SET Portfolio Update August 2013

| August 6, 2013

August 6, 2013

Dear Sector ETF Trader Reader,

It’s August and I’m sweating it out in the summer heat here in Scottsdale.  I know it’s a “dry heat” but 110 degrees still feels like an oven.  But that’s nothing compared to how hot the stock market is right now.

It seems like stocks will continue to go up and up and up… forever.  Rest assured they won’t, there’s always a correction.

But the time for a correction appears to be a ways off.  For now, the trend is our friend. And the trend is for stocks to continue moving higher.

In fact, the S&P 500 has gained 7.5% since May 1st.  I can almost hear the “sell in May and go away” crowd kicking themselves in their collective behind.  The recent surge has pushed the large cap index to a 21% year-to-date gain.

Here’s the thing…

Right now, US stocks are in the sweet spot for even more gains.

There are lots of positives for stocks – interest rates are low, profits are growing, more jobs are available, the US economy is steadily improving, and there’s a fledgling recovery in the EuroZone.

Yet those positives are tempered by slower than expected economic growth, stubbornly high unemployment rate, rising interest rates on US home mortgages, and lower than expected inflation.

As a result, the Fed is likely to continue pumping $85 billion per month into Treasury and Mortgage Backed Securities markets.

This combination of steady economic and earnings growth, along with the Fed’s cash infusions, should fuel more upside in stocks across the board.

Before we move onto the updates, I’d like to address a subscriber question…

Subscriber AY wants to know what a “Stop Loss: $28.50 and why the $28.50 was chosen” for First Trust NASDAQ ABA Community Bank Index Fund (QABA).

First things first, every good trading strategy has an exit plan.  We use a sell discipline of a price target and a stop loss.  In this case, we’ll sell QABA for profit if it hits our $40.00 price target or we’ll cut our losses if it hits the $28.50 stop loss.

Obviously, I do everything I can to ensure a trade is a winner.  But it doesn’t always work out that way.  Having a predetermined stop loss helps take the emotion out of trading and makes the approach more systematic.

As long as the fundamental and technical picture for the trade stays the same, we’ll stick by these pre-planned exit points.  You’ll notice I’ll sometimes change these targets when I send out a position update.  We’ll often let some of our winners run and other times we’ll cut a loser short before it reaches the stop loss.

The $28.50 stop loss was chosen based on technical analysis of the recent price action. QABA recently went through a month long consolidation from May 22nd to June 25th between $30 and $28.75.  I feel that if QABA falls below $28.50, the technical picture has changed to the point that we’re better off cutting our losses and looking for a better opportunity.

I hope that helps.

Now onto the updates…

. . . . First Trust NASDAQ ABA Community Bank Index Fund (QABA) – Hold

QABA is off to a solid start.  In fact, it raced past our $32.75 buy up to price in no time. And for good reason… as a group, community banks will be able to raise the interest rates they charge on loans quickly as rates go up.  Yet, the interest they pay depositors won’t go up nearly as fast.  This should lead to an expansion of net interest margin that should fuel strong earnings growth.  Continue holding QABA for bigger gains.

. . . . Guggenheim S&P 500 Equal Weight Technology ETF (RYT) – Hold

RYT has been a strong performer lately.  It’s now up nearly 8% since we recommended it in June.  It’s outperforming the S&P 500 and the market cap weighted technology ETFs. This relative strength in tech stocks should continue going forward.  Continue holding RYT.

. . . . Health Care Select Sector SPDR (XLV) – Hold

XLV continues to be one of the top performing ETFs this year.  The recent surge above $50.00 per share pushed it to a new all-time high.  Don’t forget, XLV is chock full of large cap pharmaceutical companies.  And these companies have done a great job navigating patent expirations and reloading their drug pipelines for future growth.  Needless to say, there’s still plenty up upside for XLV.

. . . . Morgan Stanley Cushing MLP High Income Index ETN (MLPY) – Buy up to $18.50

MLPY has settled into a range between $17.50 and $18.50.  And it will continue to spit a solid dividend as we wait for more upside in the share price.  Grab your shares if you haven’t already done so.

. . . . iShares Semiconductor ETF (SOXX) – Hold

SOXX reached a high of $65.60 per share last month.  But semiconductor stocks have lost some of their bullish momentum after a weaker than expected earnings report from industry bellwether Intel (INTC).  But SOXX is still holding onto support of the uptrend off the May low.  I wouldn’t be surprised to see SOXX regain its momentum as earnings season winds down and investors focus on the recovery in the EuroZone.

. . . . iShares US Industrials ETF (IYJ) – Hold

IYJ’s recent high of $89.72 is within striking distance of our $90.00 price target.  The sector is getting a lift from better than expected ISM manufacturing data as well as the glimmers of hope from the EuroZone.  We’ll likely see IYJ reach $90 in short order.  Get ready to capture you profits on this trade…

. . . . iShares DJ US Home Construction Index Fund (ITB) – Buy up to $23.00

ITB has fallen back to support at $21.50 for the fifth time since it originally broke out above this level to start the year.  Obviously, the homebuilders’ performance has been disappointing… but there’s reason to remain optimistic.  You see, homebuilders’ profits were restricted by a lack of lots that were ready to build on in the first half of the year. No lots, no sales, no building.  But the publicly traded homebuilders have ramped up their acquisition of land and lots and should no longer be constrained by lack of inventory to sell in the second half.  This could lead to a big rebound in ITB in the second half of 2013. Grab your shares of ITB up to $23.00.

. . . . Guggenheim Timber ETF (CUT) – Hold

CUT surged to a new high of $23.67.  That’s a 19% gain from where we recommended it in December.  If homebuilding accelerates in the 2nd half of the year, CUT should continue moving higher as demand for lumber increases.  Continue holding.

. . . . First Trust Internet Index Fund (FDN) – Hold

FDN is once again surging to the upside… it’s now up a whopping 31%!  And it’s closing in on our $51.00 price target in a hurry.  Our internet ETF is benefiting from the recent surge in Facebook (FB) stock after they reported blow out earnings of $0.19 per share on July 24th and soundly beat the $0.14 per share analysts were expecting.  Get ready to capture these profits when FDN hits $51.00.

Action To Take

  • Move First Trust NASDAQ ABA Community Bank Index Fund (QABA) to Hold
  • Move Health Care Select Sector SPDR (XLV) to Hold
  • Move iShares DJ US Home Construction Index Fund (ITB) to Buy up to $23.00


Category: SET Portfolio Updates

About the Author ()

Comments are closed.