SET Portfolio Update July 2013

July 2, 2013

Dear Sector ETF Trader Reader,

I’ll admit it, I was dead wrong about Fed Chairman Bernanke’s comments after the FOMC meeting a few weeks ago.

The day before the FOMC meeting I said, “The world needs the US to keep interest rates low.  And the only way Bernanke can reassure investors that low interest rates aren’t going away is to backtrack on the possibility of tapering asset purchases sooner rather than later.”

Instead, Bernanke went into detail about when they will begin to taper the $85 billion per month in asset purchases and the dates they expect them to take place.

In short, the Fed expects to begin tapering this year and to fully end the bond buying program by the middle of next year.

Wow!  That was the exact opposite of what I expected!

I may have been wrong about what Bernanke said, but I nailed the consequences of his refusal to back-track on tapering.  He sent long term interest rates soaring to their highest levels in years!

The dislocation of the bond market and the rapid rise in interest rates caused many investors to hit the sell button on all types of investments.  This was evident in the massive outflow of money from stock, bond, and commodity ETFs and mutual funds across the board.

As the dust settles, investors are adjusting to the new reality… one without the Fed buying $85 million of MBS and Treasuries per month and the higher long term interest rates that go along with it.

So far the biggest losers are emerging markets.  They were struggling to achieve the high growth rate investors expect even with low interest rates.  And they were dealt another blow from slowing growth in the largest emerging market of all – China.

But that’s not the half of it…

Europe’s still a mess, investors are afraid that rising interest rates will crush bonds, and Japan’s massive bond buying program is creating more and more volatility in Japanese stocks and the Yen.

That leaves investors with two choices – US stocks and the US Dollar.

Not surprisingly, the US Dollar has been strengthening against all of the other major currencies since the FOMC meeting.  And the S&P 500 has begun moving higher again after pulling back to support of the 2007 high around 1,560.

The result?

Even though the Fed’s tapering message dealt US stocks a blow, they’re not dead.  In fact, US stocks are the place to be compared to the unattractive alternatives right now.

Now onto the updates…

. . . . Guggenheim S&P 500 Equal Weight ETF (RYT) – Buy up to $66.50

RYT held up well in the wake of the Fed bombshell.  In fact, it began moving higher again as soon as it pulled back to the support of the uptrend connecting the previous lows going back to November.  Keep an eye on RYT as it approaches our buy up to price of $66.50. Once is clears this level, it will be off to the races.

. . . . Health Care Select Sector SPDR (XLV) – Buy up to $50.00

XLV has basically been treading water since our recommendation.  But the combination of new drugs for the pharmaceutical companies and M&A activity should fuel more upside in the 2nd half of the year.  Grab your shares of XLV while they’re under $50.

. . . . Morgan Stanly Cushing MLP High Income Index ETN (MLPY) – Buy up to $18.50

MLPY has been on a roller coaster of sorts since the interest rates began to rise in May. But one thing hasn’t changed… US crude oil production is growing.  The more oil and natural gas we pump out of the ground, the bigger the demand for pipelines, storage, and other energy infrastructure.  MLPY is on the verge of moving beyond our $18.50 buy up to price.  Grab your shares if you haven’t already done so.

. . . . SPDR S&P Oil & Gas Equipment & Services ETF (XES) – Hold

XES has basically been range bound since February.  Luckily, we recommended buying it near the low end of the range in April.  The industry has great growth potential but there’s a lot of competition and technological advancements have reduced the time it takes to drill a well.  But with WTIC crude oil prices on the verge of crossing over $100 per barrel, we could see increased drilling activity spur a rally in the weeks ahead.  Continue holding…

. . . . iShares Semiconductor ETF (SOXX) – Hold

SOXX’s 10.5% gain over the last quarter is the best among the ETFs we own.  And for good reason… semiconductor demand is in a cyclical upswing.  The good news is this surge is far from over. Continue holding…

. . . . iShares US Industrials ETF (IYJ) – Hold

IYJ has rebounded from the Fed induced selloff thanks to some better than expected economic data.  According to the Institute of Supply Management, production and new orders are increasing.  And just today, the Commerce Dept reported orders for goods produced in US factories climbed 2.1% in May.  Continue holding IYJ for further gains.

. . . . Shares DJ US Home Construction Index Fund (ITB) – Hold

ITB fell back to support around $21.50 last week.  This level has been a strong floor of support all year.  And ITB is once again moving higher after bouncing off this level again. Obviously, investors are worried about higher interest rates hurting sales of new homes. Obviously higher interest rates decrease the purchasing power of home buyers.  The good news is interest rates have already baked in the end of QE and economic growth of around 2.5% to 3% in the second half of the year.  So unless the economy really takes off, interest rates should remain near these levels throughout the rest of the year.  And that bodes well for home builders going forward.

. . . . SPDR S&P Bank ETF (KBE) – Sell

KBE surged past our $29 price target on Monday.  That’s our cue to ring the cash register. Our total gain on investment is a solid 23.8%…. not too shabby.  And it only took a little over six months to rack up those gains.  Congratulations on a successful trade!

. . . . Guggenheim Timber ETF (CUT) – Hold

CUT has rebounded as lumber prices find a bottom.  As I’ve pointed out before, lumber prices were bid up in the aftermath of Hurricane Sandy.  But the end of the temporary bubble in lumber prices isn’t a bad thing.  New home construction is on the upswing and the steadily growing demand should help fuel solid earnings growth and more upside for CUT in the months ahead.

. . . . First Trust Internet Index Fund (FDN) – Hold

FDN is settling into a familiar pattern.  It surges higher for a few months then it cools off as it consolidates those gains.  Then it surges higher again. FDN has been consolidating since reaching a high of $46.95 in early May.  If FDN follows the same pattern as before, we could see it surging toward our $51 price target in short order.  Continue holding for bigger gains.

Action To Take

• Sell SPDR S&P Bank ETF (KBE) for a gain of 23.8%.

 

Category: SET Portfolio Updates