SET Portfolio Update February 2010

| February 2, 2010

February 2, 2010

Well, the start of 2010 has been one crazy rollercoaster ride.  It all started with the Santa Claus rally cranking the markets up to a new high in mid-January.  When it crested, the plummet’s been fast and scary.  I hope you’ve had your seatbelt fastened!

While the Santa Claus rally carried the market to new highs, it did so in a bearish chart pattern.  Take a look at this chart of the S&P 500 below.


This chart pattern is a rising wedge.  It’s identified by the upward sloping contracting price movement.  And when the support line of a rising wedge pattern breaks… well you can see what happens.

A rising wedge is a reversal pattern.  It usually marks an intermediate or long term top.
So which one is it?  Are the markets going to rebound quickly or is the market setting up for a down year?

There’s no easy answer.  However, the other indicators I study are telling me this is only an intermediate term top.  And we’re likely already through the worst of it.

You see, the rising wedge reversal pattern coincided with other technical indicators.  And multiple technical indicators together produce violent moves.  The two other indicators combining with the rising wedge are Fibonacci Retracements and trend lines…

Take a look at these two charts.


You can see the S&P 500 has retraced about 50% of the losses from the market peak in ’07 to its bottom in ’09.  The 50% retracement level is an area of resistance.  We’ll often see a rally pause at this level.  And the first push through this level is often turned back. That’s exactly what happened to the S&P 500!

The last indicator I’m looking at is the trend lines.

Back in December’s monthly issue, I said the S&P 500 had crossed its long term down- trend to the upside.  And the new dominant trend was the uptrend since the March bottom.

Now take a look at this chart.


Remember, once a resistance line is broken, it become a new support line.  You can see the S&P 500 has pulled back exactly to this new support of the long term downtrend.

So far this year, the markets are being ruled by traders buying and selling based on the charts.  And the charts are telling me the correction is over.

So hold tight and don’t let the crazy dips and turns sway you from the big picture.

Remember, our stops are in place to protect us from a major change in market sentiment. And the long term dominant trend is still up.  Unless and until that changes, we just have to ride out the corrections in the leading sectors.  And once the markets begin moving higher, our positions in the strongest sectors will lead the way again.

Now for the updates…

Position Updates

. . . . SPDR S&P Semiconductor (XSD) – Buy up to $48.00

The recent market correction left no sector unscathed.  But it’s also a great buying opportunity.  The chip makers are looking great to start 2010.  Last quarter’s earnings reports are handily beating analysts’ estimates.  As buyers return to the market, XSD should once again be one of the leading industries.  Buy XSD up to $48.

. . . . First Trust Biotechnology Index Fund (FBT) – Buy up to $31.25

Biotech stocks have held up better than most industries lately.  In fact, FBT’s four-month long uptrend has supported it through the recent pullback.  It’s looking like FBT is set up for a breakout above the previous high.  Buy FBT up to $31.25.

. . . . iShares Dow Jones Transportation Average Index Fund (IYT) – Buy up to $78.00

The promising base of consolidation IYT put in throughout December and January came undone with the market’s recent pullback.  However, the big picture shows IYT is still in a long term uptrend.  Look for IYT to reclaim lost ground as the markets recover from oversold conditions.  Go ahead and buy IYT up to $78.

. . . . Utilities Select Sector SPDR Fund (XLU) – Buy up to $33.00

XLU fell below the support line of its uptrend during the latest pullback.  Looking out a few weeks, XLU has an encounter looming with its long term downtrend.  If the markets resume their bullish momentum, a breakout above the downtrend for XLU could be explosive.  Go ahead and buy XLU up to $33.

. . . . Market Vectors Junior Gold Miners (GDXJ) – Buy up to $28.00

I knew GDXJ would be volatile when we entered it back in November.  And in that respect, it hasn’t disappointed.  It’s been up and down then up and down again… Now it’s looking ready to move higher once again.  The headwind for GDXJ and gold prices is the renewed strength in the US Dollar.  However, if the US Dollar’s rally falters, GDXJ will be a big winner.  Go ahead and buy GDXJ up to $28.

. . . . SPDR S&P Oil & Gas Exploration and Production ETF (XOP) – Buy up to $45.00

The market’s recent pullback sent XOP deep into oversold territory.  Now we’re seeing the first stages of a bounce back rally.  XOP continues to advance in a wide channel.  If the US Dollar’s recent advance reverses, oil prices and XOP should make a speedy recovery. Remember, XOP gives us good exposure to the smaller oil and gas companies.  They’ll benefit the most from new exploration and production efforts as the economy recovers. Go ahead and buy XOP up to $45.

. . . . SPDR S&P Homebuilders ETF (XHB) – Buy up to $16.25

XHB is battling to stay above the support line of its uptrend.  However, the market’s recent pullback is putting the uptrend under pressure.  And its sent XHB into oversold territory.  Homebuilders are suffering from a pause in homebuyer urgency.  We saw contracts and purchases spike with the first expiration of the new home buyer tax credit in October.  Now the deadline has been extended until April 30, 2010.  We should see another round of heavy activity provide the homebuilders with a boost as the new deadline approaches.  Go ahead and buy XHB up to $16.25.

. . . . Market Vectors Gaming ETF (BJK) – Buy up to $27.00

BJK got a good pop the first week of January.  The rally was good enough to break through resistance of the short term downtrend.  However, just like the rest of the market, it’s fallen back the last few weeks.  Now BJK is at a support level and is poised to move higher from here.  Remember, gambling is cyclical.  We’re in the early stages of gambling’s popularity returning.  BJK should be one of the leaders once the market starts heading higher.

. . . . Vanguard Industrials ETF (VIS) – Hold

The news of China putting the brakes on bank lending hit the industrials and VIS hard.  The fear is, as growth in China slows, so will the rest of the world.  I think we’ll see a small slowdown in growth in the Q1 ’10.  But it will be short lived.  As the year goes on, the US economic stimulus package will finally start making an impact.  That should be the catalyst for higher prices ahead for VIS.  Hold tight for now.

. . . . iShares S&P North American Technology – Software Index Fund (IGV) – Hold

IGV’s positive momentum came to an abrupt end this month.  The software industry came under heavy selling pressure as investors worried about inventory restocking coming to an end.  The reality is Microsoft’s (MSFT) new operating system Windows 7 is going to drive technology sales for the next few years.  We’ve only seen the tip of the iceberg when it comes to businesses increasing spending on technology.  Hold tight, IGV should head higher from here.

. . . . Energy Select Sector SPDR Fund (XLE) – Hold

XLE’s wild ride continues.  Over the last few weeks, XLE has fallen back to an area of support.  Now it’s looking like it’s ready to bounce back from oversold levels.  Remember, XLE generally tracks the change in oil prices.  And right now, the US Dollar’s fluctuations are driving oil prices.  If the US Dollar’s recent strength holds up, XLE many have a hard time making any headway.  However, the next move for the US Dollar is a bit of mystery. Hold tight for now.

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

IGN made another run higher this month.  But it was turned back at the previous high set back in September and October.  Then as the markets began to rollover, IGN took a nose dive.  Keep an eye on the industry bellwether Cisco Systems‘ (CSCO) quarterly earnings tomorrow after the markets close.  Analysts’ consensus estimates are for $0.30 a share, but whisper numbers have that number as high as $0.37.  If CSCO can beat these lofty estimates while showing a good jump in revenue, IGN should lead a new charge towards our price target.  Hold tight for now.

Action To Take

  • No action to take this month.


Category: SET Portfolio Updates

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