SET Portfolio Update July 2014

July 1, 2014

As we reach the halfway point of 2014, the S&P 500 is up 7% year-to-date and flirting with all-time highs.

One of the things that’s drawing a lot of attention lately is complacency among investors and the lack of a major pullback from stocks.  It’s been over two years since the S&P 500 endured a pullback of 10% or more.

Some analysts are becoming fearful that stocks are overdue for a big correction.  But I’m not one of them… I believe there’s a good reason the S&P 500 hasn’t suffered a major correction for the last two years.

In fact, I think there are 3 things preventing a major correction.

One thing that’s helped prevent a major correction is stock buybacks.

In the first quarter, companies bought back $159 billion worth of their own stock.  That’s just below the record of $172 billion spent on stock repurchases in the third quarter of 2007.

These stock buybacks are often executed when the share price falls.  It’s like having an automatic buy order that absorbs shares that are sold by outside investors.

Needless to say, when companies are buying stock, it helps prevent a major selloff.

We’ve also seen a shift in the way money is managed at the largest brokerage houses.  These Wall Street firms are shifting away from transactional commission based management to a fee based model.

In a transactional model, the broker is paid for executing trades.  If the client doesn’t buy or sell anything, the broker doesn’t make any money.  This leads stock brokers to recommend lots of buying and selling.  It’s how they make money.

Under a managed account, the client simply pays the broker a fee that’s a percentage of the dollar amount of money being managed.  There aren’t any transaction fees so there’s no reason for the broker to recommend lots of buying and selling.

In other words, there aren’t as many brokers telling their clients to sell when the S&P 500 is down 5% or 6%.  So you don’t get the snowball effect of selling causing more selling.

And last, but certainly not least, is the Fed.

Since 2009, when the Fed began buying US Treasuries and later mortgage backed securities, there has been a direct correlation between the size of the Fed’s balance sheet and the performance of the S&P 500.

The larger the Fed’s balance sheet has grown, the higher the S&P 500 has climbed.

As I’m sure you know, the Fed is now steadily reducing the size of their asset purchases. They plan to bring the asset purchases to an end later this year.

This could be a problem for stocks down the road.  But until the asset purchases end, they should help push stocks higher.  As they say, don’t fight the Fed.

Enjoy the bull market and don’t listen to those that are calling for a major correction just because the markets are ‘overdue’ for one.

Now, onto the updates…

. . . . Guggenheim Shipping ETF (SEA) – Buy up to $23.25

SEA is our latest recommendation.  It’s been flat since we recommended it a few weeks ago.  But it should benefit from the growth is the LNG shipping market as well as a rebound in dry bulk shipping rates for the second half of the year.  Grab your shares up to $23.25.

. . . . iShares MSCI Global Metals & Mining Producers (PICK) – Buy up to $20.50

PICK is the ETF I’m expecting to profit from India’s investment in infrastructure.  This is the same story we had in China 5 to 10 years ago that sent demand for raw materials and mining stocks soaring.  PICK is currently up more than 3% and just below our buy up to price.  Grab your shares up to $20.50.

. . . . Market Vectors Unconventional Oil & Gas ETF (FRAK) – Hold

FRAK is now up more than 12% since we recommended it.  The strong performance is more than just investors expecting higher oil prices.  The ETF’s largest holding isAnadarko Petroleum (APC) and it’s rumored to be a takeover target.  This is one of the reasons we got into FRAK… big oil is targeting the US oil and gas companies for expansion. And they’re going to do it through acquisitions that should boost the valuations of the entire US onshore oil and gas market.  Continue holding.

. . . . Financial Select Sector SPDR (XLF) – Hold

Financials have underperformed relative to the S&P 500 so far this year.  But that’s quickly changing.  XLF has enjoyed a nice run over the last month that sent it to a new 52-week high.  Given the recent trend of better than expected economic data, we should see financials continue moving higher from here.  Continue holding.

. . . . Guggenheim Solar (TAN) – Hold

TAN has rebounded from the selloff that cut into our profits earlier this year.  The industry is maturing from a fast growing but unprofitable niche into a profitable business with an even better outlook for profitable growth.  Continue holding.

. . . . First Trust Consumer Staples AlphaDEX Fund (FXG) – Hold

FXG’s 15% gain since we recommended buying it is outperforming the S&P 500 by a wide margin over the same time.  We also received a dividend payment on this ETF last week. The bullish momentum should continue pushing FXG higher from here.  Continue holding for bigger gains.

. . . . PowerShares Dynamic Leisure and Entertainment (PEJ) – Hold

PEJ is enjoying a nice run over the last month.  The latest economic data shows the economy is picking up steam heading into the second half of the year.  This should lead to an uptick in the amount of money consumers are spending… that’s good news for consumer stocks and PEJ.  Continue holding.

. . . . PowerShares Dynamic Media Portfolio (PBS) – Hold

PBS is in the same boat as PEJ.  And that makes sense… they’re both related to consumers discretionary spending.  Investors are clearly moving back into consumer discretionary stocks after a rough ride from March through May.  Continue holding.

. . . . Morgan Stanley Cushing MLP High Income Index ETN (MLPY) – Hold

MLPY has moved virtually straight up since April.  Investors are clearly looking to add exposure to the booming US onshore oil and gas segment.  And the high yielding MLPY is a great way for income investors to get in on the action.  We now have a gain of more than 21% including dividends.  Continue holding.

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

ITB is moving higher after several good data points for housing.  The latest showed pending home sales jumped 6.1% in May to the highest level in eight months.  The increase in buying should help boost sales for new homebuilders as well.  Continue holding.

Action To Take

• None at this time.

 

Category: SET Portfolio Updates