SET Portfolio Update January 2012

| January 3, 2012

January 3, 2012

Dear Sector ETF Trader Reader,

Happy New Year!

Another year is all wrapped up!  Yup, it’s time to shift gears… time to step back and size up what’s happened.  And more importantly, look ahead at what 2012 will bring.

There’s no question 2011 was dominated by macroeconomic risk.  The global financial markets rose and fell in response to headlines out of Greece, Italy, and of course Washington D.C.  This is completely abnormal. Markets are usually driven by fundamentals!

Amazingly, the US stock market was the only one to finish 2011 in the black.  Every other major market was down.

Now, the question is… how can we make money in 2012?

I believe the US stock market will continue to outperform the global market.  And cyclical sectors will be the biggest winners.

Here’s why…

First off, a key economic indicator suggests the US economy will continue growing.  The Conference Board Leading Economic Index (LEI) has increased for the last three months in a row.  And an economist at the Conference Board recently said, “[t]he LEI is pointing to continued growth this winter, possibly even gaining momentum by spring.”

In short… the US has avoided a double-dip recession, and it’s unlikely we’ll slip into another one for a while.  However, the rest of the world isn’t looking so great.  Parts of Europe are already in recession.  And growth is slowing in many emerging markets.

The upshot… strong relative performance of the US economy versus the rest of the world bodes well for US stocks in 2012.

What’s more, I think we’ll see a massive inflow of capital into the US markets.

Remember, much of the global middle class is pursuing hard won economic freedoms.

People we see protesting in Russia, Italy, and elsewhere aren’t just “angry young men.” Many are employees of major global companies like Google (GOOG) and Honeywell(HON).  And they’ve had enough of political leaders who do nothing but pursue their own personal agenda.

Do you think they’re going to invest their hard earned money in economies dependent upon highly corrupt political systems?  No way!  When push comes to shove, they’re going to invest in the US, the ultimate safe haven for the new global middle class.

To sum it all up, I’m very optimistic about 2012.  I’m expecting everything from Miami real estate to US stocks to have a great year.

Now, let’s take a quick look at a chart of the S&P 500…


This simple chart confirms what I’ve been saying.  As you can see, back in July 2010 we hit a low of 1,020.  Then, over the next six months, we proceeded to smash through all resistance levels.  The S&P finally settled in around 1,350 in April 2011.

Why, didn’t we stay there?

In a word… Europe.  During the slow summer months, the S&P dropped back to around 1,100 on worries about Europe.  But here’s the key, since July 2011, we have seen a string of higher highs and higher lows.

That’s great news… the markets are in a new uptrend!

Lastly, closing the year where we started is going to be a gigantic confidence builder for investors.  With all the crises that happened in 2011, we could easily have seen the markets plunge last year.  Don’t underestimate the impact investor psychology will have on the markets.

All in all, I believe 2012 will present great opportunities to profit from the hottest US sectors and industries.

On that note, let’s move onto our position updates…

Position Updates

. . . . SPDR S&P Homebuilder Fund (XHB) – Hold

XHB is up a solid 7%.  While builder confidence remains low, don’t let that fool you.  We’ve seen consistent positive housing market data over the past several months.  For example, sales of newly-built homes rose by a better than expected 1.6% in November.  This is no doubt an indication housing is beginning to recover.  What’s more, housing permits increased by 5.7% in November, after a 9.3% increase in October.  This is great news for homebuilders… more permits issued means more home building in months ahead.  XHB has moved nicely higher in a short period of time.  It’s past our buy up to price… so we’re moving XHB from a buy to hold.

. . . . First Trust Biotechnology Fund (FBT) – Hold

FBT is sitting on a 6% gain.  And I’m expecting even bigger gains in biotech this year.  We should see a slew of key clinical trial data.  And with so many blockbuster drugs coming off patent, I’m expecting a flurry of mergers and acquisitions in the biotech space.  FBT has surpassed our buy up to price… so I’m moving FBT from buy to hold.  Continue holding for greater gains.

. . . . Vanguard Long Term Government Bond (VGLT) – Hold

VGLT is continuing to move in lock step with the news coming out of Europe.  On days when investors feel the European debt crisis is winding down, bond spreads naturally shrink.  However, I believe this crisis is far from over.  It’s simply a short break before more bad news comes out of Europe in 2012.  When the news hits the wires, bond spreads will widen again.  And this should spur VGLT to breakout to the upside.  Hold tight… bigger gains are coming.

. . . . Consumer Staples Select Sector SPDR Fund (XLP) – Hold

XLP has broken through resistance at $32.  In fact, XLP hit a new peak gain of 7%.  And it’s not stopping anytime soon.  Unemployment is improving.  The housing market is recovering.  And consumer spending is getting stronger.  As more people fill their cabinets with products from Pepsico (PEP) and Kraft Foods (KFT), XLP should keep moving higher. Continue holding XLP for bigger gains ahead.

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

We’ve seen IGV struggle to move higher recently.  With Europe still struggling with sovereign debt woes and slowdown fears, US investors may be tempted to move into defensive assets like cash.  But that would be a big mistake.  With the US economy poised for higher growth in 2012, we should see big gains in a high growth industry like software. And, IGV is doing a great job of exposing you to the software industry without the massive volatility you often get in individual stocks.  Keep holding IGV, I think it will be a gem in 2012.

. . . . SPDR S&P Semiconductor Fund (XSD) – Hold

The technology sector headed higher over the final weeks of 2011.  And semiconductor focused funds, like XSD, led the way.  Strong holiday electronic sales drove the increase and I think this trend will continue in 2012.  With earnings season right around the corner, companies like Intel (INTC) and Texas Instruments (TXN) should propel XSD even higher.  Continue to hold XSD into 2012 for bigger gains…

. . . . SPDR S&P Retail Fund (XRT) – Sell

XRT has been see-sawing over the past few weeks.  Although holiday shoppers were out in force, XRT has not participated in the way I would have liked.  And at this point, there’s no upcoming catalyst to continue driving XRT higher.  What’s more… XRT is bumping up against strong resistance right here at $52.  It’s had a great run… up 11% since we recommended it.  Sell XRT now for a solid 11% gain.

. . . . Utilities Select Sector SPDR (XLU) – Hold

XLU just continues to impress.  Since our recommendation, XLU has gained an impressive 10%.  That’s an amazing return for a utility ETF.  What’s even better, it pays a big fat 3.99% dividend yield.  As long as investors continue worrying about economic growth, utilities will remain a safe haven investment. XLU has broken above the $35 resistance level and is poised to move up towards our target price.  Continue holding XLU for bigger gains ahead…

. . . . Market Vectors Gold Miners (GDX) – Hold

When the physical metals drop in price, the miners usually follow suit.  And that’s what we’ve seen over the last month.  Since the beginning of December 2011, physical gold has plunged almost $200 per ounce.  However, we need to keep in mind, gold hasn’t fallen below the key $1,535 level.  In fact, it just bounced off this level with conviction.  And that’s good news.  Hang onto GDX for higher prices.  It looks like GDX may have found a bottom and is on its way back up.  Let’s continue holding GDX…

. . . . iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ) – Hold

REZ has done a great job of withstanding the recent market volatility.  And what’s even better, REZ is up an astounding 12% since it was recommended.  Apartment rents are going up and occupancy is at all-time highs.  That bodes well for more gains for the multifamily commercial real estate the residential REIT REZ holds.  Continue holding REZ for bigger gains ahead.

Action To Take

  • Move SPDR S&P Homebuilder Fund (XHB) to Hold
  • Move First Trust Biotechnology Fund (FBT) to Hold
  • Sell SPDR S&P Retail Fund (XRT)


Category: SET Portfolio Updates

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