SET Portfolio Update August 2012

| August 7, 2012

August 7, 2012

Dear Sector ETF Trader Reader,

Welcome to the dogs days of summer.

It’s the time of year when many of Wall Street’s big players are away on vacation.  As expected, trading volumes have dried up quicker than corn in the drought plagued fields of the Midwest over the last few weeks.

Here’s the thing…

Thinly traded markets typically follow the established trend.  In other words, the ‘trend is your friend’.

That’s good news for our ETFs.

You see, despite the problems in Europe and slowing growth in China, nearly 60% of the companies in the S&P 500 beat earnings estimates last quarter.  The strong earnings have helped spark a new uptrend in the large cap index.

Amazingly, the S&P has moved higher in eight out of the last ten weeks.  And it’s set a series of five higher highs and five higher lows.  That’s a strong uptrend!

What’s more, the trend is even more bullish longer term.  Just look at this weekly chart of the large cap index over the last five years.


As you can see, the S&P 500 is clearly in a long term uptrend.  It’s more than doubled off the bottom it hit back in 2009.

The other thing that jumps out at me is how mild the pullback was this year.

The red line on the chart is the 50-week moving average.  In 2010 and 2011, the mid-year pullback sent the S&P plunging below this line.  However, this year the S&P merely pulled back to this technical support before bouncing back.

Put simply, this is bullish chart.

At this point, the S&P is on the verge of hitting fresh bull market highs.  We’ll likely see some selling when we reach the highs it hit earlier this year.

However, any selling pressure is likely to be short lived.  And once the S&P breaks out to new highs, it should continue to rally another 5% to 1,500 before we encounter another round of profit taking.

More importantly, we’re seeing investors begin to rotate money out of defensive stocks and into more cyclical sectors like technology and materials.

That’s great news for us.  When money’s moving from one sector to another, it creates lots of opportunities for us to make money!

Now onto the updates…

Position Updates

. . . . iShares Dow Jones US Pharmaceuticals (IHE) – Buy up to $90.00

IHE has yo-yoed up to our $90 buy price and down to around $86 a few times since we rolled this trade out last month.  This price action wasn’t unexpected.  As I pointed out in the trade alert, IHE’s chart indicated it would likely pullback to $86 before moving higher. In the end, it’s not going to matter whether you bought IHE for $90 or $86… you should make money either way.  I’m expecting drug stocks to continue to rack up outsized gains going forward.  Grab your shares of IHE now, before it moves past $90 for good.

. . . . Market Vectors Agribusiness ETF (MOO) – Buy up to $50.50

Analysts’ opinions are split on how the drought will impact Agribusiness spending next year.  As corn withers in the field, some believe it will drastically reduce spending next year.  This argument is bogus.  Look, farmers are coming off three consecutive years of record high net farm income.  Farm debt is minimal.  Interest rates are low.  And commodity prices are expected to remain high.  Put simply, these factors will likely motivate farmers to spend more than ever before.  We’ll likely see a new record high for acres of crops planted next year.  And farmers need new equipment, seeds, and fertilizer to do it.  The drought is going to take a toll on production this year.  But the impact is positive for overall Agribusiness spending.  MOO is quickly approaching our $50.50 buy up to price.  Grab your shares before it’s too late.

. . . . ALPS Alerian MLP ETF (AMLP) – Hold

We’re about to collect our first distribution on AMLP.  The fund declared its third quarter distribution will be $0.2520.  The dividend will be paid on August 14th.  This is the first of many payouts we’ll collect as we hold AMLP.  At this point, the ETF is holding above our $16 buy price.  So I’m moving it to a hold.

. . . . Guggenheim Airline ETF (FAA) – Buy up to $31.25

FAA has taken a hit the last few weeks as oil prices shot up.  The selloff sent FAA below the technical support of the uptrend off the May low.  But FAA found support around $28. This level has been a strong floor of support throughout the year.  And until FAA breaks below this level, there’s no reason to panic.  Buy FAA up to $31.25.

. . . . First Trust ISE Revere Natural Gas Index Fund (FCG) – Buy up to $16.50

FCG is benefitting from improving natural gas prices as producers cut production.  Don’t forget, prices were depressed last year by record high production and a warm winter that cut demand.  As this supply/demand relationship comes back into balance, prices should continue to rise.  FCG is currently hovering around our buy up to price.  Feel free to buy FCG up to $16.50.

. . . . PowerShares S&P SmallCap Health Care (PSCH) – Hold

Small cap stocks in general are lagging behind their large cap brethren.  And healthcare stocks are no exception.  But the tide’s beginning to turn in favor of small caps.  Investors are starting to move back into smaller stocks in search of higher returns.  We’re holding onto a small gain in PSCH but it has a chance to outperform going forward.  Continue holding PSCH for bigger gains.

. . . . SPDR S&P Homebuilder ETF (XHB) – Buy up to $22.25

XHB has settled into a tight trading range between $21 and $22.  This indicates indecision in the market.  And for good reason… Investors are weighing bullish housing data against the weak economic data.  I believe the bullish housing data will win out in the end.  And that should send homebuilder stocks soaring.  Buy XHB up to $22.25.

. . . . SPDR S&P Retail (XRT) – Buy up to $62.50

XRT has lagged behind the S&P 500 as stocks have rebounded off the June low.  Why? Look no further than quarterly earnings.  Retail stocks were a mixed bag last quarter. Some lived up to analysts’ expectations but others fell well short of earnings estimates. The good news is this weakness should only be temporary.  Consumer spending should bounce back quickly next quarter.  And this dip is likely a great buying opportunity.
Feel free to buy XRT up to $62.50.

. . . . iShares S&P N.A. Tech-Software Index Fund (IGV) – Hold

IGV has survived a period of ultra negativity.  But after last quarter’s earnings, it’s clear analysts and management had became way too negative.  Many tech stocks easily beat the lowered earnings estimates and cautious growth forecasts.  It should come as no surprise that businesses continued to spend money on software that helps them increase productivity and make more money.  I’m expecting IGV to finish the year on a high note. Continue holding IGV.

Action To Take

  • None at this time.


Category: SET Portfolio Updates

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