SET Portfolio Update October 2010

October 5, 2010

Dear Sector ETF Trader Reader,

You’ve probably noticed the markets had a great month of September.  It’s lit a fire under our ETFs.  Now we’re sitting on gains in all of our positions.  And what’s even better… half of our ETFs are up more than 8%.

I’m excited because we’ve got plenty more market-moving news on tap for the next few months.

At the top of the list are third quarter earnings.  I’m not so much concerned with the actual earnings.  A weak quarter is already baked into the cake.  The key will be managements’ outlook for future earnings growth.

The good news is… I think we’re just getting warmed up.  I’m expecting a strong end of year rally with cyclical sectors leading the pack.

Remember, investor sentiment reached overly pessimistic levels as the markets bottomed out in late August.  This was a great contrarian indicator.  Whenever individual investors get overly bearish, it’s a good sign the markets are due for a rally.

And that’s exactly what happened.  A bit of optimism returned and stocks charged higher.

Now, what started out as a technical swing within a trading range could be the first leg of a new bull market.

Here’s why…

Leading indicators had been forecasting slowing growth for months.  But in the last few weeks, the tide has turned.  They’re now showing growth should accelerate in the next six months.

This is huge!

Slowing economic growth and fears of a double dip recession have kept stocks in neutral for the better part of this year.  Now stronger than expected economic growth could be the catalyst for stocks to retest their April highs.

What’s more, on a technical basis, stocks are holding near the high end of the trading range.

This is a big change from what we’ve seen over the last few months.  When the S&P 500, Dow, and NASDAQ reached this level before, it was met with heavy selling.  But this time around, stocks are holding onto their gains.

In fact, we’re seeing some important cyclical sectors like technology, consumer discretionary, and basic materials clear the high end of their trading range.

However, it’s not all great news.

Financial, energy, and transportation stocks are still lagging.  If this rally has legs, these sectors need to join in.

Without a doubt, economic conditions are showing signs of improvement.  And that’s great news for our ETFs.

So sit back and enjoy the ride.  This should be a good one.

Now for the updates…

Position Updates

. . . . Guggenheim Airline ETF (FAA) – Hold

First, a bit of housekeeping regarding FAA.  I’m sure you noticed the name of the ETF has changed.  But the ticker, price, stop loss, and price target remain the same as before.

Here’s the official press release from the ETF provider…

“Claymore Securities, Inc. (“Claymore”) officially changed its name to Guggenheim Funds Distributors, Inc. (“Guggenheim Funds”).  The change marks the next phase of business integration following the acquisition of Claymore by Guggenheim Partners, LLC (“Guggenheim Partners”) announced on October 15, 2009.”

FAA is off to a great start.  Honestly, our timing was a bit lucky.  A week after I recommended the ETF, Airtran (AAI) agreed to a buyout from Southwest Airlines(LUV). And both stocks jumped sharply higher on the announcement.

The two stocks account for nearly 20% of FAA’s holdings.  Clearly, the jump in their stocks had a big impact on our ETF.  It sent FAA past our buy up to price.

Beyond the buyout, the outlook for airlines remains strong.  Hold tight for further gains.

. . . . iShares N.A. Technology – Software Index Fund (IGV) – Buy up to $55

IGV has pulled back to support around $51.25.  I pointed out in the trade alert that IGV was due for a correction.  And I even said a pullback to $51.25 would be a great entry point.  So far it’s looking like my crystal ball was working.

But in the end, it’s not going to matter whether you got in a buck or so higher or lower. The bottom line is software companies are on a roll right now.  And the cloud computing revolution is just warming up.  Go ahead and buy IGV up to $55 if you haven’t already.

. . . . SPDR KBW Bank ETF (KBE) – Buy up to $23.50

KBE has muddled along the last few weeks.  Clearly investors are still concerned about bad loans and financial reforms impacting bank profitability.  It’s the same old story about investors hating uncertainty.  And there’s more than enough uncertainty to go around in the banking industry right now.

But I think we got into KBE at the right time.  Banks are out of favor with investors.  And KBE is holding just above key support levels around $21.  So our downside is limited.

As the economy picks up steam, investors will flood back into bank stocks.  And we’ll be there to reap the rewards.  Go ahead and buy KBE up to $23.50.

. . . . iShares Pharmaceuticals Index Fund (IHE) – Hold

IHE’s in a strong uptrend.  And if you disregard the crazy prints from the flash crash, IHE is breaking out to new 52-week highs.

In fact, we’re seeing more interest in healthcare stocks than at any time since Obama took office.  Until now, the sector’s been shunned by investors.  Everyone’s been focused on the unknown impact of healthcare reform.

Now investors are finally getting a handle on healthcare reform.  It’s setting the stage for a big run in healthcare stocks.  Hold tight for now.

. . . . iShares Oil Equipment and Services Index Fund (IEZ) – Hold

IEZ is our play on higher oil prices.  And we’re up more than 11% as I write.

Right now, crude oil is trading around $82 per barrel.  This is toward the upper end of the $70 to $85 trading range.  Oil and commodities in general are benefiting from weakness in the US Dollar.

We should see IEZ continue moving higher in lockstep with oil.  Continue holding IEZ for further gains.

. . . . First Trust NYSE Arca Biotechnology Index Fund (FBT) – Hold

FBT has momentum and set a new peak gain of 9.5% last week.

Many of the large drug makers are staring down the barrel of patent expirations and slow growth prospects.  It’s a recipe for M&A mania.  Big players will seek out new drugs to replace old ones… And their best source is other companies.

French drug maker Sanofi-Aventis (SNY) bid to buy Genzyme (GENZ) went hostile this week.  Investors have bid up GENZ beyond $71, yet the hostile bid only pays $69 per share… Clearly investors are expecting the offer to be bid even higher.

Expect more of this type of M&A action in the biotech industry.  Continue holding FBT for further gains.

. . . . iShares Dow Jones U.S. Consumer Services Sector Index Fund (IYC) – Hold

IYC is charging onward and upward.  Thanks in large part to the August consumer spending and income data.

What’s interesting is how much of the growth in disposable income and spending is due to unemployment.  The government now accounts for a record high 20% of personal disposable income.

Clearly this is unsustainable in the long run.  But government appears committed to shelling out unemployment benefits until job growth accelerates.  So in the end, it’s good for IYC.

The recent rally sent IYC past our buy price.  So hold tight for further gains.

. . . . iShares Dow Jones U.S. Real Estate Index Fund (IYR) – Hold

IYR pulled back a little after hitting a new 52-week high two weeks ago.  The total return of dividends plus share appreciation has pushed our peak gain to over 13%.

IYR should continue its dramatic run higher as economic conditions improve.

Obviously commercial real estate isn’t out of the woods just yet.  But investors’ appetite for bonds is allowing many REITs to raise capital very cheaply.  In the end, cheap financing should lead to higher valuations for REITs and IYR.  Hold tight for now.

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

XSD has battled back from oversold conditions.  The bottom line is investors were overly pessimistic on chip stocks.

It will be interesting to see how industry leaders like Intel (INTC) spin their third quarter earnings.  Remember, Intel had a record setting second quarter.  Then they cut their third quarter guidance in August on weaker than expected PC demand.

I’ll be keeping an eye on Intel when they report earnings next week.  If the quarter turns out better than they thought, XSD could explode to the upside.  Hold tight for now.

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

Transportation stocks have failed to break out of their trading range.  The fact that IYT hasn’t broken out is a bit disturbing to me.  Transportation stocks are usually among the earliest movers in a new bull market.

However, rail traffic continues to increase according to the Association of American Railroads (AAR).  Last week U.S. railroads saw the highest weekly intermodal volume for 2010.  And with leading economic indicators turning bullish, it seems to be just a matter of time before IYT finally breaks out.  Hold tight for now.

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

XLU is hovering near its 52-week high.

Owning utilities can often feel like you’re watching paint dry.  It’s just not too exciting.

But I keep looking at the historical relationship between the 10-year treasury and dividend yield on utilities in the S&P 500.  It seems like something has to give… That potential for a nice move along with collecting a fat dividend while we wait is good enough to keep me in XLU for now.

Hold tight for further gains.

Action To Take

• Move Guggenheim Airline ETF (FAA) from Buy to Hold
• Move iShares U.S. Consumer Services Sector Index Fund (IYC) from Buy to Hold

FYI – I also adjusted the buy price on IYT, XLU, XSD, IYR, IYC, IEZ, and KBE for dividends.

 

Category: SET Portfolio Updates