SET Portfolio Update October 2014

| October 7, 2014

October 7, 2014

October is infamous for being the month of market crashes.

The panic of 1907, the crash of 1929, and Black Monday in 1987 all happened in October. Even the 2008 financial crisis had some of the biggest selloffs during the month of October.

Judging by the recent market action, investors have become fearful of another October meltdown. And this time it’s more than just psychological for investors.

Right now there are several headwinds that are comingling to form a major barrier to stocks moving higher.

The most pressing is the end of QE.  There’s little doubt that the Fed’s bond buying program has been good for stocks. And the stock market didn’t react well to the end of the Fed’s previous QE endeavors.

So, it’s understandable if investors are more than a little nervous about how stocks will react without the Fed support.

What’s more, economic growth around the globe is slowing.

The fallout from the geopolitical conflicts and economic sanctions against Russia are hitting European economies.  And there’s more uncertainty across Asia and South America.

In fact, the good old US of A is looking like the lone safe haven for investors.  And as a result, the US Dollar has been soaring higher over the past several weeks.



As you can see, the US Dollar has been moving higher over the last month after being relatively stable over the last year.

The strength of the US Dollar is unexpected… and it’s contributing to an increase in volatility.  Not surprisingly, it has had the biggest impact on international stocks as well as US sectors like basic materials and energy.

Adding fuel to the fire are the all too real concerns about ISIS and Ebola.  All together these things have formed a major barrier that must be overcome before stocks can move higher.

How will we overcome such a big hurdle?

In a word, earnings.

That’s right, the end of the 3rd quarter means it’s time for a new round of quarterly earnings and some fresh forecasts.

The good news is expectations are low.  So even a 5% uptick in the S&P 500 earnings should be a pleasant surprise to current expectations.

And with all of the stock buybacks, cheap money, and M&A activity, there’s little doubt in my mind that companies in the S&P 500 will clear this low bar.  If we also see organic revenue growth exceed 4% – we’ll have the makings of the next leg higher for the S&P 500.

In other words, I expect the fear that’s dominating the markets right now to give way to greed in short order.  And that will set the stage for a strong finish to the year.

Now, onto the updates…

. . . . First Trust NASDAQ-100 Technology Sector Index Fund (QTEC) – Buy

QTEC is our latest recommendation.  This ETF holds large cap technology stocks that are in the NASDAQ 100.  These large cap tech stocks have been strong performers over the last few years.  And there’s no reason to believe they won’t continue to lead the markets higher from here.  Buy QTEC up to $42.00.

. . . . First Trust Health Care Alpha Dex Fund (FXH) – Buy

FXH has pulled back over the last few weeks.  But it’s holding up much better than some of the other ETFs that are more sensitive to the US Dollar.  If you haven’t already done so, you can use this brief pullback to add FXH while it’s below our $56.00 buy up to price. This healthcare ETF is poised to deliver stellar returns in the weeks and months ahead.

. . . . Global X Social Media Index ETF (SOCL) – Buy

The $20.00 level is not only our buy up to price for SOCL, but it’s also an inflection point. Our social media ETF seems to be magnetized to this level… any time it gets too far away from it, it seems to get pulled right back to $20.00.  Investor sentiment toward social media may be the most volatile thing about these stocks.  But there’s little doubt they are becoming more ingrained in our society than ever before.  That’s the type of business model that can generate huge returns for investors.  Buy SOCL up to $20.00.

. . . . Guggenheim Shipping ETF (SEA) – Sell

The weakness in the global economy (especially China) and the strength of the US Dollar threw a wrench in this trade.  There’s no doubt that a strong US Dollar will hurt the demand for basic materials and oil.  And that’s a big chunk of the shipping business.  As a result, SEA has sold off and triggered our $21.00 stop loss.  The stop loss did its job and got us out of SEA with a manageable 8.1% loss.

. . . . iShares MSCI Global Metals & Mining Producers (PICK) – Sell

PICK is another ETF that has been hit hard by the strength in the US Dollar.  This ETF is full of international metals and mining producers.  It’s not the ETF to be in when the US Dollar starts ripping higher.  Unfortunately, PICK triggered our stop loss at $18.00 per share.  That’s a manageable loss of just 7.6%.  It’s time to sell PICK.

. . . . Market Vectors Unconventional Oil & Gas ETF (FRAK) – Buy

FRAK has been hurt by falling oil prices and the strong US Dollar.  The current fundamentals in the US onshore oil and gas market point to further increases in production.  At the same time, demand for crude oil is expected to weaken.  That’s a difficult situation for players in the unconventional oil & gas segment.  They’ll likely see revenue and earnings growth come up short of their previous estimates.  Nevertheless, I think investors have become too negative toward FRAK.  I think we’ll see FRAK bounce back with a strong 4th quarter.  Grab your shares up to $32.00.

. . . . Financial Select Sector SPDR (XLF) – Hold

XLF has been exhibiting some relative strength over the last few weeks.  This ETF’s next move will be determined by 3rd quarter earnings.  Citi (C), JP Morgan Chase(JPM), and Goldman Sachs (GS) will get things going next week.  Continue holding.

. . . . Guggenheim Solar (TAN) – Hold

TAN is dealing with the bankruptcy of GT Advance Technologies (GTAT), one of the 30 holdings in TAN.  The stock accounted for a little more than 3% of the ETF before GTAT filed for bankruptcy.  Obviously, that’s not great news.  But we’re still up 11% on this trade and the long run fundamentals should provide another lift as 2014 draws to a close. Continue holding…

. . . . First Trust Consumer Staples AlphaDEX Fund (FXG) – Hold

FXG has been in a bullish long-term uptrend.  And it appears to be poised to break out to a new 52-week high above $40.00.  This smart-beta ETF is my favorite way to play the consumer staples sector.  And right now consumer staples are in favor with investors due to the increase in fear and volatility.  Continue holding.

. . . . PowerShares Dynamic Leisure and Entertainment (PEJ) – Hold
. . . . PowerShares Dynamic Media Portfolio (PBS) – Hold

Consumer discretionary ETFs like PEJ and PBS are poised for a strong 4th quarter.  Right now the strong US Dollar is playing havoc with our ETFs that have exposure to commodities and international stocks.  The good news is a strong US Dollar is actually good for the American consumer.  It makes imports cheaper and the drop in commodities usually drives down food and energy costs.  In other words, a strong US Dollar is a tailwind for US consumer spending and the entire consumer discretionary sector. Continue holding.

. . . . Morgan Stanley Cushing MLP High Income Index ETN (MLPY) – Hold

MLPY has pulled back from the 52-week high.  But that’s ok with me… Until it hits our price target, we still get to collect those juicy quarterly dividend payments… Continue holding.

Action To Take

  • Move FXH, SOCL, and FRAK to Buy.
  • Sell SEA and PICK.


Category: SET Portfolio Updates

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