SET Portfolio Update September 2010

September 7, 2010

Welcome back to the roller coaster ride we call the stock market.  I hope you had a great Labor Day weekend.

It was great to see the markets go into the long weekend on such a strong note.  But we’re already seeing some selling pressure today.

Clearly the volatile range bound trading isn’t going away.

But don’t get the wrong idea.  There’s still money to be made.

In fact, the latest upswing sent three of our ETFs to new highs.

We were also able to book a 15% gain on our Market Vectors Junior Gold Miners ETF (GDXJ) last week.  And today we’re taking a 10% gain on the Rydex S&P Equal Weight Materials ETF (RTM).  See all the details below…

It’s not too shabby grabbing gains like those in a flat market.

As always, we’re looking for clues to the markets next move.  I’m digging into the economic data, technical analysis, and investor sentiment readings.

And you know what?  I’m really excited by what I see.

Right now everything points toward a period of slowing growth.  But there’s no indication we’re heading for a double dip recession.

Remember, periods of slowing growth within a cyclical upswing are normal.  And the vast majority of times, slow growth doesn’t turn into a recession.

But because investors are so pessimistic today, they’re already pricing in a double dip.  In fact, individual investors are overly bearish.

The last time they were this down on stocks was back in March of 2009.  Then the S&P 500 went on an 83% rally over the next 13 months.

Clearly where we’re at is an extreme in market confidence.  And extremes in market confidence are often turning points.

The result?

A period of slowing growth within a cyclical upswing looks like a great buying opportunity. And with market confidence at extremely low levels, we could be at the beginning of a new bull market rally.  So hold on tight!

Now for the updates…

Position Updates

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

KBE initially traded down after our recommendation.  But it came roaring back last week. Everyone should have been able to buy this ETF at a great price.  But if you haven’t already, go ahead and buy KBE up to $23.50.

Right now the US banking sector is separated into have and have nots.

There are 7,932 banks insured by the FDIC in the US.  But only the largest banks (like the ones in KBE) are benefiting from the current regulatory environment.

So when you hear there are 829 banks on the FDIC problem bank list, remember one thing. The small banks are in trouble.  We’ll see large banks profit from taking over the assets of small failed banks… And that’s great news KBE.

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

IHE’s uptrend looks strong.  It’s continuing to set a series of higher highs and higher lows.

A recent report from UBS shows the huge potential for drug makers in developing countries.  A mindboggling 70% of sales growth will come from selling existing drugs in new markets.

Clearly the big name drug makers have huge growth potential.  Continue holding IHE for further gains.

. . . . iShares Oil Equipment and Services Index Fund (IEZ) – Buy up to $41.50

IEZ is closely tied to oil prices (I know, it’s a shocker…).

For the better part of the year, oil has bounced around a range between $70 and $85 per barrel.  After touching $71 a few weeks ago, oil is heading higher again.  Right now it’s trading for around $75 a barrel.

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 hit a new high Friday as biotech stocks build momentum.  It’s now above our $33.25 buy up to price.

We’re beginning to see M&A activity heat up.  French drug maker Sanofi-Aventis(SNY) offered to buy Genzyme (GENZ), one of FBT’s holdings, for $18.5 billion.  Shares on GENZ shot up 30% on the news.  The initial offer was refused but an increased offer is rumored to be in the works.

This is just the type of action we’re looking for with FBT.  Continue holding for further gains.

. . . . iShares Dow Jones U.S. Consumer Services Sector Index Fund (IYC) – Buy up to $61.00

IYC got a lift from better than expected back to school sales in August.  And upbeat reports on jobs and consumer sentiment added fuel to the fire.

However, investors remain overly pessimistic toward consumer stocks.  Many of them are pricing in a double dip recession.  As investors expectations come back in-line with reality, IYC is set to soar.

Go ahead and buy IYC up to $61.

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

IYR hit a new high on Friday.  Despite the troubles in real estate, REITs are poised to continue their strong performance.

Vacancies in apartments, offices, retail, and self-storage complexes have stabilized.  In fact, occupancy rates in apartments and offices are much higher than a year ago.

Clearly the commercial real estate market has seen major improvements.  Continue holding IYR for further gains.

. . . . Rydex S&P Equal Weight Materials ETF (RTM) – Sell

RTM hasn’t done much but bounce around its trading range lately.  Over the last three months, it tested the outer limits of $48 and $55 on numerous occasions.  But it remains entrenched in this range.

Right now RTM is at $54.61.  This is near the upper limits of its established trading range. Let’s go ahead and lock in our 10% gain on RTM.

In the long run, RTM has the potential to go much higher.  But headwinds in the short term are limiting its potential.  We’ll look to get back into the materials sector at a better price down the road.  Go ahead and sell RTM.

. . . . SPDR S&P Semiconductor (XSD) – Buy up to $48.00

Intel (INTC) confirmed speculation of slowing PC demand.  It’s certainly put a dent in chip stocks over the last month.

At this point, the bad news has been priced in and then some.  XSD held above our stop loss through it all.  And we’re only down about 5% from our entry point.

The good news is expectations are much lower than a few months ago.  Now any earnings surprises in the coming quarter could spark a strong bounce back rally.  Go ahead and buy XSD up to $48.

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

Transportation stocks continue to show good relative strength.  IYT has consistently posted bigger gains and smaller losses than the S&P 500 over the last three months.

This is good sign for the entire market.  Remember, demand for shipping is a great indicator of economic activity.  My favorite is rail traffic.  Just last week the four week average of rail traffic surged to another yearly high.  That’s great news for IYT, continue holding for further gains.

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

XLU is attempting to break out of its trading range.

The low yields in the bond and Treasury market are certainly helping.  Right now the spread between 10-Year Treasury yields and utilities stock yields is extremely wide.

It makes XLU’s yield of over 4.1% extremely attractive to income investors.  And the longer Treasury yields stay at depressed levels, the more interest income investors will have in XLU.  Hold tight for now.

. . . . Market Vectors Junior Gold Miners (GDXJ) – Sell

We sent out a special email to sell GDXJ last week.  We booked a solid 15% gain.

If you haven’t already, go ahead and sell GDXJ.  We’ll look to get back into gold miners on a pullback down the road.

Action To Take

• Sell Market Vectors Junior Gold Miners (GDXJ) for 15% gain.
• Sell Rydex S&P Equal Weight Materials ETF (RTM) for a 10% gain.
• Move First Trust NYSE Arca Biotechnology Index Fund (FBT) from Buy to Hold.

 

Category: SET Portfolio Updates