SET Portfolio Update September 2013

September 3, 2013

Dear Sector ETF Trader Reader,

I hope you enjoyed your Labor Day weekend.  Words can’t explain how excited I am for the return of football… I watched too many college games to count and ate more than my fair share of burgers and great BBQ.

The holiday also marked the end of summer and the end of a rough month for US stocks. After a strong start to the summer, US stocks finished with their worst monthly performance since May 2012.

If I had to sum up the recent market action in a word, it’s got to be… uncertainty.

Right now we’re facing issues creating uncertainty with Fed tapering, Syria, and emerging markets.  And the impact of the increase in uncertainty has taken the wind out of the bull market’s sails.

At this point, everyone is looking at 1,560 on the S&P 500 as the level we could see if the correction persists.  This is the 2nd quarter low for the large cap index it hit back on June 24th.  It’s also near another important technical level – the 200-day moving average.

If the S&P falls to 1,560, it will be an 8.7% correction from the 1,709 peak.  A normal correction and certainly nothing to be afraid of as far as corrections go.

On a more upbeat note, the forward looking economic data points for Europe and China are bullish.  The latest readings on the European PMI show the vast majority of European countries manufacturing sectors are expanding.

However, the US economic data was more of a mixed bag.

For instance, just last week durable goods orders, housing, continuing jobless claims, and personal income and spending came in below expectations.  However, consumer confidence and a revision to 2nd quarter GDP growth of 2.5% came in better than expected.

The most important take away from the recent data is the reemergence of global growth. This will likely cause a shakeup of the top performing US sectors.

It bodes well for sectors with a big portion of sales coming from overseas like consumer staples, industrials, technology, and basic materials.

But that’s not all…

The increase in uncertainty can also be seen in the analyst earnings estimates.  In short, earnings growth estimates are very subdued.  And the only sectors expected to have stronger 3rd quarter earnings growth than the S&P 500 are financials, consumer discretionary, and staples.

Looking forward, the August jobs report and the Fed meeting with the potential taper announcement are the two events most likely to move the markets.

The way I see it, there’s the potential for increased volatility in the short run as hot money moves into and out of US stocks.  But any pullback in stock prices should be viewed as a buying opportunity as global growth accelerates.

Now onto the updates…

. . . . First Trust Global Wind Energy (FAN) – Buy up to $11.00

FAN has held steady since our recommendation. And that’s a good sign in a down market. The wind energy industry is on the upswing. The US and other countries are clearly committed to expanding the amount of energy generated by wind power. Grab your shares of FAN up to $11.00.

. . . . First Trust NASDAQ ABA Community Bank Index Fund (QABA) – Buy up to $32.75

QABA has taken a step back as financial stocks have taken a hit from a number of lawsuits against banks for past activities and fears of a collapse in the mortgage business. But don’t forget, the yield curve is steepening and the impact should benefit bank earnings going forward.  Use this pullback to pickup shares of QABA under $32.75.

. . . . Guggenheim S&P 500 Equal Weight Technology ETF (RYT) – Hold

RYT held up well as uncertainty drove investors out of stocks the last few weeks.  In fact, RYT is in a strong upward trending price channel.  Right now, it’s near support of the series of higher lows.  As long as this trend remains intact, we should see more upside in the weeks ahead.  Continue holding RYT.

. . . . Health Care Select Sector SPDR (XLV) – Hold

XLV’s chart looks bullish. It recently pulled back to technical support of the high water mark in May and began moving higher.  What’s more, the move was accompanied by a large influx of money into XLV – $46.8 million – last week.  Continue holding for bigger gains.

. . . . Morgan Stanly Cushing MLP High Income Index ETN (MLPY) – Buy up to $18.50

MLPY is beginning to trend lower. But I don’t see much downside from here.  The bulk of the correction in dividend paying stocks has already occurred.  And MLPY will continue to spit out a solid dividend while we wait for bullish momentum to come back around.  Grab your shares if you haven’t already done so.

. . . . iShares Semiconductor ETF (SOXX) – Hold

SOXX benefited from better than expected earnings last quarter.  But there’s still much uncertainty surrounding many of the big players in the space.  The good news is chip makers stand to benefit from the revival of global economic growth.  And it could result in a nice upside surprise in the pace of sales over the rest of the year.  Continue holding…

. . . . iShares US Industrials ETF (IYJ) – Hold

IYJ came close to reaching our $90 price target.  But the rally fell short as uncertainty crept into the markets the last few weeks.  However, it’s in a good position to outperform other sectors in the weeks ahead.  Manufacturing data around the world shows an acceleration of new orders.  I’m expecting IYJ to make a run at $90 in short order.

. . . . iShares DJ US Home Construction Index Fund (ITB) – Buy up to $23.00

ITB’s problems continue to mount as rising interest rates drive down demand for new homes.  But don’t forget, interest rates are still very low historically.  I believe it’s only a matter of time until buyers adjust to the higher rates.  What’s more, there was a change in regulations at HUD.  FHA loans are now available to home buyers just one year after a foreclosure or short sale.  Previously home buyers were forced to wait for three years. The influx of these new buyers could turn the tide for homebuilders.

. . . . Guggenheim Timber ETF (CUT) – Hold

CUT is currently trading just a few percentage points away from its recent highs.  Bullish demand trends and supply issues should support higher lumber prices.  In fact, timber prices are forecast to eclipse the 2005 high water mark in next few years.  Obviously, the vast majority of timber is used to build new homes.  So the industry is dependent upon the acceleration of new home construction.  And as I pointed out in the update on ITB, I’m expecting an influx of new buyers in short order.

Action To Take

• None at this time.

 

Category: SET Portfolio Updates