SET Portfolio Update November 2009

November 3, 2009

The captain has turned on the fasten seat belt sign.  Please return to your seats.  It’s going to be a bumpy ride… The stock market’s hit some turbulence the last few weeks.

We’ve seen a significant jump in volatility too.  Daily swings on the Dow of 100 points or more are becoming a regular event for the first time since March.  Even with the added volatility, I think the pullback is going to be short lived.

Let’s take a look at the recent quarterly earnings, economic data, and a few charts to get a feel for where the market’s likely headed next.

First off, the Q3 earnings largely came in better than expected.  More than 80% of the S&P 500 companies reporting Q3 earnings beat analysts’ estimates.  Many of them did it by cutting costs, buying back shares, or other accounting ‘tricks’.  What the market wants is good old fashioned revenue growth.

These measures delivered a one-time boost to earnings.  But many investors saw these gimmicks as a sign to sell.  Instead of buying into the hype, they sold into strength.

We saw companies like Intel (INTC) and Alcoa (AA) (as well as many others) jump higher on their earnings announcement.  Only to see heavy selling make those gains disappear a short time later.

The profit taking put a lid on the market’s uptrend.  That led to even more profit taking. We saw assets pour out of riskier stocks and into cash.  The shift gave the U.S. Dollar a boost over the last few weeks.

And right now, investors are focusing on the U.S. Dollar.

Take a look at the YTD charts of the PowerShares DB US Dollar Index Bullish Fund(UUP) as a proxy for the US Dollar and the S&P 500 ($SPX).  You’ll notice an inverse relationship between the U.S. Dollar and the S&P 500.

In other words, every time the U.S. Dollar goes down, the stock market goes up.  And when the U.S. Dollar goes up, the stock market goes down.

 

 

As long as the Fed keeps interest rates near 0%, we’ll likely see the dollar continue to fall and the stock market continue to rise.

The Fed is front and center on everyone’s radar.

If the Fed hints at hiking interest rates, the dollar will head higher while commodities like gold and oil will head lower.  But I don’t think it’s likely to happen until we see unemployment start to improve.

Moving beyond the US Dollar, the fundamental picture hasn’t changed.  The economic data’s improving.  Just last week the third quarter U.S. GDP numbers came in better than expected.

The US economy grew 3.5%, indicating the recession’s technically over.

A slew of other indicators like consumer confidence, ISM manufacturing index, and home sales are also improving.  All signs are pointing toward continued economic improvement.

As you can tell, there are a lot of moving parts right now.  The most important short term is investor sentiment.  And the best way to gauge it is technical analysis.

The S&P 500 and the NASDAQ are battling key levels of resistance.

The biggest of them all is the long term downtrend on the S&P 500.  Take a look at the chart below.  The blue line is the long term downtrend dating back to the October ’07 highs.

 

Remember, the longer the trend, the more dominant it is.  A break through this level will officially make the uptrend since March the dominant trend.

The last strong resistance level the S&P 500 hit was the 200-day moving average in June. The index traded down or flat for the next month and a half.  Then it rocketed 25% higher over the next three months.  I wouldn’t be surprised if we get a similar result this time around.

Another gauge of investor sentiment I watch closely is the Fibonacci retracements.  This tool is based on human behavior and our tendency to act in a predictable pattern.

Right now the NASDAQ is behaving exactly as Fibonacci says it would.  Take a look at the chart.  You’ll see the index has retraced 50% of the losses from the October ’07 to the March ’09 low.

 

We’ve seen pullbacks at the 38.2% and 50% retracements.  This tells me the market’s actions are healthy.  We should see the market heading higher again soon.

To make a long story short… A good Q3 earnings season was overshadowed by the lack of revenue growth.  Investors are focused on the U.S. Dollar.  And technical resistance levels have combined to turn the markets lower in the short term.

I think the market will regain its positive momentum later this month.  We’ll see it carry this momentum through the end of ’09 to finish the year out on a positive note.

Now for the updates…

Position Updates

…. SPDR S&P Oil & Gas Exploration and Production ETF (XOP) – Buy up to $45
…. SPDR S&P Homebuilders ETF (XHB) – Buy up to $16.25

Every sector of the market is lower since I recommended XOP and XHB last month.  So it’s no surprise they’re down.

They have managed to stay above our stop loss levels.  A break below this level would indicate a major shift in market sentiment and could lead to a big correction.  So keep a close eye on your stop losses.  However, I don’t think it’s likely.  Go ahead and use this pullback as an opportunity to pick up these shares at a discount if you haven’t already.

…. Market Vectors Gaming ETF (BJK) – Buy up to $27

BJK has pulled back to support at $23.50.  This support level is a combination of the May high, the inflection point in August, and a Fibonacci retracement.  The ETF is also looking very oversold on the full stochastic and the RSI.

I knew going into this trade the gambling industry had already had a nice run and a short term pullback wasn’t out of the question.  I gave the stop loss plenty of room so we wouldn’t get whipsawed out of the trade.  I still see big upside potential for the industry as the economy comes out of recession.  We’re well below our buy up to price so go ahead and pick up some shares if you haven’t already.

…. SPDR S&P Retail (XRT) – Buy up to $34.75

XRT has pulled back off its highs with the rest of the market recently.  It’s currently at support of the uptrend and the 50-day moving average.  XRT continues to be very sensitive to consumer confidence.

The theory is a happy consumer is likely to spend more money than a pessimistic one.  The good news is consumer confidence is rising.  But a blip this month showing consumer confidence may be losing momentum gave investors a reason to take some profits.  I’m not surprised.  Many retailers have posted very impressive gains so far this year.

I think the retailers will head higher from here.  We’re still below our buy up to price if you haven’t had a chance to open a position yet.

…. Vanguard Industrials ETF (VIS) – Hold

We had some good news this week from the U.S. manufacturing industry.  The ISM manufacturing index came in better than expected.  Executives are asked about their expectations for future production, new orders, inventories, employment and deliveries. This report is a very good leading indicator of future growth in the manufacturing sector and the overall economy.

VIS has also pulled back off its recent highs.  It’s testing support of the uptrend since March.  The ETF is looking oversold on the full stochastic and RSI.  I’m expecting VIS to head higher from here.

…. iShares S&P North American Technology – Software Index Fund (IGV) – Hold

IGV has pulled back to support of the 50-day moving average and the August highs.

Profit taking in the tech sector has put the uptrend under pressure.  Investors are worried the tech companies have come too far, too fast.  But like I pointed out in the market update, the tech heavy NASDAQ is following the mathematical patterns Fibonacci identified.  I think the correction in tech stocks is coming to an end.  We should see them lead the market higher into a strong finish for ’09.

…. Market Vectors Agribusiness ETF (MOO) – Buy up to $38.75

I’m starting to sound like a broken record… MOO has pulled back to support of the uptrend.  The RSI and full stochastic have reached oversold levels.

The big picture is commodities are in the middle of a secular bull rally.  That means we have strong upward momentum since commodities corrected in ’08.  I expect continued weakness in the U.S. Dollar to help push MOO higher.

We inched back below our buy up to price.  Take advantage of this pullback to open a position if you haven’t already.

…. SPDR S&P Metals and Mining ETF (XME) – Buy up to $43.50

It’s the same story for XME… it’s pulled back to support of the uptrend.  And it’s looking very oversold at these levels.

Commodity prices are moving higher because of the weakening U.S. Dollar.  The dollar’s recent bounce has sent commodity prices lower.  I think this is nothing more than a short term blip on the radar.  XME should resume its upward march as commodity prices move higher.

The pullback has sent XME below our buy up to price.  Go ahead and open a position if you haven’t already.

…. Energy Select Sector SPDR Fund (XLE) – Hold

Oil finally broke out of its trading range last month.  A barrel of crude oil hit $82 before pulling back to support of the 20-day moving average.

U.S. Dollar strength is once again front-and-center in the discussion about commodities.  A weakening dollar will push commodity prices higher.  But a short term bounce will serve to push commodity prices down.

XME has pulled back alongside oil prices.  It’s found support of the 50-day moving average.  This level has held three times since August.  Hold tight, I think we’ll head higher from here.

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

The semiconductor industry continues to recover from a horrible period at the end of ’08. Now the focus is on growth.  How quickly will the industry grow in the new year?  If the industry bellwether Intel (INTC) is any indication, we should see strong growth in 2010. They posted a much better than expected third quarter.  And management increased guidance for their full year earnings.

Despite the glowing numbers from Intel, the entire industry came under heavy selling pressure.  Investors took profits off the table.  Selling pressure continued to mount as XSD broke below its uptrend a few weeks later.

Now XSD is just above two key levels of support.  I’m expecting XSD to rebound from these levels and lead the markets higher through the end of the year.

…. iShares S&P N. American Tech – Multimedia Networking Index Fund (IGN) – Hold

IGN has pulled back with the rest of the tech sector.  Selling pressure has pushed IGN down to support of the uptrend.  The RSI and full stochastic are showing the ETF has reached oversold levels.

It’s the same story as the rest of the tech sector.  I’m expecting a strong rebound into the end of ’09.  Hold tight for now.

Action To Take

• Change Market Vectors Agribusiness ETF (MOO) to buy up to $38.75
• Change SPDR S&P Metals and Mining ETF (XME) to buy up to $43.50
• Change SPDR S&P Retail ETF (XRT) to buy up to $34.75

 

Category: SET Portfolio Updates