SET Portfolio Update May 2010

| May 4, 2010

May 4, 2010

Is it time to “Sell in May and go away”?

“Sell in May and go away” is an old Wall Street adage.  It comes from the stock markets historical tendency to have higher returns in the months November to April than from May to October.

But where exactly are we supposed to go?

According to the “godfather” of sector rotation strategy, Sam Stovall of S&P 500, the answer is defensive sectors like health care and consumer staples.

Remember, history is a guide but just because it worked in the past doesn’t mean it will work today.  In other words, past performance is no guarantee of future results.

And I think this could be a perfect example.

For starters, “Sell in May and go away” leaves out the fundamental principles of sector rotation.  It doesn’t look at where we’re at in the business cycle. It just says sell or rotate into defensive sectors during the summer.

But if you take a look at the steadily improving economic data and corporate earnings, it tells a different story.  Clearly we’re still in the early stages of recovery.

And that means the more economically sensitive cyclical sectors should continue to outperform the defensive ones.

Not to mention moving into defensive sectors is also fighting the trend.  Something I’m not inclined to do.

I’ll let the markets tell me when the defensive sectors are in favor with investors.  If and when the defensive sectors start showing relative strength to the cyclical sectors, I’ll look to move in that direction.

I think it’s better to see the trend change instead of looking into my crystal ball and foretelling the future.

If the market’s advance does stall and defensive sectors start to outperform, we’ll adjust.

But for now, the trend is our friend.

And the trend right now is in cyclical and small cap stocks.  They are making the biggest gains.

Now for the updates…

Position Updates

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

Consumer discretionary stocks are up again this month.  XLYS hit a peak gain of 7.3% since we recommended it last month.  Consumers who can afford it are spending money again.  Consumer confidence is up.  So are incomes and disposable personal spending.  And the savings rate ticked down to 2.7% in March from 3% in February.  It’s all evidence the American consumers “new normal” is a lot more like the “old normal” than experts were predicting.  Go ahead and buy XLYS up to $27.75.

. . . . Rydex S&P Equal Technology ETF (RYT) – Hold

RYT was spurred higher by tech stocks solid quarterly earnings.  RYT hit a peak gain of 8.5% this month.  So far the increased revenue is being driven by consumer demand.  But we’re starting to see businesses loosen their purse strings too.  Business spending on technology upgrades has the potential to drive even bigger revenue and earnings growth over the next year.  That’s a good sign RYT is just scratching the surface of its potential. RYT is past our buy up to price so hold tight for now.

. . . . Market Vectors Agribusiness ETF (MOO) – Buy up to $46.50

MOO hasn’t gotten off to a great start.  The sector is being weighed down by some of the large fertilizer companies like Monsanto (MON) and Potash (POT).  They’re expecting to see earnings fall short of analyst estimates in the second quarter.  Despite the short term earnings fears, Agribusiness should rebound as the prices for commodities like corn, soybeans, and wheat move higher.  Go ahead and buy MOO up to $46.50.

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

RTM continued to rack up gains this month.  It hit a peak gain of almost 19%.  We came within $1 of hitting our price target before pulling back the last few days.  Even after the pullback, RTM remains in strong uptrend.  And it’s holding above support of the previous high in January.  As long as the economy continues to improve, the demand for basic materials should too.  And strong demand almost always leads to better earnings and higher stock prices.  Hold tight for now.

. . . . SPDR S&P Semiconductor (XSD) – Hold

XSD broke out to new 52-week highs this month.  The catalyst was industry bellwetherIntel’s (INTC) Q1 earnings and the Q2 earnings guidance.  Both came in ahead of analyst estimates.  Their earnings growth is being driven by worldwide consumer demand.  But Intel CEO Paul Otellini said they’re starting to see corporate purchases increase too.  If business spending on tech finally snaps back, XSD should continue its winning ways.  XSD is past our buy up to price.  Hold tight for now.

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

IYT is benefiting from growing economic activity.  It hit a peak gain of 16% last week.  As the economy picks up steam, more stuff needs to be shipped.  It’s the first time in four years freight deliveries have increased.  Freight deliveries usually start to increase about six to twelve months ahead of a strong rebound in economic activity.  So add this to the list of positive developments… Hold tight for now.

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

XLU is steadily climbing higher in a confirmed uptrend.  It’s set a series of higher highs and higher lows since mid-February.  The few months old uptrend is now approaching resistance of the longer term downtrend from the 2007 highs.  I’ll be keeping an eye on XLU to see how its price responds.  If XLU breaks through the downtrend, it could start to quickly rack up gains.  Hold tight for now.

. . . . Market Vectors Junior Gold Miners (GDXJ) – Hold

GDXJ continues its string of higher highs and higher lows.  But gold miners are notoriously volatile.  And if European debt fears push the value of the US Dollar higher, it could hurt the price of gold.  And in turn the gold mining stocks.  If GDXJ does fall, I think it’s a great buying opportunity.  But right now GDXJ is beyond our buy up to price.  Hold tight for now.

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

XHB jumped higher this month.  It hit a peak gain of nearly 30%!  The economic data’s all roses for homebuilder stocks.  New home sales spiked 26% in March.  And we’re also seeing increased construction spending and pending home sales.  The increased sales are likely being driven by home buyer tax credits.  In order to qualify for the tax credits, buyers had to have a purchase contract signed by the end of April.  This may set the stage for a big drop in sales as the tax credits expire.  Hold tight for now.

Action To Take

  • Move Market Vectors Junior Gold Miners (GDXJ) to Hold


Category: SET Portfolio Updates

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