SET Portfolio Update October 2011

| October 4, 2011

October 4, 2011

Dear Sector ETF Trader Reader,

It’s been an ugly five months since the S&P 500 peaked in early May.

At the time, we were riding high on Fed stimulus induced optimism and the elimination of public enemy #1, Osama bin Laden.

Now the large cap index is down 19% from the April 29 closing high.  And small cap stocks aren’t doing any better.  The Russell 2000 is down 30% over the same time.

What’s behind the market meltdown?

There’s been a litany of bad news over the last five months.  We’ve had sovereign debt crises, credit rating downgrades, and toxic politics just to name a few.  And over time, each piece of bad news has slowly chipped away at investor optimism.

Finally, investors are throwing in the towel.  They’re selling everything… stocks, commodities, gold, you name it.  It’s all being thrown on the trash heap as investors seek safety of good ol’ cash.

And now the final straw…

Last week the Economic Cycle Research Institute (ECRI) indicated the US economy is doomed.  For the first time, they publicly acknowledged nothing can be done to prevent the US economic slowdown from sliding into recession.

Ughhh… that’s bad news.

You see, ECRI has correctly called the last three recessions with no false alerts in between.  A perfect record…

Here’s how…

ECRI studies leading indicators.  These indicators show what the economy will be doing next month, six months from now, or even a year down the road.

Right now, these indicators show the economy is slowing.  And it’s slowing in a way seen when we’re about to dip into recession.

As a result, ECRI is able to conclude with a high degree of certainty that the US will be in a recession within the next six months.

What’s more, one technical indicator I’m following could put the final nail in the stock market’s coffin… And officially send us into a new bear market.

You see, the S&P 500 is in danger of falling below its 200-week moving average.

The chart below shows the S&P 500 has fallen below the 200-week moving average (gray line) only twice in the last twenty years.  And both times it marked the beginning of a new bear market.


It happened in March of 2001 and again in June of 2008.

From March 2001 to July 2002, the S&P 500 fell a gut wrenching 30% after closing below the 200-week MA.

And again from June 2008 to March 2009, the large cap index fell an eye-popping 45%.

As you can see, the 200-week moving average is a key technical support zone.  If this level doesn’t hold now… the S&P 500 is likely to fall another 30% to 45%.  That would knock another 340 to 500 points off the index.  And that’s just scary…

Here’s what to look for in the weeks ahead…

If the S&P 500 closes below the 200-week moving average at 1,144 this week, it’s a big red flag.  But it’s not the death knell for stocks.

However, if the index stays below the 200-week moving average for an entire week,it’s a good bet we’re in a new bear market.

But don’t jump the gun… If the S&P 500 can rally above 1,144 this week, there’s still hope we’ll avoid falling into a bear market.

Here’s the silver lining…

Stocks are already pricing in a recession.  So we could see stocks rally even if the US economy continues to slow.

Clearly, there’s downside risk.  But at this point, if we don’t have another trigger like Lehman Brothers collapsing in 2008, I think the markets will step back from the brink.  We may even see them begin moving higher before the end of the year.

Position Updates

. . . . SPDR S&P Semiconductor Fund (XSD) – Buy up to $49

XSD is down a little bit.  But so is just about every sector of the market.  More importantly, XSD’s holding above our $39 stop loss.  And if the economy doesn’t implode, I think semiconductor stocks are a screaming buy at these prices.  Go ahead and buy XSD up to $49 if you haven’t already.

. . . . SPDR S&P Retail Fund (XRT) – Buy up to $49

XRT is holding up well in a down market.  That’s a clear indication of relative strength in retail stocks.  If the market finds a bottom and moves higher, XRT should be among the strongest performing sector ETFs.  Don’t forget, retailers are doing a great job of generating earnings growth despite weak economic growth.  Go ahead and buy XRT up to $49 if you haven’t already.

. . . . PowerShares S&P SmallCap Energy Portfolio (PSCE) – Sell

PSCE took a big hit as negative economic data drove down oil prices.  PSCE closed below our $28.50 stop loss on September 22nd.  And that’s our cue to sell.  At some point down the road, oil prices will rebound and small-cap energy stocks will come screaming back. But for now, we’re out of PSCE.

. . . . Utilities Select Sector SPDR (XLU) – Buy up to $34

XLU is stable.  And that’s a great thing in today’s uncertain market.  In fact, XLU hit a new peak gain of over 5% this month.  Clearly, investors are moving into utility stocks for their defensive qualities and a solid 3.9% dividend yield.  I can’t think of a better sector to be in with so much uncertainty in the market.  Go ahead and buy XLU up to $34.

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

GDX is all over the map.  Just last month it was hitting new highs as gold prices sky-rocketed above $1,900.  Now, gold prices are down around $1,600 and mining stocks are taking it on the chin.  I think the US Dollar is to blame.  You see, the dollar is exploding higher as investors flee the Euro.  And as the dollar rallies, it drives down the price of gold in terms of US Dollars.  Until the Greek debt crisis is resolved, I think the US Dollar will continue to rally and keep downward pressure on gold prices.  Keep an eye on your stop loss at $50.

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

REZ shares are down 12% in the last month.  Investors are clearly afraid a Greek default will be bad for residential REITs.  Remember, REITs are heavily dependent upon credit to operate.  If a Greek default causes credit markets to freeze up, then REITs are going to have a hard time operating.  REZ has seen volatility pick up dramatically as a result.  But as long as we avoid another credit crisis, REZ should be just fine.  And any pullback below $41 is a good buying opportunity.

. . . . Market Vectors Agribusiness (MOO) – Sell

MOO fell below our $45 stop loss on September 22nd.  As a result, everyone should have sold MOO on the market open of the 23rd.  Obviously, I’m disappointed in MOO’s performance.  In the long run, I expect Agribusiness stocks to do very well.  But when the market moves against us, we stick with our system.  And that means we’re out of MOO for now.

Action To Take

  • Sell Market Vectors Agribusiness (MOO)
  • Sell PowerShares S&P SmallCap Energy Portfolio (PSCE)


Category: SET Portfolio Updates

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