Exchange Traded Funds: ETFs:ETF Trading System:Wall Street Sector Selector

Dear Investor:

On February 24, we went to the “green flag” mode, expecting higher prices ahead.

Since then, the S&P 500 has rallied +3.9% and our Standard Portfolio has gained +5.1%.

Our current positions look like this:

EWW: iShares Mexico Index:                   +4.4%
IWM: iShares Russell 2000 Index:           +6.2%
XHB: SPDR Homebuilders Index:            +4.9%
XLI: SPDR Industrials Index:                    +4.5%
XLY: SPDR Consumer Discretionary:      +5.5%

The only disappointment in the picture was that our 2X bid gapped open above our limit price and so missed this impressive short term move.

Now, of course, the big question is, “How Far Can this Rally Go?

Looking At My Screens

By any measure, the general indexes and most sectors have entered a dynamic uptrend in the face of mixed economic news.

The S&P is well above its 50 and 200 Day Moving Averages and the MACD is on a strong uptrend.

But the flies in the ointment are that the general indexes and most sectors are now vastly overbought two gaps higher over the last five days of trading indicate the possibility of a retracement to below the 1120 level.

The other issue that remains to be resolved is if this market has the power to break through the 1150 level on the upside where you can see significant resistance just ahead at the January highs.

For the week, all sectors were in strongly positive columns with Consumer Discretionary, Materials and Financials leading the way.

The View from 35,000 Feet

A quick review of last week’s activity shows us an improving picture, although one with still serious concerns.

On the upside, factory payrolls were up in the ISM report and the unemployment report came in better than expected along with same store retail sales that climbed by +4.1% year over year. Temporary hiring improved substantially, growing by 48,000 which is generally seen as a precursor to job growth ahead and “only” 469,000 initial weekly unemployment claims were filed, resuming a downward trend that had been interrupted the two weeks prior.

Still, pending home sales declined -7.6% in January and RealtyTrac forecasts that as many as 3.5 million homes could be foreclosed upon in 2010 up from 2009’s record 2.8 million as more and more underwater homeowners opt for “strategic defaults.” Doesn’t that term have a nice ring to it? In the old days, default had a distinctly negative connotation but in our new “Alice in Wonderland Economy” default is now a new strategic plan.

Also interesting on this front is that people are opting to default on their homes while keeping their credit card payments up to date which is a chilling development for the real estate industry and can possibly be explained by the fact that these folks figure they might need their plastic to live on in coming months.

U6, officially defined as the “total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force” rose to +16.8% from +16.5% which means that “total unemployment” actually rose for the month.   Bottom line is that 14.9 million people don’t have jobs and another 8 million or so are involuntary part timers.

What It All Means

Overall, we have an economy whose growth is still “unsustainable” on its own according to Chairman Bernanke’s recent testimony and an employment situation that is only modestly improving, at best. Real estate is traditionally a leading sector coming out of a recession but still shows weakness on both the residential and commercial fronts. We’re down 8.4 million jobs since 2007 and need to create 100,000 jobs a month just to break even.

The only reasonable conclusion to all of this is slow growth being the best case and a double dip recession being an increasingly likely possibility as the stimulus measures run out later this year. In any case, I believe that we have a long, slow slog ahead of us.

All of which brings us back to our first question, “How Long Can This Rally Go On?”

My answer to that is no one knows but that I’m counting on our indicators to move us to the right side of the market whatever happens going forward.

The Week Ahead

Compared to last week, this week’s economic news will be positively boring with the following major reports on tap:

Wednesday: January Wholesale Inventories

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims,

Friday: February Retail Sales, March Michigan Consumer Sentiment, January Business Inventories

Sector Spotlight:

Leaders: Biotech, Metals and Mining, Steel

Laggards: Natural Gas

I was in Seoul, South Korea this week and noticed some very interesting contrasts to what is happening in the United States. I stay at the very upscale J.W. Marriott which is connected to the Shingase shopping mall which features the likes of Bulgari, Chanel and Mont Blanc. In 2008, the hotel and mall were virtual ghost towns, but this week the stores were full and the hotel lobby was packed with businessmen doing deals and entertaining clients at the lavish lobby bar. Clearly, South Korea is experiencing the “V” shaped recovery that everyone here is hoping for but that unfortunately appears unlikely to materialize.

All the best,
John
John Nyaradi
Publisher
Wall Street Sector Selector