SET Portfolio Update July 2011

| July 5, 2011

July 5, 2011

Dear Sector ETF Trader Reader,

I hope everyone had a fantastic holiday weekend.  We’ve certainly seen some fireworks in the market lately.  So, let’s jump right in…

The big news has to be stocks’ big move to the upside.

From June 23rd to July 1st, the S&P 500 shot up more than 6%.  It was part of the best one week gain for the large cap index in two years.

What’s behind the S&P 500’s big move?

Simply put, it’s a technical trade.

Take a look at the chart of the S&P 500 below.  I’ll show you the technical setup traders are jumping all over right now.


You can see the trading range that has dominated trade so far this year.  The blue line near 1340 is the high end of the range.  And the red line near 1260 is the low end the range.

But something interesting happened last week… When the S&P 500 fell to the bottom end of the range, it also lined up with two other technical levels of support.

The other support zones are the 200-day moving average (gray line) and long term uptrend off the March 2009 lows (not pictured).  The convergence of three support zones fueled massive buying by technical traders.

As a result, easily identifiable technical signals like this one often create a self fulfilling prophecy.  There are simply so many traders buying this support zone that it drives stocks higher.

But don’t be fooled… Stocks are still facing some serious headwinds.

Remember, economic growth rates are being slashed around the globe.  Economists have cut their forecast for US, Europe, and emerging markets growth for 2011 and 2012.  And until the headwinds causing the slowing growth calm down, the technical bounce is unlikely to hold up.

In fact, you can see the S&P 500 is now near the high end of its trading range (the blue line).  At this point, it’s more likely the markets sell off than continue their bullish momentum.

In the end, a technical trade will only hold up for so long without confirmation from the fundamentals.  And right now the weak fundamentals and charts point to further weakness in stocks in the short term.

The good news is we’re well positioned in defensive ETFs.  And when the time is right, we’ll be ready to buy cyclical ETFs.  Until then, we’ll play it safe…

Position Updates

. . . . Utilities Select Sector SPDR (XLU) – Buy up to $34

XLU is our latest recommendation.  This defensive sector will kick off a solid 3.9% dividend yield while we wait for the markets to settle down.  Go ahead and buy XLU now before it moves beyond our buy up to price.

. . . . SPDR S&P Biotech ETF (XBI) – Buy up to $75

XBI is looking good.  After some weakness in the early part of June, XBI has come roaring back.  And the potential is there for a massive bull market rally.  In fact, the recent trading action looks outright bullish to me.  Biotech stocks are cheap and in solid uptrend.  Go ahead and buy XBI up to $75 if you haven’t already.

. . . . PowerShares S&P SmallCap Healthcare (PSCH) – Buy up to $35

PSCH is jumping up the charts by leaps and bounds.  In fact, after a bout of weakness in the first half of June, PSCH is looking as strong as ever.  The relative safety of health care stocks and the growth potential of small caps give PSCH big upside potential.  We’re rapidly approaching our buy up to price, so go ahead and buy PSCH up to $35 if you haven’t already.

. . . . iShares Dow Jones US Healthcare Providers ETF (IHF) – Hold

IHF is going strong.  In fact, IHF is in a strong uptrend and showing relative strength to other sectors.  That means IHF should continue to outpace the market in the weeks ahead.  The source of IHF’s strength comes from the managed care providers.  The health insurance companies are easily beating analysts’ earnings estimates.  And that’s a trend I expect to continue.  Hold IHF for bigger gains ahead.

. . . . Consumer Staples Select Sector SPDR Fund (XLP) – Buy up to $31.50

XLP is cruising along nicely.  The steady performing non-cyclical stocks are holding up well as the markets jump around.  And we collected our first dividend payment at the end of June.  The defensive consumer staples stocks are up about 3% from our entry point.  And XLP is rapidly closing in on our buy up to price.  Go ahead and buy XLP up to $31.50 if you haven’t already.

. . . . Market Vectors Gold Miners (GDX) – Buy up to $58

GDX is in a downtrend off the April high.  That’s never good… The good news is the price of gold is holding steady.  And the divergence between the physical metal and gold mining stocks can’t last forever.  At some point, gold stocks will outperform gold to catch back up.  And when they do, GDX will soar.  Go ahead and buy GDX up to $58 if you haven’t already.

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

REZ continues to look great.  Even after a mild correction, the residential REITs are showing relative strength to the market.  And that’s a good sign REZ’s strong performance will continue.

And the fundamentals are looking good too… There are numerous sources showing rental vacancies continue falling.  That gives landlords the ability to raise rents.  In fact, we could see rents increase even more than we expected.  And higher rents should fuel another surge in REZ.

We also collected another dividend at the end of June.  Continue holding REZ for further gains.

. . . . Market Vectors Global Alternative Energy (GEX) – Sell

GEX closed below our $17.75 stop loss on June 24th.  That’s our cue to sell… I still think alternative energy has a great future.  But it’s clear investors aren’t overly optimistic about the industry’s immediate future.  If you haven’t already done so, go ahead and sell GEX now.

. . . . Market Vectors Agribusiness (MOO) – Hold

MOO is trading in a volatile consolidation pattern.  But the writing is on the wall for windfall profits in Agribusiness this year.

Remember, we’re coming off near record high farm income last year.  That means farmers are spending money on everything from seed and fertilizer to new tractors and equipment.
In fact, the recent USDA report shows farmers planted more crops than expected.  And the more crops farmers’ plant, the more income Agribusiness companies are going to generate.  Continue holding MOO for further gains ahead.

. . . . First Trust ISE Global Platinum Index Fund (PLTM) – Buy up to $30.25

PLTM is down in similar fashion to our gold miners ETF.  And just like gold, the price of platinum is holding steady.  In other words, mining stocks are trading at a big discount to the physical metal.  I think we’ll see mining stocks catch up with the physical metal at some point.  That means PLTM should make a big move higher in short order.  Go ahead and buy PLTM up to $30.25 if you haven’t already.

Action To Take

  • Move Market Vectors Agribusiness (MOO) to hold
  • Sell Market Vectors Global Alternative Energy (GEX)


Category: SET Portfolio Updates

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