SET Portfolio Update October 2012

| October 2, 2012

October 2, 2012

Dear Sector ETF Trader Reader,

As we roll into October, Major League Baseball pennant races are heating up, the NFL finally has real officials, POTUS debates are starting, and the stock market is consolidating after a summer rally.

One thing’s for sure, October is shaping up to be an exciting month.

First off, let’s take a look at a chart of the S&P 500.


As you can see, the recent price action in the large cap index has been extremely bullish. The rally off the June lows has broken out to a new 52-week high.  And despite a few lackluster weeks, it’s holding above the support of the uptrend (green line).

As they say, the trend is our friend.  And this bullish uptrend indicates there’s more upside in the weeks ahead.

However, the rally is facing headwinds from a difficult macroeconomic backdrop.

For instance, economic data’s pointing to slower economic growth… Europe’s sovereign debt crisis still isn’t solved… The fiscal cliff in the US is looming in January… And earnings season is about to get underway…

The good news is none of these headwinds are taking investors by surprise.  We’ve known about these challenges for months.  Yet the S&P has surged 13% over the last four months.

Obviously, the stock market has rallied despite these concerns.  And it should continue to “climb a wall of worry” going forward.

In fact, the recent pullback should be treated as a buying opportunity.

Don’t forget, the Fed’s new bond buying program, QE3, is just getting underway.  But the effects of the new monetary stimulus won’t be reflected in the economic data for a few months.

So buckle your seatbelt, we’re likely on the verge of the bull market rally’s next leg higher.

Now onto the updates…

. . . . First Trust Internet Index Fund (FDN) – Buy up to $39.50

FDN hasn’t had a chance to do much yet.  The markets have been consolidating since the monthly issue came out a few weeks ago.  But the ability to monetize mobile internet is going to be a huge lift for internet stocks going forward.  Grab your shares of FDN up to $39.50.

. . . . iShares Dow Jones US Basic Materials (IYM) – Buy up to $70.00

IYM has been up to a high of $72.18 but it’s recently fallen back below our $70.00 buy up to price.  Don’t be fooled by the recent weakness, IYM’s still in an uptrend and it’s now above the key 200-day moving average.  This is clearly a bullish chart indicating more upside in the weeks ahead.  Use this pullback to grab your shares of IYM up to $70.

. . . . SPDR S&P Oil & Gas Equipment & Services (XES) – Buy up to $36.00

After a fast start, XES has had a rough few weeks.  But there’s no reason to panic.  As I’ve stated before, big institutional traders flooding into and out of oil futures can amplify swings in oil prices.  And that’s exactly what happened over the last few months.  Traders flooded into long oil futures before QE3 was announced and they’re flooding back out just as quickly since it was announced.  The ensuing downdraft in oil prices has taken a toll on XES.  But with QE3 just getting started, traders will be back to bidding up oil futures soon. Once crude oil prices begin moving higher, XES should follow suit.  Grab your shares of XES up $36.00.

. . . . iShares Dow Jones US Pharmaceuticals (IHE) – Hold

IHE hit a new high of $91.64 this month. As expected, strong fundamentals are fueling an industry-wide rally. The recent surge sent IHE past our buy up to price. Continue holding for bigger gains.

. . . . Market Vectors Agribusiness ETF (MOO) – Hold

MOO surged to a new high of $53.19 before pulling back to $52.21 this week.  We’re still sitting on a solid 6% gain.  Our Agribusiness ETF is battling a level of technical resistance around $53.  But there’s no denying the ETF is also in a strong uptrend off the June low. I’m expecting MOO to continue consolidating in the short term.  But the uptrend should eventually lead MOO to break through $53 and continue on toward our $56 price target.

. . . . ALPS Alerian MLP ETF (AMLP) – Hold

AMLP hit a new high of $16.77 last week.  Our MLP ETF is now up more than 7%.  Clearly, investors are searching out ways to add yield to their portfolio.  And AMLP’s juicy 6% dividend yield is too tempting for them to resist.  Continue holding AMLP for bigger gains ahead.

. . . . First Trust ISE Revere Natural Gas Index Fund (FCG) – Hold

FCG is riding high as natural gas prices continue to surge.  Our ETF is currently trading for $17.59.  That’s good enough for a 13% gain.  Amazingly the rally in FCG pales in comparison to the rise in the commodity itself.  In fact, natural gas prices are at their highest level since last December.  The good news is I don’t expect FCG to continue lagging behind.  I think we’ll see FCG make a big move higher to catch up with the move in natural gas prices.  Continue holding for bigger gains.

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

PSCH is now trading for nearly $37 per share.  That’s a solid 9% gain over the last few months.  But there’s still more upside for healthcare stocks.  Continue holding for bigger gains.

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

XHB hit another new high this month.  Our homebuilder ETF surged to $26.16 before pulling back to $24.70.  Right now we’re sitting on an impressive gain of more than 15%.  But XHB’s rally is far from over.  New home construction is on the upswing for the first time since the real estate bubble burst.  As construction ramps up to meet demand, XHB is sure to follow suit.  Continue holding XHB for bigger gains.

. . . . SPDR S&P Retail (XRT) – Hold

XRT has taken a step back after breaking out to a new 52-week high.  In fact, XRT has fallen back to the support zone of the previous high.  This is the same technical resistance level XRT broke through last month.  And once a resistance level is broken, it becomes a new support.  I’m expecting XRT to consolidate at these levels before moving higher once again.  Continue holding XRT for further gains.

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

IGV is stair-stepping its way higher.  Our software ETF rode a wave of optimism back to the 52-week high before running into resistance.  Much like the overall market, IGV’s uptrend is still intact.  And after a period of consolidation, I’m expecting IGV to explode to the upside again.  Continue holding IGV.

Action To Take

  • Move SPDR S&P Oil & Gas Equipment & Services (XES) to Buy
  • Move iShares Basic Materials ETF (IYM) to Buy
  • Move iShares Pharmaceuticals Index Fund (IHE) to Hold


Category: SET Portfolio Updates

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