SET Portfolio Update May 2012

May 1, 2012

Dear Sector ETF Trader Reader,

We’re now five months into 2012, and the stock markets keep moving higher.  In fact, the Dow Jones Industrial Average posted its seventh consecutive month of gains!

After such a great run, is it time to sell in May and go away?

Not a chance.  There are two major reasons why I’m calling for this market to continue higher… economic data and earnings.

First off, US economic data has been trending in the right direction.  Now sure, the bears will be happy to point out all of the bad reports over the past two months or so.  But none of them have been truly awful… just misses.

Listen, if every economic data point met or beat its forecast during a fragile recovery, something would be fishy.  It just doesn’t work that way.  But overall, the trend is moving in the right direction.  That’s what matters.

What’s more, today’s ISM manufacturing index shows a rising rate of growth in the manufacturing sector.  In April, the ISM reading came in at 54.8… easily beating the 53.0 consensus and the 53.4 reading in March.  As manufacturing picks up, we’re seeing one of the critical keys to the US economy’s health improve as well.

In fact, improvements in manufacturing often leads to job growth.  So don’t be surprised if Friday’s unemployment numbers show signs of improvement as well.

But economic data isn’t the only reason we’ll see the rally continue…

So far this quarter, earnings have been nothing short of spectacular!  According to Bloomberg, 190 of the 270 companies having reported in the S&P 500 so far had a positive earnings surprise.  That’s over 71%!  In addition, just 16.9% had negative results.

Take a look at the top five sectors with companies reporting positive earnings surprises –

• Consumer Discretionary – 29
• Financials – 33
• Industrials – 36
• Technology – 27

Those look familiar?  They should, because we’re holding every single one of them in our portfolio.

There’s no doubt that at some point, we may see a consolidation.  But with the way things look now, May is definitely not the time to go away.

Now onto the updates…

Position Updates

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

We just rolled out this trade two weeks ago and it’s already exceeded our buy up to price! In fact, we’re up by roughly 3% already on PSCH.  If you recall, this ETF offered us both downside protection in classic healthcare industries and the big upside potential of biotechs and pharmaceuticals.  Given the rally going on in the markets right now, I expect to see PSCH continue higher.  Hold this ETF for much bigger gains.

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

The homebuilders are posting good earnings numbers right now.  And as a result, the stocks in this industry continue to march higher.  The entire sector is also getting a boost from improving housing data.  As a matter of fact, pending home sales rose 4% in March. More importantly, today’s construction spending showed year over year growth of 6%!  As XHB flirts with a new high, buy this ETF up to $22.25.

. . . . SPDR S&P Retail (XRT) – Hold

With the XRT bumping into a 52-week high just yesterday, there’s no doubt this ETF can surge higher from here.  And it’s all due to the great retail data out from March.  Recently, Amazon (AMZN) shattered earnings expectations and XRT surged higher as a result.  You see, AMZN makes up 1.3% of the total weight of XRT.  I see continued consumer demand driving retail even higher from here.  As we just broke through our $62.50 buy price, let’s now hold this ETF for bigger gains.

. . . . Industrials Select Sector SPDR ETF (XLI) – Buy

Considering the overall market rally, we’re shocked at the lack of performance from industrials.  Right now, XLI is trading right near where we bought it.  The good news is Chinese PMI for April came in at 53.3, up from a March reading of 53.1.  In addition, new home sales rose last month.  Construction drives demand for industrial goods.  So this does come as a big surprise to see the industry lag.  It seems industrials should catch up with the rest of the market at any moment.  As such, continue buying XLI up to $38.25.

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

It looks like we timed our entry into the financial sector just right.  At the moment, the KIE is trading up over $42, a 3% gain on our trade.  This comes as no surprise as the financial sector is one of the best performing this earnings season.  As I pointed out above, financials have the second most positive earnings surprises so far.  In addition, P&C carriers are benefiting from a lack of weather catastrophes so far this year.  The big news, however, will come when the Supreme Court delivers their decision on Obamacare later this month.  If they determine the law is unconstitutional, we’re sure to see KIE take off!  Continue holding KIE for more gains.

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

PBJ is holding fast at just under the $20 level.  Remember, we purchased this ETF back in January to provide some stability to our portfolio.  Unfortunately, we’re seeing minimal gains from PBJ.  We’ll continue holding this ETF as a defensive component.  However, if we don’t see better movement shortly, we’re going to consider cutting PBJ loose.  Hold this ETF for now.

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

The IGV is heading higher once again.  In fact, our trade is back to an 11.5% gain. Between the rally going on in the NASDAQ and the lineup of earnings due out shortly for companies in IGV, I expect we’ll see this ETF break to new highs.  Hold shares of IGV for bigger gains.

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

Surprisingly, XLU is making some headway once again.  While this ETF lay dormant for most of this past quarter, it looks like investors are finally keen to the growth story in XLU.  The better the economy… the more power that’s needed to fuel growth.  In addition, a number of power providers are set to capitalize on cheap natural gas.  Instead of burning more expensive coal to produce electricity, major players in this space are lining up natural gas plants.  As a result, we’re going to see the margins of utility companies improve over time.  Let’s continue holding XLU as it heads to 52-week highs.

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

REZ continues to climb to new 52-week highs.  In fact, this ETF is now up a massive 24.7%.  The S&P/Case-Schiller index rose from the previous month for the first time since April 2011.  Remember, this ETF holds apartments, healthcare, self storage, and manufactured homes… all which can benefit from rising real estate prices.  As such, continue holding REZ to capture more gains.

Action To Take

• Move PowerShares S&P SmallCap Health Care (PSCH) to a Hold
• Move SPDR S&P Retail (XRT) to a Hold

 

Category: SET Portfolio Updates