SET Portfolio Update November 2011

November 1, 2011

Dear Sector ETF Trader Reader,

Whew, what a ride!

The S&P 500 just had the best October since 1974.

The large cap index shot up more than 10% for the month.  And at one point, the index was up more than 20% from the October 4th low.  That’s an unbelievable run to say the least.

Can stocks continue their epic run higher?

The simple answer is… Yes.

Unfortunately, it’s not that simple.

You see, last month’s rally was driven by a perfect storm of fundamental and technical events.  Let’s take a look at the rally’s key drivers.

To start the month, the S&P 500 was down nearly 20% from the April highs.  It was on the verge of dipping into bear market territory.

At the time, the markets were overrun by pessimism.  And stocks were dropping like rocks.

Investors were concerned about Greece defaulting on their debts.  They were also watching economic data deteriorate rapidly.  And economists were rapidly cutting their projections for economic data.

The fear of losing money was driving investor actions.

Then everything changed…

Suddenly, the news out of Europe became a little ‘less bad’.  US economic data wasn’t as bad as feared.  Some of the economic reports even came in better than expectations.

Mind you, nothing was fixed.  The same problems still existed.  But the little bit of ‘less bad’ news sparked a rally.

And here’s the kicker…

The rally prevented the S&P 500 from closing in bear market territory.  And once stocks began moving higher, traders flooded back into the market.

They were more afraid of missing out on the rally than they were of losing money.

As you know, investor psychology can play havoc with the markets.  And it was one of the major driving forces behind last month’s amazing rally.

Now, the easy part’s over.  The markets have already rallied as things went from bad to ‘less bad’.  In order for the market rally to continue, economic data will need to start improving.

Here’s the bottom line…

Stocks had an amazing month.  But it will take an awful lot of improvement in Europe and the US for stocks to continue their epic run higher this month.

So, keep your expectations in check.  And don’t be surprised if US economic data comes up short of expectations or the European bailout hits another bump in the road.

Position Updates

. . . . Consumer Staples Select Sector SPDR Fund (XLP) – Hold

XLP is up more than 2% since our recommendation. The rally pushed our ETF above our $31 buy up to price.  So, I’m moving XLP to a hold.  I’m expecting consumer staples to be a stabilizing force in an uncertain market.  This is one holding that should do well no matter what.  And we’ll collect a solid 2.9% dividend yield along the way.  Continue holding for bigger gains ahead.

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

IGV is off to a fast start.  Our software ETF is up more than 5%.  Clearly, tech stocks are doing well as investors turn bullish.  The rally sent IGV through our $59 buy up to price. I’m moving IGV to a hold.

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

XSD had a great month.  After falling to nearly $40 per share, XSD staged a massive 27% rally.  It reached a new high of $51.25 last week.  The entire sector is getting a boost from industry leader Intel (INTC).  INTC reported 3rd quarter 2011 earnings of $0.65 per share on October 18, 2011.  They handily beat estimates of $0.61.  Obviously, when an industry leader blows out earnings, it’s a positive for the entire sector.  The rally pushed XSD past our $49 buy up to price.  I’m moving XSD to a hold.

. . . . SPDR S&P Retail Fund (XRT) – Hold

XRT had an amazing month.  Our retail ETF is benefiting from strong consumer spending. It’s simply amazing how resilient the US consumer is right now.  Sales are rising even though consumer confidence is low and unemployment remains high.  And that’s just not supposed to happen… The recent rally pushed XRT above our $49 buy up to price.  And it reached a peak gain of more than 15% last week.  Continue holding for bigger gains ahead.

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

XLU hit a new high of $35.47 last week.  Our peak gain is over 7%.  And it’s now above our $34 buy up to price.  What’s more, XLU is paying a hefty 3.9% dividend.  And that’s a great thing in today’s uncertain market.  Utility stocks should be rock solid no matter what happens to the economy.  Continue holding for bigger gains ahead.

. . . . Market Vectors Gold Miners (GDX) – Hold

GDX’s wild ride continued last month.  The good news is GDX is trending higher again after the massive selloff in September.  As you know, gold mining stocks have underperformed gold over the last six months.  But that could be changing… typically we’ll see periods where gold outperforms gold miners for a time.  Then mining stocks outperform the physical metal.  And right now the time is right for mining stocks to lead.  Continue holding for bigger gains ahead.

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

REZ is looking good again after a 22% rally last month.  We don’t usually see such volatility in the REIT sector.  However, the European debt crisis adds another layer of risk to REIT investing.  Remember, REITs use a lot of debt to fund the purchases of commercial real estate.  If a Greek default triggers another credit crisis, it will undermine the REIT’s ability to operate.  As a result, REZ is reacting to every ebb and flow of the Greek fiasco.  But as long as Europe avoids melting down, REZ should continue moving higher from here.  Continue holding REZ for bigger gains ahead.

Action To Take

• Move XLU, XSD, IGV, and XLP to Hold

 

Category: SET Portfolio Updates