SET Portfolio Update July 2010

| July 6, 2010

July 6, 2010

Thankfully the second quarter has come to an end.  And not a moment too soon.  It’s been an ugly quarter to say the least.

This quarter alone, the Dow is down 10%, the S&P 500 shed 12%, and the NASDAQ lost 12%.

Every sector in the S&P 500 is showing a loss for the quarter.  Defensive sectors like consumer staples and utilities slipped the least.  While more economically sensitive sectors like financials, materials, and industrials lost the most.

The downturn in stocks was kicked off by fears of European sovereign debt defaults.  But it’s since morphed into fear the economic recovery is slowing.  Investors have moved into safe havens like treasuries and adopted a wait and see attitude.

The key to getting investors interested in stocks again rests with the job market.  Until payrolls start increasing and the unemployment rate starts falling, stocks will continue to struggle.

Until recently, the losses looked like a correction.  It’s not uncommon to see 10% corrections within a bull market.

But the completion of a head and shoulders reversal pattern in the S&P 500 changes everything.  The bull market off the March 2009 lows is at an end.

Take a look at the weekly chart of the S&P 500 so far this year.


You can see the left shoulder formed at the beginning of the year.  Then the April high made the head.  And the right shoulder formed when the S&P 500 failed to make a new high in June.

The pattern was completed when the S&P 500 closed below the neckline at 1,040 last week.  It officially marks the end of the bull market since March 2009.

Obviously the big question on everyone’s mind is… Where do we go from here?

First of all, the end of a bull market doesn’t mean we’ve entered into a bear market. It just means the previous bull market is over.

We could see a new bull market develop, or we could enter into a period of range bound trading.  Of course we could see a new bear market take control.  Right now it’s too early to tell.

The bears appear to have the upper hand.  But we can’t jump to any conclusions.  We’ve got to let the market tell us.  That means we let our strategy play out.

We’ll stay in our ETFs with the strongest fundamental and technical setups.  If the markets head lower, our stop losses will protect us from taking any big losses.  And when the bulls regain control, we’ll be there to profit.

Now for the updates…

Position Updates

. . . . First Trust NYSE Arca Biotechnology Index Fund (FBT) – Buy up to $33.25

FBT is down a bit along with the majority of stocks.  But M&A activity and new drug developments could send the biotech industry skyrocking at any moment.  Go ahead and buy FBT up to $33.25.

. . . . iShares Dow Jones U.S. Consumer Services Sector Index Fund (IYC) – Buy up to $61.00

IYC’s gotten off to a slow start.  Investors are pulling back on cyclical stocks as economic indicators suggest growth is slowing.  Everyone’s attention has become fixated on the job market.  If we see job growth accelerate, IYC should rebound quickly.

Right now IYC is holding above support of the February low.  Go ahead and buy IYC… But be prepared to sell IYC if it closes below our stop loss at $52.50.

. . . . iShares Dow Jones U.S. Real Estate Index Fund (IYR) – Buy up to $52.75

IYR’s been holding up well.  The fundamentals of the REITs are strong.  But over the last week, IYR’s come under pressure as the S&P 500 fell below key levels of support.

Keep an eye on IYR as it approaches our stop loss at $45.  This level has been a strong support zone so far this year.  But if the markets take another leg down, be prepared to sell IYR on a close below $45.

. . . . Rydex S&P Equal Technology ETF (RYT) – Sell

RYT fell below our stop loss Friday.  Everyone should have sold RYT when the markets reopened today after the holiday weekend.

I still think tech stocks could deliver strong earnings growth in the face of slowing economic growth.  But we have to stick to our system.  And once an ETF closes below our stop loss, it’s time to look for better opportunities.  Go ahead and sell RYT.

. . . . Rydex S&P Equal Weight Materials ETF (RTM) – Hold

Basic materials stocks continued sliding this month.  Investors are concerned demand for basic materials will dry up if economic growth slows.  As a result, they’re bailing out of this economically sensitive sector.

The driving force behind materials next move will be China.  I think the concerns about growth and inflation have been overblown.  I think strong growth and tame inflation will stoke demand for basic materials stocks.  Hold tight for now.

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

Semiconductor chip sales rocketed up 47.6% annually in May.  Sales of PCs, cell phones, and corporate IT are all strong.  But fear of slowing growth in the second half of the year has investors running scared.

I think the pullback is great buying opportunity.  Investors are overreacting to gloomy economic data and driving chip stocks prices to bargain levels.  Go ahead and buy XSD up to $48.00.

. . . . iShares Dow Jones Transportation Average Index Fund (IYT) – Hold

IYT gave up some ground the last two weeks.  Investors have been quick to cut their exposure to cyclical industries as fear of slowing economic growth emerges.  But companies haven’t cut their earnings guidance.  It looks like investors are expecting growth to flatline or turn negative soon.  But so far companies are still expecting growth to continue.  There’s clearly a disconnect between investor expectations and corporate guidance…

If we get a bit of positive economic news, we could see investors come rushing back to transportation companies.  Hold tight for now.

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

XLU continues to fluctuate between the low $30s and our stop loss at $28.  Utility stocks have been holding up extremely well compared to the broad market.  And we’re collecting a nice dividend while we wait for XLU to regain its momentum.  Hold tight for now.

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

GDXJ is holding up well in a down market.  But it could be due for a short term pullback. Right now gold’s rally looks a little overheated.  I wouldn’t be surprised to see gold fall back to support of the long term uptrend around $1,114 before moving higher again.  But in the end, I think gold will continue to march higher.  And higher gold prices should drive the junior gold miners higher too.  Go ahead and buy GDXJ up to $28.00.

. . . . SPDR S&P Homebuilders ETF (XHB) – Hold

The bottom fell out of the housing market with the expiration of the home buyer tax credit.  It’s turned investors bearish on the homebuilder industry.  I think the reaction is a bit overblown.  Were investors really expecting new home sales to go up after the expiration of the tax credit?

Despite the bearish outlook from investors, the industry is recovering in areas that avoided speculative bubbles back in 2005.  But in order for the recovery to continue, the job market must start improving.

XHB is holding above our stop loss at $13.50.  But be prepared to exit the position if XHB closes below $13.50.  Hold tight for now.

Action To Take

  • Sell Rydex Equal Weight Technology (RYT)
  • Move Market Vectors Junior Gold Miners (GDXJ) from hold to buy


Category: SET Portfolio Updates

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