it looks like economic recovery is coming with a vengeance.

We’re seeing economic data come in better than expected.  Everything from GDP estimates, unemployment, new home sales, manufacturing, and construction spending came in better than expected in the last week.

When you add in the effects of the government stimulus plan (which is finally going to get underway this quarter), the pace of recovery should pick up quickly.

The way I see it, we’re at the bottom of the trough in the business cycle.  The cyclical companies should continue to post solid gains as investors look for growth opportunities.

Beyond 2009, there are a host of risks that could derail the economy.  But for now, recovery looks to progress in “V” shaped fashion, which is great news for our ETFs.

Now for the updates…

Position Updates

…. iShares S&P North American Technology – Software Index Fund (IGV) – Buy up to $41.00

IGV is our newest tech ETF we recommended last month.  So far so good.  It’s up 5% and flirting with our buy up to price.

The technical picture is a thing of beauty.  The ETF, as well as the 20- and 50-day moving averages, are all in a strong uptrend.  The ETF is consolidating around $41 after a feverish move higher during the previous two weeks.

I’m expecting the trend higher to resume once the 20-day moving average catches up to price.

…. SPDR KBW Bank ETF (KBE) – Hold

I’m a firm believer that the financials need to be part of any sustained market rally.

The reason’s simple.  If the economy is on the mend, there is going to be more money flowing through the system.  Some of it will end up in the hands of the people and companies that need it to repay their loans.  And that means smaller loan losses and bigger profits for the banks.

Apparently I’m not the only one who thinks the banks are in position to make money.  KBE shot past our buy up to price shortly after we recommended it.  And it’s not looking back. KBE will keep moving higher as long as the outlook for the economy continues to improve.

…. Market Vectors Agribusiness ETF (MOO) – Buy up to $38.75

MOO moved into positive territory.

Shortly after we recommended MOO, Potash (POT) and Monsanto (MON) said sales had fallen off sharply.  The news sent Ag stocks down across the board.  But the bad sales could be a good sign for the future.

Here’s why.

Farmers around the world bought less fertilizer as economic conditions and the credit crunch crimped their budgets.  But not buying fertilizer like potash isn’t an option.  You see, crops deplete the minerals in the soil.  As mineral levels drop, crops begin to produce smaller and smaller yields.  (That’s not a good thing.)  The only way to repair the damage is through fertilizers.

I’m expecting farmers around the world to play catch up on their fertilizer purchases over the next year.  They’ll need to use their products and in larger amounts to get the soil back into prime production.  That sounds like a recipe for huge profits ahead to me.

…. SPDR S&P Metals and Mining ETF (XME) – Buy up to $43.50

XME recently moved into positive territory.  A few weeks ago it was selling off in the face of deteriorating economic data.  XME’s cyclical nature makes it prone to big swings from changes in the economy.  So it’s not surprising the negative economic news sent the shares lower.

The good news is the economic data is getting better.  And it has sent XME up sharply over the past few weeks.  XME is poised to move higher from here on increased demand for raw materials.  Hold tight to this one.

…. Energy Select Sector SPDR Fund (XLE) – Buy up to $51.15

Energy companies’ profits took a hit last quarter from lower prices.  But now oil and natural gas prices are moving higher.  That’s great news for our energy ETF.

The bottom line is energy prices are going to rise as demand picks up.  And demand is going to be fueled by economic expansion.  Right now the economic data is telling us better times are just around the corner.  Again, hold tight to this ETF.

…. SPDR S&P Semiconductor ETF (XSD) – Hold

Our semiconductor ETF is up 30% since we recommended it in May.

It briefly shot past our price target in early morning trading on July 30, only to pull back before the end of the day.

Everything is pointing toward XSD continuing to move higher.  We’re at a point in the business cycle where chip makers traditionally do well.  The technical indicators are still bullish.  And, the industry has the strongest relative strength in the market.

All things considered, now isn’t the time to be selling this ETF.  I’m increasing our price target to $45.

…. PowerShares Dynamic Building & Construction Portfolio (PKB) – Hold

Shares of PKB have enjoyed a nice rally over the last month.  We’re now up 23% from our buy price.

The better than expected numbers on new homes sales and construction spending has PKB closing in on our price target.  More positive economic news and we’ll have a big winner.

…. iShares S&P N. American Tech – Multimedia Networking Index Fund (IGN) – Hold

IGN is consolidating around $25.  It’s not unusual for an ETF or stock to ‘calm down’ a bit after big jump higher.  Right now we’re sitting on a 25% gain and closing in on our price target.

I’m expecting the $7.2 billion in stimulus money for broadband expansion to start making its way into the private sector soon.  News of contracts being awarded should push IGN through our price target.

…. SPDR S&P Biotech (XBI) – Sell

In case you missed it in the July issue, we’re closing out our position in XBI.  The cloud of uncertainty continues to swirl around the healthcare sector.  I think the industry’s recent uptick can be attributed to the resistance healthcare reform has run into in the Senate.

But the bottom line is until the situation is resolved, I think our money can be put to better use elsewhere.

Action To Take

  • Sell SPDR S&P Biotech (XBI)
  • Increase the price target for SPDR Semiconductor ETF (XSD) to $45
  • Change SPDR KBW Bank ETF (KBE) to ‘Hold’


Category: SET Portfolio Updates

About the Author ()

Comments are closed.