SET Portfolio Update May 2011
May 3, 2011
Dear Sector ETF Trader Reader,
It’s a good day to be an American.
Osama Bin Laden is dead.
It has certainly brought a bit of closure to events of September 11, 2001 for the entire country. I only hope it will do the same for those who lost friends or family that day. And let’s not forget the sacrifices the men and women in the armed forces have made in the decade of war on terror since then.
Now the question is…
Can we get politicians to deal with our fiscal deficit and national debt with the same steely nerve as they’ve shown in dealing with these terrorists?
I sure hope so.
For now, there are more pressing matters driving the markets and our ETFs.
First off, the markets are in midst a major sector rotation. Money is flooding into the defensive sectors like consumer staples and healthcare.
We saw this trend developing in the early stages and successfully positioned ourselves in IHF and XLP to profit from the seismic shift in the investing landscape (more on them below).
As you know, we see investors rotate money into different sectors for a variety of reasons. In this case, it looks like the business cycle and a seasonal shift have occurred at the same time.
The shift in the business cycle was tipped off by skyrocketing energy costs.
As you can see in the chart of the business and market cycle, consumer staples stocks tend to do their best after energy stocks have peaked.
After the recent run in oil and gas stocks, it’s a pretty safe bet we’ve seen an intermediate term top in energy stocks… unless, of course, supply is disrupted. As a result, we’ve seen sector rotation into defensive stocks based on the business cycle.
But this sector rotation is being driven by more than the business cycle alone.
The peak in energy prices is occurring right before the summer months… a time the markets are usually weak anyway. The not so technical term for the phenomenon is “sell in May and go away”.
As a result of the market’s historic weakness from May to October, some investors rotate out of stocks. Or at least they move into more defensive sectors during the summer months.
The meeting of a business cycle and seasonal sector rotation has given rise to the flood of money flowing into defensive sector stocks.
But that’s not all…
We also have the end of QE2 on tap at the end of June. Inflation’s rearing its ugly head. Corporate margins appear to be peaking. Job growth is still weak. Housing is still in a depression. And we’re two full years into this business cycle upturn.
Simply put, there are plenty of headwinds for this bull market.
Here’s how I see it playing out…
Defensive sectors outperform cyclical sectors throughout the summer. During that time, the US Dollar will rally. And we’ll see a correction in commodity prices across the board.
Any economic slowdown should be minor. There isn’t going to be a repeat of the 2008 credit crisis. And by the time the year is out, we’ll see cyclical stocks regain their role as markets leaders.
Now for the updates…
Position Updates
. . . . iShares Dow Jones US Healthcare Providers ETF (IHF) – Hold
IHF is off to a red hot start. We’re seeing a lot of money flood into defensive sectors like healthcare. Investors are employing a classic sector rotation strategy. Historically defensive sectors perform better in the summer months between May and October. Our ETF hit a peak gain of 8% on Friday. The big rally in healthcare provider stocks has sent IHF past our $62 buy up to price. Move IHF to a hold.
. . . . Consumer Staples Select Sector SPDR Fund (XLP) – Hold
XLP is another defensive sector ETF profiting from sector rotation. So far our consumer staples ETF has a peak gain of nearly 3%. That’s good enough to send XLP through our $31.50 buy up to price so I’m moving it to a hold.
. . . . Market Vectors Gold Miners (GDX) – Hold
GDX is moving higher along with gold prices. There’s a clear relationship between gold and inflation expectations. And right now inflation is showing signs of accelerating. We’re already seeing central banks from around the world raise rates to curb inflation. But the reality is inflation is just beginning to rear its ugly head. If inflation expectations take off, so should gold prices. And that’s great news for our gold miners ETF. Continue holding GDX for bigger gains ahead.
. . . . PowerShares S&P SmallCap Technology Portfolio (PSCT) – Buy up to $33
PSCT (formerly XLKS) hit a new peak gain this month and is closing in on our buy up to price. PSCT has tremendous upside. The small cap tech companies are benefiting from the adaption of new technologies, the explosion in mobile internet, and the corporate upgrade cycle. 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 benefiting from strong investor interest in REITs. REZ should continue to rack up gains as residential REITs increase rents this year. Our ETF just hit a peak gain 13.5%. And it’s showing no signs of slowing down. Continue holding REZ for further gains.
. . . . Market Vectors Global Alternative Energy (GEX) – Buy up to $22
GEX continues to chart a volatile path higher. Remember, solar stocks are a big component of alternative energy. And investors have a love/hate relationship with these stocks. Solar stocks are full of potential but often come up short of investor expectations. Now, one development could be the spark to launch solar to the forefront of the energy conversation. Total SA (TOT), Europe’s third largest oil producer, just bought a majority stake in US solar company, SunPower (SPWRA), for $1.38 billion. If more oil and gas companies begin to diversify into alternative energy, we could see this volatile sector finally live up to its potential.
. . . . iShares Dow Jones Industrials (IYJ) – Hold
IYJ is benefiting from an economic improvement. Our industrial ETF hit a new peak gain of more than 12.5% last week. Industry bellwether General Electric (GE) reported first quarter earnings shot up 48% year over year. That’s a good sign industrials should continue moving higher in the weeks ahead. Continue holding for further gains.
. . . . Market Vectors Agribusiness (MOO) – Hold
MOO is trading in a volatile range between $54 and $57.50. Clearly, Agribusiness stocks have lost some of their bullish momentum. But there’s still plenty of upside. Commodity prices are high and farmers are planting crops from fence post to fence post. With all of the extra land in production, we could see a banner year for seed and fertilizer companies. Continue holding MOO for further gains ahead.
. . . . First Trust ISE Global Platinum Index Fund (PLTM) – Hold
PLTM continues to be range bound between $30 and $35. But as the recent run in silver prices has shown, precious metals can move higher in a hurry. The fundamentals for platinum in industrial use are strong. What’s more, the metal looks undervalued compared to gold and silver. And we know if the price for the metal takes off, so will the mining stocks. Hold tight for the next leg higher.
. . . . iShares N.A. Technology – Software Index Fund (IGV) – Hold
IGV is closing in on our $65 price target in a hurry. Our software ETF is riding a boom in cloud computing and web 2.0. Keep an eye on IGV and be ready to sell when it hits $65. That will be good enough for a 25% gain.
Action To Take
- Move Market Vectors Global Alternative Energy (GEX) to buy up to $22
- Move iShares Dow Jones US Healthcare Providers ETF (IHF) to hold
- Move Consumer Staples Select Sector SPDR Fund (XLP) to hold
Category: SET Portfolio Updates
