SET Portfolio Update March 2010

March 2, 2010

Spring is in the air.  (At least, it is here in Arizona.)  Of course, spring isn’t officially here until March 20th.  But the temperature is warming up and rain showers have the desert flora in full bloom.

That can only mean one thing… It’s time to give our open positions a spring cleaning.  Let’s lock in some winners and cut a few non-performers loose.

Remember, we’re not a buy and hold system.  We’re profiting by trading into and out of the sectors with the most favorable trends in the business cycle, economic data, and technical indicators.

I want to take action now for a few reasons (not just because spring is in the air).

The major stock market indices are at a crossroads.  There are fundamental reasons and technical indicators supporting both the bulls and the bears.

The bears constantly point to the sovereign debt problems, unemployment, and a financial system that’s still crippled.  And on the technical side, the recent pullback took out many of the support lines of the uptrend in place since March ’09.

The bulls, on the other hand, are quick to point out some equally as compelling arguments.

One of my favorite indicators of an improving economy is the yield curve.  That’s to say short term interest rates are lower than long term interest rates.  And right now the yield curve is steep.  A steep yield curve now, often translates into higher stock prices in the next year.

And on top of that, every leading economic indicator I follow has improved in the last year.  Some are holding and some are still improving, but they are all in a range indicating the economy is expanding.

Personally I side with the bulls.  I think the market will continue to move higher.  But we could see a period of range bound action before the market’s able to eclipse the highs from January.

One interesting piece of information I want to point out is the recent strength in mid-cap and small-cap stocks.  Their strength is being driven by a wave of M&A (Merger and Acquisition) deals.

These types of deals can boost the valuations of entire sectors even if they’re not directly involved in the deal.  I think this is a trend that will continue throughout 2010 as the pace of M&A deals accelerates.

We’ve already seen two of our ETFs benefit from increased exposure to small-cap and mid-cap stocks.  The First Trust Biotechnology Index Fund (FBT) jumped over 12% in six weeks thanks to a couple of M&A deals!  And, the Rydex S&P Equal Weight Materials ETF (RTM) shot up over 5% in two weeks.

I’m looking to add a few more ETFs to increase our exposure to these small and mid-cap stocks.  That should position us to reap the benefits when the markets resume their uptrend.

Now for the updates…

Position Updates

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

Our most recent pick is off to great start.  RTM quickly shot up over 5% as it recovered from oversold levels.  It’s now past our buy up to price.  Yesterday, RTM closed above two important resistance levels… the 50-day moving average and the previous highs from September through November.  Both are around $51.70.  A close above this level should turn this price point into an area of support going forward.  Hold tight for future gains.

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

The correction in the chip makers is over.  XSD rebounded higher after touching the support line of the long term uptrend.  XSD continues to build momentum as it races towards a retest of the previous highs around $48.  The fundamental picture is looking great.  A number of mid and small-cap firms have recently upgraded their earnings guidance for the rest of the year.  Go ahead and buy XSD up to $48.

. . . . First Trust Biotechnology Index Fund (FBT) – Hold

Biotech stocks are on fire thanks to a couple of M&A deals.  Two of FBT’s holdings are being acquired by larger firms.  Milipore (MIL) is being bought by the German conglomerate Merck KGAA.  And the Japanese drugmaker, Astellas Pharma,launched a hostile takeover of OSI Pharmaceuticals (OSIP).  The deals sent MIL and OSIP stock prices soaring.  Both stocks are up nearly 50% since the news hit.  It’s sent FBT through our buy up to price.  Hold tight for bigger gains ahead.

. . . . iShares Dow Jones Transportation Average Index Fund (IYT) – Buy up to $78.00

IYT has made a strong recovery from severely oversold conditions at this time last month. Now IYT is testing recent highs.  The transports have the potential to lead the markets once again as the economy gets stronger.  Go ahead and buy IYT up to $78.

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

XLU has fallen back into the trading range it was in for most of the second half of 2009. The promising technical setup of a few months ago has come undone.  The bullish technical setup was derailed by the blizzards across the country.  They knocked out power and caused damage to utilities infrastructure.  These real world fears have put any bullish sentiment toward the utilities on hold for now.  However, I still like the underlying thesis.  I’m moving XLU to a hold.

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

GDXJ continues to be volatile.  The bulls and bears are battling over the price of gold.  And the US Dollar’s exchange rate is only adding to the volatility.  Despite the volatility, I think the fundamentals point toward higher gold prices ahead.  Go ahead and buy GDXJ up to $28.

. . . . Energy Select Sector SPDR Fund (XLE) and SPDR S&P Oil & Gas Exploration and Production ETF (XOP) – Sell

XLE and XOP have settled into a trading range over the last several months.  The bullish momentum for oil prices and energy companies has petered out.  I think we could see a correction in oil prices over the next few months as the US Dollar strengthens against foreign currencies.  That would lead to lower prices for our energy ETFs.  I think it’s best to get out of energy for now.  Let’s sell XOP now and cash in a 20% gain on XLE.  Congratulations on a successful trade!

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

XHB’s one of the best performing industry ETFs so far this year.  It’s building momentum as some of the key holdings like DR Horton (DHI) and Lennar (LEN) said they could turn a profit this year.  Now XHB sits at a crossroads.  It’s bumping into resistance of the previous highs around $16.25.  And the support line of the uptrend as well as the 20- and 50-day moving averages are just below its current price.  The support and resistance are converging.  That means we’ll likely get a big breakout soon.  XHB has moved past our buy up to.  Hold tight for now.

. . . . Market Vectors Gaming ETF (BJK) – Sell

It’s time to cut BJK loose.  I still like our investment thesis and think the industry will deliver some huge gains at some point.  But right now the technical indicators show BJK is likely headed lower.  At this point, BJK’s bullish momentum is gone.  In the last few weeks, BJK fell below the 200-day moving average.  That’s a sign BJK could turn lower, or at least be stuck at, current levels for the time being.  I’ll keep an eye on BJK for possible re-entry down the road.  For now, I think we’re better off putting our money to work elsewhere.

. . . . Vanguard Industrials ETF (VIS) – Hold

VIS has made a strong rebound from oversold levels last month.  The bullish momentum continues to build as VIS makes another run at the highs set in January.  The momentum should continue with strong reports like the ISM manufacturing index registering a 56.5 yesterday.  A reading over 50 indicates growth in the manufacturing industry.  Hold tight for now.

. . . . iShares S&P N.A. Tech – Software Index Fund (IGV) and iShares S&P N.A. Tech – Multimedia Networking Index Fund (IGN) – Sell

I think it’s time to lock in two big winners in tech.  Let’s sell iShares S&P N.A. Tech – Software Index Fund (IGV) for a 17% gain.  And, sell iShares S&P N.A. Tech – Multimedia Networking Index Fund (IGN) for a whopping 38% gain.  Congratulations on two very profitable trades!

Don’t get me wrong, there’s a lot of potential for future gains in tech.  I’m looking to add an ETF that will give us more exposure to the small and mid-cap tech stocks soon.

Action To Take

• Sell S&P N.A. Tech – Multimedia Networking Index Fund (IGN) to lock in a 38% profit now!
• Sell iShares S&P N.A. Tech – Software Index Fund (IGV) to lock in a 17% profit now!
• Sell Energy Select Sector SPDR Fund (XLE) to lock in a 20% profit now!
• Sell SPDR S&P Oil & Gas Exploration and Production ETF (XOP).
• Sell Market Vectors Gaming ETF (BJK).
• Move SPDR S&P Homebuilders ETF (XHB) to hold.
• Move Utilities Select Sector SPDR Fund (XLU) to hold.
• Move Rydex S&P Equal Weight Materials ETF (RTM) to hold.
• Move First Trust Biotechnology Index Fund (FBT) to hold.

 

Category: SET Portfolio Updates