SET Portfolio Update July 2016

| July 19, 2016

What The Bizarre Bond Market Is Telling ETF Investors

When we look back on 2016, the lackluster economic growth, the convulsions of Brexit, and the upheavals on the American political landscape, what else will turn out to be significant?

There’s always the bond market.

No matter how loud the sound of alarm bells clanging or champagne corks popping, we will always have the bond market to turn to for what has historically been one of the more useful indicators of what might lie ahead.

Except that this summer, the signals being sent by the bond market are bizarre.  As the New York Times noted last week, “If the bond market is correctly predicting the economic path ahead, we should all be terrified.”

For ETF investors, that’s a big if.  Bond prices have always been closely linked to the overall outlook for economic growth and inflation.  And with long-term interest rates as low as they are, the obvious conclusion is that we’re in for tough times ahead.

The yield curve, which compares rates for short, medium, and long-term bonds, suggests a 60% chance of a recession within the next year according to analysts with Deutsche Bank.

They’re not alone.  But to see what’s happening on the bond market, and to get a feel where the economy might be headed, we should look beyond the yield curve.

Why are bonds being bought, even though rates are either low or negative?  Money needs a home.  In many cases, money needs a home that is dictated by regulators, who make it mandatory for pension funds, insurance companies, and banks to buy bonds.

This creates demand.  And when the supply of bonds dries up, as in many cases it has, the interest a bond pays goes down.

Something else to consider is that the #1 customer for bonds are the world’s central banks.  Here in America, our “Quantitative Easing” is over.  But it’s alive and well in other countries.

What does this mean for ETF investors? 

Sector Safety Comes With A Price Tag 

In the spring, we told you that we’re positioning our ETF portfolio with defense in mind.  Our outlook has not shifted, and we believe that the “safety zone sectors” represented by our recommendations are appropriate.

Financials and financial services are still not sectors we’re comfortable with. When we look at energy, we see a consolidation of this year’s strong gains before the resumption of significant upward movement.

In last month’s update, we described health care as “the elephant in the room” and what happens with these stocks is difficult to determine.  For now, we are holding our position in our iShares Medical Devices ETF (IHI) and assessing the landscape for a possible future buy.

For now, safety is centered in the usual sector suspects… utilities, consumer staples, telcom, insurance, and REITs.


. . . . Vanguard Information Technology ETF $VGT – HOLD 

We recommended the ETF earlier this month at $106.29.  Today, it closed at $112.05. 

This ETF has very quickly shot up above our buy up to price of $110.00, so we are advising that you hold this position, and wait for possible dips below $110 for bargain price buys.

. . . . First Trust ISE-Revere Natural Gas Index Fund $FCGBUY

We recommended the ETF in June at $25.90.  Today, it closed at $24.15.

When commodity prices fell back following the Brexit vote, largely stemming from amplified concerns of a global economic slowdown, natural gas followed suit.

The price target is $37.00.  Buy up to $26.70.

. . . . PowerShares S&P SmallCap Energy ETF $PSCE – BUY

We recommended the ETF at $15.66 in May.  Today, it closed at $15.61.

It’s the same story as natural gas prices… concerns about demand given economic uncertainties.

The price target is $27.00.  Buy up to $17.50.

. . . .  First Trust NASDAQ Community Bank Index Fund $QABA – HOLD

We recommended the ETF at $35.87 in April.  Today, it closed at $39.58.

For the short term, as the financial and financial services suffer because of low interest rates, QABA will be held back.  But we continue to believe small banks will weather the storm better than larger banks.

The ETF has again climbed back above our buy up to price of $38.00.

The price target is $46.00. 

. . . . Aberdeen Chile Fund $CH – HOLD

We recommended the ETF at $5.73 earlier this year.  Today, it closed at $5.89.

There’s been a setback because of falling commodity prices.  Copper, Chile’s primary export, was particularly hard hit on Friday.  The combination of slower manufacturing in China and the strong U.S. Dollar is keeping a lid on prices.

Despite the headwinds, the ETF has once again climbed back above our buy up to price of $6.25.

The price target is $11.00. 

. . . . SPDR S&P Homebuilders $XHB – HOLD

We recommended the ETF at $29.64 earlier this year.  Today, it closed at $32.50.

Despite low interest rates, the rate of new home sale growth slowed slightly in May.  But the market remains strong, a bright spot in the generally sluggish economy.

The price target is $50.00.  Continue holding. 

. . . . iShares Medical Devices ETF $IHI – SELL

We recommended the ETF at $117.25.  Today, it closed at $140.35. 

The price target is $140.00, which we have achieved. Sell this ETF and collect a 20% return in less than a year.

. . . . Utilities Select Sector SPDR $XLU – HOLD

We recommended the ETF at $41.36.  Today, it closed at $52.06.

The buy up to price of $42.50 has been exceeded. Continue holding.

Action to Take

  • Move Vanguard Information Technology ETF $VGT from Buy to Hold.
  • Move First Trust NASDAQ Community Bank Index Fund $QABA from Buy to Hold.
  • Move Aberdeen Chile Fund $CH from Buy to Hold.
  • SELL iShares Medical Devices ETF $IHI for a 20% profit.

Category: SET Portfolio Updates

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