SET Portfolio Update June 2010

June 1, 2010

May was an ugly month for the stock market.  Every sector in the S&P 500 suffered declines.  In fact, the markets posted their worst monthly loss since February 2009.

Right now, stocks aren’t trading on technical or fundamental data.  The driving force behind the recent correction is fear.  It’s given investors a reason to hit the sell button first and ask questions later.

There’s a crazy amount of volatility.  Just look at the S&P 500.  It’s gained or lost 1.5% in a day nine times in the last month.

Investor fears are being stoked by a flood of bad news.

The markets have been hit by sovereign debt problems in Europe, oil spills in the Gulf of Mexico, heightened tension in the North and South Korea, Icelandic volcano eruptions… The list seems to go on forever.

We’re left weighing the impact of events that have yet to unfold…

It’s created a lot of uncertainty.  And it’s allowing fear to run rampant.

On a technical basis, the markets are in correction.  The correction slashed more than 14% off the S&P 500.  It’s sent the S&P 500 crashing through numerous support levels.

The good news is the support line from the S&P 500’s February low is holding.  And the support lines of the uptrend in the leading cyclical sectors are holding.

Will June be any better?

If the market is going to resume its uptrend, two things need to happen.  The cyclical sectors need to lead the way and they must do it on high volume.

Until these two things happen, the big institutional players are either selling or sitting on the sidelines.  And without their support, any rally is doomed to fail.

And of course, all of this can change quickly as world events continue to unfold.

Now for the updates…

Position Updates

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

IYR briefly undercut the support line of its uptrend.  But it’s rebounded nicely and is showing relative strength to other sectors.  The pullback should have allowed everyone to get into IYR at a great price.  If you haven’t already, go ahead and buy IYR up to $52.75.

. . . . State Street Energy Select Sector SPDR (XLE) – Sell

XLE broke through the support line of the uptrend and triggered our stop loss. Unfortunately, the technical setup was overpowered by investor fear.  It’s also why I used a tight stop loss.  Now that the support line has been broken, XLE could struggle to move higher from here.  We’re better off cutting our losses short and looking for better opportunities.  Go ahead and sell XLE.

. . . . PowerShares S&P SmallCap Consumer Discretionary Portfolio (XLYS) – Buy up to $27.75

XLYS has weathered the correction well.  Remember, U.S. small cap consumer discretionary stocks generate the majority of their sales domestically.  So they’re not as exposed to the international economy as large cap stocks.  This should serve XLYS well because right now the U.S. economy is looking strong.  XLYS began moving higher again last week and should continue leading the markets higher as they regain their momentum. Go ahead and buy XLYS up to $27.75.

. . . . Rydex S&P Equal Technology ETF (RYT) – Buy up to $48.15

Tech stocks have been extremely volatile during the correction.  Investors are trying to determine if the sector will be able to generate strong enough earnings to keep the sector moving higher.  Obviously the biggest question is how will less government spending and higher taxes in European countries impact earnings growth.  At this point, it’s all speculation.  I believe there is enough pent up demand to drive earnings higher even if European growth slows.  RYT is trading below our $48.15 buy up to price.  Use this pullback as a buying opportunity.

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

Basic materials stocks were beaten up as the markets corrected.  But our equal weighted materials ETF has held up better than the market cap weighted materials ETFs.  Now that China is refocusing on growth, the materials companies should see Chinese demand drive commodity prices higher.  And that should help RTM regain its momentum.  Hold tight for now.

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

Investors are ignoring the latest round of strong earnings reports out the semiconductor industry.  The fear is slowing growth in Europe and a strong U.S. Dollar will hurt international sales.  But I think the fears are being overblown.  XSD is back to trading near our initial entry point.  Go ahead and use the pullback as a buying opportunity.  Buy XSD up to $48.00.

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

IYT pulled back to the support line of the uptrend before rebounding last week.  It’s a good sign the markets uptrend hasn’t completely broken down when leading sectors are able to hold above key levels of support.  When the markets regain their momentum, the strongest ETFs like IYT should lead the markets higher.  Hold tight for now.

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

XLU flirted with our stop loss, but the support level around $28 held.  Now XLU has begun moving higher again over the last week.  And don’t forget, XLU is paying a nice divided while we’re waiting for the sector to gain momentum.  Hold tight for now.

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

GDXJ hit a new high this month as investors drove gold prices to new highs.  But GDXJ has fallen back below our buy up to price as gold prices retreated.  As long as investor fears remain, high gold should continue to zigzag its way higher.  And GDXJ should continue moving higher along with gold.  Go ahead and buy GDXJ up to $28.00.

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

XHB’s pulled back along with the rest of the market.  Right now XHB is holding above the support line of the uptrend as well as support of the January and February highs.  Coming up this week, there are a couple of economic reports on pending home sales and employment.  If these reports are good, XHB could regain the momentum that’s made it one of the best performing ETFs so far this year.  Hold tight for now.

Action To Take

• Sell Energy Select Sector SPDR (XLE)
• Move Market Vectors Junior Gold Miners (GDXJ) to Buy
• Move Rydex S&P Equal Technology ETF (RYT) to Buy
• Move SPDR S&P Semiconductor (XSD) to Buy

 

Category: SET Portfolio Updates