SET Portfolio Update July 2009

| July 7, 2009

July 7, 2009

The stock market’s at a crossroad.

Technology stocks and blue chips are heading in opposite directions.  The NASDAQ is holding onto its gains while the Dow has fallen back to June lows.

The next big move will likely be decided by the winner of this tug o’ war.  If technology stocks regain bullish momentum, we should move higher.  But if the blue chips fall below their June lows, they’ll likely pull the entire market lower.

You can see the increased volatility.  Now the S&P 500 is sitting at an inflection point.

One key technical pattern is indicating the uptrend could be coming to an end.  Take a look at this chart of the S&P 500.  It is forming the right shoulder of a head and shoulders pattern.


A break below the neckline at 886 (which is also the June low and the 200-day moving average) will likely send it down 10% to around 800.  This break could get ugly really quickly.

However, it’s an entirely different story if support at 886 holds.  A failed head and shoulders pattern often turns out to be a bullish continuation pattern.  And that’s a very positive situation.

What could influence the next move?

Since March, the story has been economic data.  But right now the data isn’t sending us a clear picture.  So, forget economic data… we need to focus on something else.

I think the next market moving data will come from quarterly earnings reports.  In particular, I’m watching the technology sector’s earnings closely.

Tech companies should be among the first to see an uptick in earnings from economic recovery.  Like a canary in a coal mine… their earnings should shed some light on the business cycle.

For now, the markets are trading in a range without conviction.  I’ll be keeping my eye on the earnings announcements in the next few weeks.  They’ll clearly point to our next destination.

Now for the updates…

Position Updates

…. Market Vectors Agribusiness ETF (MOO) – Buy up to $38.75
…. SPDR S&P Metals and Mining ETF (XME) – Buy up to $43.50
…. Energy Select Sector SPDR Fund (XLE) – Hold

The three month rally in commodity stocks is taking a breather.  Our three commodities based ETFs have all retraced to their first Fibonacci level of 38.2%.  We should see them move higher from here if the uptrend is still intact.

The good news, the underlying macro trend for these ETFs is still strong.

The reason behind the recent pullback lies squarely with the uncertainty of the economic recovery.  If economic recovery is slower than expected, it will hurt demand for commodities.  And right now we’re unclear how fast the world economy is or when it will recover.

Investors are using this as a reason to lock in profits.

An improvement in quarterly earnings and economic data should bring investors running back into the cyclical companies.  When they do, this pullback will look like a great buying opportunity.

…. SPDR S&P Semiconductor ETF (XSD) – Hold

Technology continues to be the strongest sector.

The semiconductor companies will be on the leading edge of earnings improvement.  The demand for semiconductors should start to increase a few months in front of economic recovery.  Early orders will come from companies who use semiconductors.  They will try to anticipate a rebound in demand for their products.  Hold tight for the earnings announcements.

…. PowerShares Dynamic Building & Construction Portfolio (PKB) – Hold

The US infrastructure play is having a hard time getting off the ground.  Apparently stimulus bill money isn’t making its way into the private sector, yet.

Most of the federal money is designed to supplement projects funded by state and local governments.  But right now, states and cities are running short on cash.  In order to balance their budgets, many infrastructure projects are being cut or put on hold.  (So much for quick stimulus.)

The Feds are working on a solution.  This should speed up the rate at which the cash moves into the hands of the private sector, which is great news for PKB.

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

IGN has been in a holding pattern for the last month (along with most of the market).  The 50-day moving average has been a solid floor of support.

IGN should lead the market higher if quarterly earnings show signs of improvement.  Hold tight for earnings to be released.

…. SPDR S&P Biotech (XBI) – Hold

XBI is trending higher over the last two months.  This defensive sector has been moving higher as most of the market has pulled back.

In fact, XBI has reached its 200-day moving average which could slow down its recent run.  Hold tight as XBI will probably need more than one try to overtake the 200-day moving average.

Action To Take

  • No changes this month…
  • Remember to keep a close eye on your stop losses…


Category: SET Portfolio Updates

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