SET Portfolio Update June 2012

| June 5, 2012

June 5, 2012

Dear Sector ETF Trader Reader,

Let’s face it, May and the first part of June have been hard on stocks.

Since May 1st, the S&P 500 has dropped from 1,415 to 1,278.  The 10% drop has erased all of the gains we made in the first three months of the year.

Obviously, the quick correction wasn’t what we were hoping for.

Now, the large cap index is testing the 200-day moving average support line.  This key support line is the line in the sand.

When the S&P is above the line, it’s considered to be in an uptrend.  And when it’s below, it’s considered to be in a downtrend or market correction.


If the market can hold at this level, stocks could snap back in a hurry.  However, if the support zone fails, all bets are off… the S&P could fall back to the October low around 1,100.

Here’s the thing…

The market’s next move won’t be decided by the charts.

Believe me, the charts can tell us where we’ll go once we do break higher or lower.  But the market’s next move will be driven by news out of Europe and economic data.

Unfortunately, Europe is a mess and economic data is falling short of expectations.

Just last week, 21 economic indicators were released.  And amazingly, 18 of them were weaker than expected.  The flood of weak economic data added fuel to the market selloff.

However, there is a silver lining…

As you know, economic data is always relative.  And last week’s debacle has drastically lowered expectations for the next batch of economic data.

In other words, the bar has been lowered.  So there’s a good chance the next round of data can beat the lowered expectations.

But that’s not all…

Even if the economy continues to weaken, it could be good for stocks.  Don’t forget, another batch of weak economic data will likely cause the Fed to intervene.  That means we could see QE3 or some other action to spur economic activity.

Here’ the bottom line…

Fear of the Euro Zone collapsing and weak economic data have driven stocks down.

But we could be nearing a turning point.  There’s a good chance the next round of economic data won’t fall short of expectations.  And even if it does, the Fed will likely step in to backstop the market.

At this point, the odds favor a snapback rally over another leg down.

Now onto the updates…

Position Updates

. . . . Guggenheim Airline ETF (FAA) – Buy

Our airline ETF hit some turbulence shortly after takeoff.  Last month we recommended buying FAA at $30.28.  Since then, it’s been as low as $27.97 and as high as $31.30.  It’s been a bumpy ride for airline stocks as investors grapple with the impact of falling oil prices and weak economic data.  So far the weak economic data hasn’t dented the expectations for a strong summer travel season.  And with oil prices in the low $80s, it should make for a very profitable summer.  Buy FAA up to $31.25.

. . . . First Trust ISE Revere Natural Gas Index Fund (FCG) – Buy

Natural gas producers have struggled out of the gate.  They’ve fallen as natural gas prices have slipped back to $2.40 per MMBtu from around $2.50 per MMBtu.  This looks to be nothing more than a minor pullback as prices continue to bounce back from a 10-year low. The fact remains, natural gas production in the US has been drastically dialed back.  And prices are destined to go higher from here.  And that’s good news for FCG.  Buy FCG up to $16.50.

. . . . PowerShares S&P SmallCap Health Care (PSCH) – Buy

Small cap health care stocks are down along with broad market.  The smaller health care stocks haven’t held up as well as their large cap brethren.  Remember, even though they’re healthcare stocks, the majority of smaller companies are still considered to be growth stocks.  So when the economy weakens, they’re prospects for growth weaken as well.  But this looks like the proverbial baby being thrown out with the bath water.  I think the selloff has been overdone.  If you haven’t bought PSCH yet, go ahead and grab your shares up to $34.25.

. . . . SPDR S&P Homebuilder ETF (XHB) – Buy

Homebuilder stocks were hit hard by the weaker than expected economic data last week. More specifically, weak employment data and a 5.5% decrease in pending home sales hurt homebuilder stocks.  However, a 2.8% increase in residential construction spending gave investors reason to remain optimistic.  Buy XHB up to $22.25.

. . . . SPDR S&P Retail (XRT) – Hold

XRT has fallen in lockstep with the broad market.  But don’t discount the impact of falling oil prices on consumers’ ability to spend.  The average price for a gallon of regular gas has fallen more than 8% from $3.92 to $3.59.  In fact, consumer spending was one of the few economic indicators that actually met economists’ expectations last week.  At this point, retail stocks are oversold and due for a rally.  Continue holding XRT.

. . . . SPDR S&P Insurance ETF (KIE) – Hold

Insurance stocks have had a rough go lately.  They’ve sold off as investor sentiment turned bearish on financial stocks.  However, insurance stocks are holding up better than other financial stocks.  Over the last month, KIE is down about 6% while theFinancial Select Sector SPDR ETF (XLF) has fallen more than 10%.  When stocks finally rebound, KIE should lead financials higher.  Continue holding KIE.

. . . . PowerShares Dynamic Food & Beverage (PBJ) – Hold

PBJ has held up well as the broad market has tumbled lower recently.  Over the last month, PBJ is down about 2.5% while the S&P 500 has fallen 6.5%.  While the performance isn’t great, it’s doing exactly what defensive sectors are supposed to do in a down market.  Continue holding PBJ.

. . . . iShares S&P N.A. Tech-Software Index Fund (IGV) – Hold

Software stocks have taken a beating lately.  Unfortunately, we’ve seen all of our gains in IGV slip away over the last few months.  Investors have piled out of technology stocks as economic data has weakened.  But as I told you earlier, we could be nearing a turning point in this market selloff.  IGV should be one of the ETFs leading the way higher when the broad market snaps back.  Continue holding IGV.

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

Utilities stocks are performing admirably as the broad market has fallen apart lately.  In fact, XLU has actually risen 1.5% over the last month.  Clearly, this is a sign that investors have shifted money from cyclical sectors and put that money to work in more defensive ones.  And that’s great news for XLU.  Continue holding XLU for bigger gains.

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

Our residential REIT ETF hit a rough patch this month.  But we’re still up 18% after dividends.  More importantly, the bullish fundamental case for REZ hasn’t changed. Apartment rents are rising and the number of renters is growing.  That’s a strong fundamental case for earnings growth and higher REIT prices ahead.  Continue holding REZ for bigger gains.

Action To Take

  • None at this time.


Category: SET Portfolio Updates

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