SET Portfolio Update March 2011

March 1, 2011

Dear Sector ETF Trader Reader,

For better or worse, it has been an exciting few weeks.  (And March Madness hasn’t even started!)

The political unrest in Libya hit the boiling point.  Gadafi refuses to step down.  And peaceful protests turned violent.

As a result of the conflict, Libya’s oil and gas production was slashed in half.  It was enough of a disruption to put a hefty fear premium into crude oil prices.

The price of a barrel of oil soared into the dreaded triple digits…

Here’s the thing… The fundamentals don’t warrant $100 oil.  In fact, the supply and demand picture points to oil around $75.  That means there’s about a $20 to $25 fear premium in oil prices.

Investors are worried higher oil prices will take the wind out of the economy’s sails.  That’s why we saw stocks sell off sharply when oil prices spiked.

The bottom line is investors overreacted to the Libyan crisis.  In other words, speculation has bid up oil prices well beyond the price supported by fundamentals.

I expect oil prices to retreat once the fear premium comes out.

Then the same underlying investment theme that’s driven the markets the last six months will push stocks higher.

Remember, the Fed’s quantitative easing program will run through the end of June. Corporate earnings are improving.  Balance sheets are flush with cash.  And to top it off, interest rates are very low and inflation is tame.

It all points to more good times ahead for corporate earnings growth.  And that’s great news for our ETFs.

Now for the updates…

Position Updates

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

XLKS is in a strong uptrend.  And the upward trending 50-day moving average is serving as a solid floor of support on any pullback.  Small tech companies look like they’re in prime position to profit from the fast growing mobile computing market.  Go ahead and buy XLKS up to $33 if you haven’t already.

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

REZ and the apartment REITs continue to shine.  Mounting foreclosures and new household formations are creating more renters than apartments.  It’s tipping the scales of supply and demand.  It’s the perfect storm for higher rents over the next few years.  REZ has already sailed past our buy up to price.  Continue holding for further gains ahead.

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

GEX is trading in a consolidation pattern.  I’m expecting a bullish breakout at any moment. The recent spike in oil prices should remind everyone why more investment in and use of alternative energy is badly needed.  Simply put, America needs an energy policy that frees us from foreign oil.  Go ahead and buy GEX up to $22 if you haven’t already.

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

IYJ sold off as violence erupted in Libya and oil prices spiked.  Oil dependent industries like trucking, delivery services, and airlines weighed heavily on IYJ’s performance.  But once the fear premium comes out, the lower oil prices should spark a rally in these under-performing stocks.  Continue holding IYJ for further gains ahead.

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

MOO hit a peak gain of more than 13%.  Higher grain prices are clearly having a good impact on Agribusiness companies.  Farmers are expected to plant more acres this year to take advantage of the high commodity prices.  It should lead to another year of strong farm income and spending.  I’m expecting this spending to propel MOO to new heights. Continue holding MOO for further gains ahead.

. . . . PowerShares S&P Small-Cap Energy Portfolio (XLES) – Sell

XLES hit our $39 price target on February 17th.  Clearly, XLES was a big beneficiary of higher oil prices.  Congratulations to everyone locking in stellar 40% gains! Those are big profits in just three months…

. . . . First Trust ISE Global Platinum Index Fund (PLTM) – Hold

PLTM has settled into a trading range.  The ETF has bounced between $32.50 and $35 over the last few months.  Not surprisingly, the platinum chart looks nearly identical to that of our platinum miners ETF.  The bottom line is platinum prices need to go up if PLTM is going to move higher.  The good news is I think a combination of an accelerating economy and increasing inflation pressures will lead to higher prices for platinum and PLTM in the weeks and months ahead.  Continue holding PLTM for further gains.

. . . . iShares N.A. Technology – Software Index Fund (IGV) – Hold

IGV hit a peak gain of over 21%.  And the strong uptrend looks likely to continue.  Strong revenue and earnings growth across the software industry is just too good for investors to pass up.  This is clearly where the cutting edge technology is being developed.  Keep an eye on IGV as it approaches our $65 price target.

. . . . SPDR KBW Bank ETF (KBE) – Hold

KBE hit a peak gain of 22% earlier this month.  Since then, the market correction has caused KBE to give back some of its gains.  But it’s nothing to worry about.  Hedge funds, institutional investors, and even Warren Buffet are buying up undervalued financial stocks. Clearly they’re expecting a strong year for financial stocks.  Sit tight for the next leg higher.

Action To Take

• Sell PowerShares S&P Small-Cap Energy Portfolio (XLES) for a 40% gain!
• Move iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ) to Hold.

 

Category: SET Portfolio Updates