SET Portfolio Update February 2016

| February 16, 2016

portfolio update

Change is in the air.

“It appears a major sea change in the way markets work may be at hand,” is what hedge fund manager Adam Sender told his investors last month.

Key factors driving this change… a global slowdown, oil prices, China worries, and market declines.

From our perspective, key question #1 for sector ETF traders to ask right now is, “Where’s the real problem?  In the financial markets or in the global economy?”

Key question #2…”Are we going into a recession, even a mild one?”

This week, we’ve started off with a rally in Europe and Japan.  On Monday, Japan’s Nikkei Stock Average soared 7.2%.  The Stoxx Europe 600 was up 3%.

We’ll take it.  But we won’t mistake two up days on global markets as sure signs of a turnaround.

The Landscape For Sector ETFs

The rush to safety has been kind to our Utilities ETF.  More on that to follow.

This rush has also driven the price of 10-year U.S. Treasury notes down more than half a percentage point.  Sweden and Japan are two of the charter members of the negative interest rate club.

Recessions are defined as two back-to-back quarters when economic output shrinks.  We don’t see this happening.  The latest U.S. retail sales reports are strong.

What’s weak is certainty and confidence.  Too many unanswered questions, including questions on the outcome of the U.S. elections.

Setbacks in the stock market have stung sectors that are economically sensitive.  It’s been a particularly rugged 2016 for bank stocks…


Crude Oil Prices

$20 barrels of crude?  We wouldn’t be surprised.  But what would surprise us is if prices stay this low for long.   We expect a change in the dynamics of supply and demand that, so far, have kept driving oil prices lower.

One of the reasons why we see changes ahead: outside the U.S., there’s not much room left to store oil that’s being produced. Storage tank capacity is almost gone.  Iran could start to sell all the oil it wants at a cut-rate price, but if there’s no place for buyers to put it, deals won’t get done.

We believe global demand will continue to increase, and that by late summer, crude oil prices will be back above $40.

Edward Morse, head of global commodity research at Citigroup, is forecasting $50 a barrel by December.

The Tech Thrashing

Wings are being clipped.  High-fliers are drifting back to earth.

On February 5th, concerns over growth hit the tech sector hard. The tech-driven heavy NASDAQ Composite Index fell 3.2% to 4363.14 Friday.

Why?  Concerns about growth, and the ability of companies like Yelp, Pandora, and LinkedIn to significantly increase revenue.

There’s also the high profile drama of Yahoo! and the company’s inability to lock into a promising strategic direction.


Bad loans.  Cooking the books.  Leaders who don’t know how to lead.

What happens in China impacts virtually every sector.  When a massive economy like this keeps sneezing, ETFs in virtually every sector are in a prime position to catch a cold.

China’s currency reserves are melting away as it tries to prop up the renminbi or yuan, which enjoyed a 1.35% uptick in trading against the dollar earlier this week.

Something’s got to give.  And we’ll start by giving one of our ETFs a nudge out the door.

Now, onto the updates…

. . . . US Global Jets ETF $JETS – SELL

It’s time for us to get off the plane and sell $JETS.  We expected the airline stocks to benefit from dramatically lower oil prices, and they have not… not for a sustained period of time.  The lift we saw late last year has gone away.

. . . . SPDR S&P Homebuilders $XHB – BUY

No major moves, no news of significance following an unexpected sag in new housing starts in December.  One of the homebuilder stocks the ETF tracks, D.R. Horton, turned in stronger than expected earnings.

Buy up to $31.00.  The price target is $50.00.

. . . . Consumer Staples Select Sector SPDR $XLP – HOLD

The ETF enjoyed a solid January and reached a 2016 high of $50.93 on February 1.  In January, U.S. retail sales rose for the third straight month.

The price target is $52.00.  Continue holding.

. . . . Market Vectors Retail ETF $RTH – HOLD

RTH is up 4.2% after a nice dividend payment at the end of 2015.  As with the Consumer Staples Select Sector SPDR $XLP, growing U.S. retail sales is the tide that lifts the stocks in this ETF boat.

The price target is $90.00.  Continue holding.

. . . . Utilities Select Sector SPDR $XLU – HOLD

XLU has been doing well.  Historically, utility stocks are a safe harbor in market storms.

The price target is $50.00.  Continue holding.

. . . . iShares Medical Devices ETF $IHI – HOLD

$IHI is another ETF that historically outperforms the market.  It was launched in 2006 and has delivered an annualized return of 10.44%.  But so far this year, $IHI is down 6%.  We are forecasting a strong rebound.

The price target is $140.00. Continue holding.

Action to Take

  • Sell US Global Jets ETF $JETS
  • Sold First Trust Dow Jones Internet Index Fund $FDN  hit our $65.00 stop loss

Category: SET Portfolio Updates

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