Showing You How To Profit From The World’s Hottest Markets
New Feature: “Sector Watch” And “Commodities Corner”… Showing You How To Profit From The World’s Hottest Markets
Monday, March 10, 2008
By Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
Editor’s Note: We’re kicking off a new Smart Profits Report feature for you today, starring two of our experts, Jim Stanton and Lee Lowell. As renowned specialists in their respective fields and professional traders, Jim and Lee boast impressive resumes - and we’re keen to share their knowledge, analysis, and insights with you on a more regular basis. After all, if you want to become a smarter investor and invest like a pro, listening to the guys who’ve been “in the trenches” and know how the market works is a great way to do so.
Jim and Lee will write on rotation, alternating columns each week, bringing you up-to-the-minute analysis on some of the hottest markets and showing you where they’re headed next, so you know how to profit. Lee’s “Commodities Corner” column will focus on the performance of the world’s most important commodities like oil and natural gas, with a future price outlook. Jim’s “Sector Watch” will dig deeper into the forces moving the market by analyzing the performance of the major sectors and showing you the best and worst performers.
Your regular Tuesday and Thursday Smart Profits Report columns will continue as normal. We’re simply adding some diversity to your subscription and bringing you bonus analysis on the most important markets. Of course, it’s still absolutely free, too. So over to Jim with today’s “Sector Watch.”
March Malaise For The Stock Market, As It Gets Set To Test January Lows
Having set their highs last October, the major stock indexes have since endured intermittent selling pressure ever since, as a flood of negative data spooks investors and throws up some significant barriers to the stock market’s progress.
Top of the list is arguably the oft-mentioned liquidity crunch, caused by the meltdown in the subprime mortgage arena and the overall slump in the real estate market.
Since setting their lows in late January, the stock indexes have traced out a sideways consolidation pattern that could last a while longer. While the Dow Industrials and S&P 500 have held up slightly better than the Nasdaq indexes, they all have similar chart patterns. After last Friday’s big selloff, it looks like a test, or break, of the January lows is in the cards.
That’s the background. Now, let’s get into the meat of my regular column here every other Monday. I’m going to break things down a bit and focus on a couple of the major sectors moving the market. One of the best, simplest ways to do that is by looking at the ETFs (Exchange-Traded Funds) that track those sectors…
A 2-Minute ETF Breakdown
Before we get underway, I want to make sure we’re on the same page and that you understand what ETFs are and how they work. That way, you’ll be able to get the most from my columns.
ETFs are one of the fastest-growing investment instruments. Over the past couple of years, we’ve seen a ton of new ETFs hit the market, giving investors a simple way to diversify their portfolio and increase their exposure to different sectors and markets.
And when I say simple, I mean it! While ETFs track a certain sector, market, or index, they trade just like regular stocks. Here are a few other benefits:
- An Entire Market In One Trade: ETFs consist of a group of different assets, which are bundled together and offered as one security. ETFs reflect the performance of the underlying sector/market that they represent. So instead of spending hours scouring the market and researching different stocks, you can benefit from an entire sector/market in just one investment. For example, you can gain exposure to the gold or oil market through one of several ETFs in those areas. And if the price of gold or oil goes up, so too will your ETF. If the British Pound moves higher, the price of the ETF linked to it will rise. If a certain sector is hot, chances are its ETFs will rise. You can also buy ETFs to capture downside action and even ones that double the move of the underlying market.
- Major Diversity And Portfolio Protection: These days, think of an investment area and you can bet there’s an ETF (often more than one) that represents it! There are ETFs that cover geographic regions, countries, indexes, sectors, commodities, and currencies. By investing in an ETF that represents an entire market and includes many different assets, your risk is spread much better and you virtually eliminate the portfolio fallout from a single stock plunge, while also benefiting from the upside growth possibilities of many other stocks.
- Easy To Execute Trades At Any Time: ETFs trade on the major stock exchanges and you can buy them through any brokerage account any time you like and as often as you wish. In this regard, they’re more flexible than mutual funds, which you can only buy at the closing price each day and which typically require a minimum holding period.
- Lower Cost: ETFs are also cheaper than mutual funds. While mutual funds require a minimum investment, you can invest as much money as you want in ETFs. In addition, their maintenance fees are much lower than mutual funds.
- Knowledge Of Holdings: You don’t invest blindly with ETFs. You can easily see the top holdings of any ETF. For example, the Energy Select Sector SPDR (AMEX: XLE) consists of some of the world’s biggest oil and oil services stocks like Exxon-Mobil (NYSE: XOM), Chevron Corp (NYSE: CVX) and ConocoPhillips (NYSE: COP). Many ETFs will also inform you of any changes to the holdings.
Simply put, no matter what kind of investor you are and what your style is, ETFs are a diverse, flexible, and safe way to invest. So let’s get to some analysis…
Technology Tempts The Bears
Pop quiz: Without mentioning obvious sectors like financials, name another area that has performed poorly over the past few months.
This chart should give you a big clue…
While there are some “pure” ETF plays on the technology sector, like the Technology Select Sector SPDR (AMEX: XLK) and the Vanguard Information Technology ETF (AMEX: VGT), the PowerShares QQQQ (Nasdaq: QQQQ) provides a much better representation.
It’s the ETF that tracks the performance of the Nasdaq 100 index, which is heavily weighted towards technology shares. The QQQQ is also one of the most heavily traded stocks in the world, with an average daily volume of 169,660,000 shares over the past three months. Here are the top ten holdings in the QQQQ ETF:
| 1 | Apple, Inc. | AAPL | 13.74% |
| 2 | Microsoft Corporation | MSFT | 6.51% |
| 3 | Google, Inc. | GOOG | 5.63% |
| 4 | Qualcomm, Inc. | QCOM | 4.41% |
| 5 | Research in Motion, Ltd. | RIMM | 3.61% |
| 6 | Cisco Systems, Inc. | CSCO | 3.33% |
| 7 | Intel Corporation | INTC | 3.10% |
| 8 | Oracle Corporation | ORCL | 2.74% |
| 9 | Gilead Sciences, Inc. | GILD | 2.40% |
| 10 | eBay, Inc. | EBAY | 1.90% |
As you can see from the chart, the stock has traded in a sideways pattern since the lows in late January before breaking those lows late last week. With that unimpressive performance as a backdrop, the pattern will resolve itself to the downside.
According to Elliott Wave Theory (named after its founder, Ralph Nelson Elliott), indexes and stocks tend to flow in repetitive (and therefore predictable) wave patterns. Note that the QQQQ has traced out almost a perfect 4-wave decline (out of 5) so far and after making new lows last Friday, it now appears to be entering the 5th wave.
Bottom line: If this theory holds, the QQQQ should trade below $40 before a meaningful rally could get underway.
Bulls Get Back To Basics
“There’s always a bull market somewhere.”
So says Jim Cramer, anyway. On this point at least, he’s right. So while it sometimes seems like the sky is falling, remember that there are always sectors that aren’t.
One of them is the basic materials area - and one of the best-looking ETFs right now is the Basic Materials SPDR (AMEX: XLB). Its robust performance has a lot to do with the bull market in commodities, because XLB is comprised largely of metal, paper, and chemical stocks - all of which have performed well lately. Take a look at its top holdings:
| 1 | Monsanto Co. | MON | 14.97% |
| 2 | E.I. DuPont de Nemours & Co. | DD | 9.81% |
| 3 | Freeport-McMoRan Copper & Gold Inc. | FCX | 9.40% |
| 4 | Dow Chemical Co. | DOW | 8.44% |
| 5 | Alcoa Inc. | AA | 7.66% |
| 6 | Newmont Mining Corp. | NEM | 5.14% |
| 7 | Nucor Corp. | NUE | 4.67% |
| 8 | Air Products & Chemicals Inc. | APD | 4.38% |
| 9 | Praxair Inc. | PX | 4.30% |
| 10 | International Paper Co. | IP | 3.35% |
The chart below is a weekly chart of XLB. As you can see, it has never closed below its weekly uptrend line, which has been in place for 20 months. Notably, even after all the selling we’ve seen over the past several weeks, it’s only about 5 points shy of making new all-time highs.
The chart pattern looks like a bullish consolidation pattern and, barring a collapse in commodities (an unlikely scenario right now) and a weekly close below $37.50, XLB should perform well once the selling in the indexes is complete.
That’s all for this edition. I’ll touch base with you again in a couple of weeks.
Jim
