SET Portfolio Update June 2011

June 7, 2011

Dear Sector ETF Trader Reader,

The Wall Street adage – sell in May and go away – looks like great advice.

The Dow, S&P 500, are NASDAQ hit their bull market high on May 2nd.  And since then, they’re trending steadily down.  The major indices are down in the neighborhood of 6%.

But large cap stocks aren’t alone.  Small and mid-cap stocks, as well as crude oil, share a similar fate.

As you know, we were expecting stocks to struggle.  There were simply too many headwinds for the market to continue flying higher.

Remember, leading indicators tipped us off to a global downturn in manufacturing activity months ago.  Now we’re seeing a soft patch of economic data confirm our expectations.

In just the last few weeks, we’ve seen a number of indicators come in weaker than expected.  For instance, investors were expecting the US to add 170,000 jobs in May.  But we only added 54,000 jobs… That’s a big disappointment!

But that’s not all…

We’ve seen similar results in a number of other economic indicators.  Factory orders are down, vehicle sales are weak, consumer confidence is down, and home prices are double dipping.  And that’s just to name a few.

What’s the economic data telling us?

Economic growth was accelerating until April.  Then the business cycle peaked.  Now economic growth is slowing.

In other words… “It’s the economy, stupid!”

But don’t get overly pessimistic.  There’s still reason for hope.  Here’s what we need to keep sight of… Slowing growth doesn’t mean we’re destined for recession.  The period of slowing growth can end.  And growth can accelerate without dipping into recession.

Right now it appears stocks will struggle this summer.  But if things don’t get worse, stocks should come roaring back later this year.  And that will be great for our positions across the board.

So, keep your head up and your eyes peeled for opportunities.  If everything plays out as I’m expecting, we’ll be sitting pretty by the end of the year.

Now for the updates…

Position Updates

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

XBI is looking strong.  It’s holding onto its recent gains as the broad market pulls back. There are plenty of exciting new drugs and potential M&A deals that could send biotech stocks soaring at any moment.  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 holding up well as selling pressure pushes the broad markets down.  The non-cyclical nature of healthcare stocks is a big positive as investors begin to question economic growth rates.  I’m expecting PSCH to continue pushing higher throughout the summer.  Go ahead and buy PSCH up $35 if you haven’t already.

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

IHF hit a peak gain of 11.5%.  The quick move up pushed the ETF into overbought territory.  It set the stage for a short term pullback that took place over the last week or so.  The good news is the long term uptrend, in place since September, is still intact.  I’m expecting IHF’s relative strength to continue.  In other words, IHF should be among the leading sectors going forward.  Continue holding IHF for bigger gains ahead.

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

XLP hit a peak gain of nearly 6%.  Since then, it has pulled back below our $31.50 buy up to price.  But the fear of an economic slowdown should push investors into this defensive sector in the weeks and months ahead.  Right now XLP is just above the 50-day moving average.  We’ll usually see ETFs in a strong uptrend bounce higher after they test this support zone.  Go ahead and buy XLP up to $31.50 if you haven’t already.

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

GDX has given back some solid gains.  I think this is a great buying opportunity.  Over the last month or so, we’ve seen a divergence between gold and gold mining stocks.  But it won’t last forever.  Right now gold is testing its all time highs.  But gold stocks are off more than 10% from their highs.  I think gold stocks are due for a rally to close the gap on gold.  Go ahead and buy GDX up to $58 if you haven’t already.

. . . . PowerShares S&P SmallCap Technology (PSCT) – Buy up to $33

PSCT (formerly XLKS) is having a hard time gaining momentum.  The looming economic slowdown has made investors afraid to bid up highly cyclical tech stocks.  The good news is the slowdown is expected to be mild with growth accelerating sometime in the second half of the year.  When growth accelerates, small-cap tech stocks should soar.  Go ahead and buy PSCT up to $33 if you haven’t already.

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

REZ is a rock star in these uncertain economic times.  Residential REITs should soar thanks to their increasing cash flows and solid dividend yield.  Right now REZ is just off its 52-week high with a peak gain of 13.5%.  Continue holding REZ for further gains.

. . . . Market Vectors Global Alternative Energy (GEX) – Buy up to $22

GEX’s volatile bullish pattern gave way to the market selloff.  But there’s huge potential for alternative energy stocks in the wake of the Japan’s nuclear crisis.  The electricity currently being generated by nuclear power will need to come from somewhere.  And with solar power closing in on grid parity with fossil fuels, the potential for GEX to make a big run is still in the cards.  Go ahead and buy GEX up to $22 if you haven’t already.

. . . . iShares Dow Jones Industrials (IYJ) – Sell

IYJ is outpacing the S&P 500’s decline.  I think IYJ could get hurt badly if global manufacturing continues to slow.  Let’s grab our 5.5% gains now and get out.  Go ahead and sell IYJ now.  We’ll look to get back into industrial stocks when the outlook for economic growth improves down the road.

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

MOO is trading in choppy range bound action.  But the upside potential is huge.  Look, the bottom line is farmers are making money hand over fist with grain prices hovering near all time highs.  They’ll be spending their war chest on equipment, seed, and fertilizer to make even more money.  That’s a windfall for agribusiness companies making the things farmers want.  Continue holding MOO for further gains ahead.

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

PLTM is officially in a downtrend.  It’s set a series of lower lows and lower highs.  Here’s the problem… PLTM is suffering the same fate as our gold miners ETF (GDX).  The price of the metal is near the bull market high but mining stocks are severely underperforming the metal.  I don’t think this divergence will last.  I’m expecting PLTM to close the gap on platinum in the weeks and months ahead.  If you don’t already own PLTM, feel free to snap up shares under $30.25 now.

Action To Take

• Move Market Vectors Gold Miners (GDX) to buy up to $58
• Move Consumer Staples Select Sector SPDR Fund (XLP) to buy up to $31.50
• Move First Trust ISE Global Platinum Index Fund (PLTM) to buy up to $30.25
• Sell iShares Dow Jones Industrials (IYJ) now for gains of 5%

 

Category: SET Portfolio Updates