SET Portfolio Update September 2012

September 4, 2012

Dear Sector ETF Trader Reader,

I hope you enjoyed your Labor Day weekend.

The holiday marks the end of summer and the beginning of a new school year.  And thankfully, the start of football season!  It’s also time for the big players to get back to work on Wall Street.

It will certainly be interesting to see how the market performs over the next few weeks. Will it continue to follow the bullish uptrend?  Or will the bears take control?

Here’s what we do know…

At the beginning of the summer, the European debt crisis was at a critical point.  Investors were afraid things were about to go very badly for the Euro and the entire financial system.  It sent the S&P 500 spiraling down to a low of 1,266 on June 4th.

Thankfully, the ECB has put Europe’s sovereign debt problems to bed… at least for now. And the S&P has responded with an 11% rally off the June low.

The markets are obviously ending the summer much stronger than they began.  However, we’re now dealing with two items that could spell trouble for stocks… at least in the short run.

First off, the rally in the S&P is at a technical resistance level.  As you can see, the summer rally has pushed the large cap index back to the bull market high around 1,420.

 

Don’t forget, anyone who bought back at the highs in April has ridden the S&P down and back up.  Now they will likely take this opportunity to get out of their trades at breakeven.

Additionally, traders who bought at the bottom back in June are locking in their sizeable profits at this level.

As you might suspect, whenever we have two groups of traders (those who bought good in June and those who bought bad in March) selling at a particular level, it will create a strong level of resistance.

It will likely take an outside catalyst to spur the S&P past this technical resistance level. And unfortunately, that catalyst isn’t economic data.

In fact, economic data has been downright ugly.

A quick look at any number of economic data points from around the world indicate the same thing… economic growth is slowing.  If it continues, we’ll eventually slide into another recession. And that’s not good for stocks or our ETFs.

The good news is we’re likely already past the bottom of slowing growth.

I believe growth really hit the brakes because of the uncertainty in Europe earlier this year.  Businesses were simply taking a wait and see attitude.  And we’ll likely see the fallout from this period of indecision continue to impact economic data over the next few months.

Don’t forget, big companies aren’t quick on their feet.  It often takes weeks or even months for a decision at the top to filter down to the front lines.

In the end, I think we’ll look back and see the peak in slowing economic growth coincided with the peak in fear about the European debt crisis.  That’s good news long term.

For now, we’re stuck with weak economic data and a stock market at technical resistance.  And that means we’ll likely see the stocks continue to consolidate at these levels.

Now onto the updates…

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

IYM is off to a slow start.  But don’t forget, the time to buy basic materials is when the business cycle is near the trough.  And I believe we’ve already passed this point.  As soon as investors catch a hint of accelerating economic growth, this sector is off to the races. Grab your shares of IYM up to $70.

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

XES has fallen back to around $33.25.  The ETF ran into resistance at the 200-day moving average a few weeks ago.  And traders took the opportunity to lock in some profits at this technical resistance level.  But this should prove to be a minor hurdle as XES continues moving higher in the weeks ahead.  Grab your shares of XES up to $36 if you haven’t already.

. . . . iShares Dow Jones US Pharmaceuticals (IHE) – Buy up to $90.00

IHE continues to consolidate in tight range around $87.  This looks like a bullish continuation pattern to me.  It’s holding above the 50-day and 20-day moving averages. I’m expecting big things from drug stocks going forward.  Grab your shares of IHE now, before it moves past $90 for good.

. . . . Market Vectors Agribusiness ETF (MOO) – Buy up to $50.50

Analysts can’t agree on the impact the drought will have on Agribusiness stocks.  I can tell you I believe it is extremely bullish.  Don’t forget, the US is coming off a few record years for net farm income.  So it’s not like farmers were hurting before the drought hit.  In fact, farmers may be better equipped to rebound from a bad year better than at any time in the last 30 years.  And they’ll be spending big bucks to ramp up production to reap the rewards of record high grain prices next year.  Grab your shares up to $50.50.

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

AMLP is trading for $16.34.  Our MLP ETF is up about 5%.  It’s been trading in tight range the last month.  And it will likely continue trading in this range.  Don’t forget, we’re looking to collect dividends and profit from the build out of energy infrastructure over the long term with this ETF.  Continue holding for more cash payouts and upside down the road.

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

FAA has been in a tailspin the last few months.  Clearly, rising oil prices are putting pressure on the airline stocks.  FAA is on the verge of breaking below the support level around $27.50 to $28.  At this point, were only down about 5%.  But I think oil prices are going higher and there’s no reason to wait around waiting for higher oil prices to knock FAA even lower.  Sell FAA now to conserve capital.

. . . . First Trust ISE Revere Natural Gas Index Fund (FCG) – Buy up to $16.50

FCG is the beneficiary of rising natural gas prices.  Prices have jumped 44% since the April low.  But as prices have risen, production has also picked up.  US natural gas inventories are once again swelling to record levels.  This should only be a temporary speed bump as FCG cruises to much higher prices.  Buy your shares of FCG up to $16.50 before it cruises past this level for good.

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

PSCH has shown considerable relative strength over the last few weeks.  It’s continued to climb higher as the broad markets fell back.  This is a good sign for PSCH.  We’re currently up more than 7%.  And I’m expecting it to continue moving to the upside.  Hold PSCH for bigger gains.

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

XHB is breaking out to new highs.  We’re now up more than 10% on our homebuilders ETF. And for good reason… housing represents our economy’s best chance to reignite the flames of economic growth.  A revival of construction jobs and all of the jobs that feed off of a strong real estate market would do wonders for our economic growth.  Not to mention, it would send homebuilding stocks soaring.  Continue holding XHB for bigger gains.

. . . . SPDR S&P Retail (XRT) – Buy up to $62.50

XRT is benefitting from a strong back to school season.  August same-store sales rose 3.6% at US retailers.  It was a much stronger showing than the 2% rise in sales analysts were expecting.  Clearly, the American consumer is alive and kicking.  Feel free to buy XRT up to $62.50.

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

IGV has come storming back lately.  We’re now up about 8% from our original buy price. However, the rally in software stocks has lagged behind the S&P.  As I pointed out earlier, the S&P has already made it back to its bull market high.  But IGV is still down 5% from the April high.  I think IGV will make it back to those highs in the weeks ahead.  Continue holding IGV for bigger gains.

Action To Take

• Sell Guggenheim Airline ETF (FAA)

 

Category: SET Portfolio Updates