Dear Bottarelli Research Reader,
Over the past few weeks, we’ve taken a good look at Exchange Traded Funds (ETF). You know, the funds that buy up shares of supposedly similar companies, bundle them together, and then sell shares of the whole kit and kaboodle on the stock market.
The idea is that investors who want exposure to a given sector shouldn’t have to do the spade work investigating individual companies. The ETF does it all for them.
It’s a nice concept, but these ETFs can hide more than a few flaws when it comes down to execution.
This week, we’ll look at two more ETFs that couldn’t be more different.
But first, we can’t go another second without looking at Tuesday’s breakdown on the Dow Jones Industrials (DJIA).
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The Current Situation
As you’ll see, our bearish forecast continues to play out…
We’re now looking at the fourth red candlestick in four weeks – and this one isn’t as timid as last week’s. So far, the DJIA has lost some 5.6%. Rough stuff, but still not a full 10% to 15% correction.
Volume is returning but it’s not the kind of volume investors usually like, because it’s mostly sellers looking to secure gains before the Fed takes away the punch bowl and closes down the party.
The Sellers Cross on Moving Average Convergence/Divergence (MACD) continues to widen. There is no longer any doubt that we’re in full-on sell mode now.
Finally, the Accumulation/Distribution (A/D) oscillator has rolled over and is now confirming that a sizable plurality of investors would just as soon have cash right now, thank you very much.
With all the indicators backing us up, we stand by our initial price target of Dow 14,429 – but warn that if the bears can break this support level, things will get ugly fast.
The Telling Details
Now, let’s get back to those ETFs…
Sure, they’re certainly a convenient way to measure and trade specific sectors. However, as we have seen, some of these ETFs can wander pretty far off the mark.
In last Saturday’s Bottarelli Research LEAPS alert, we showed members a really esoteric niche ETF called the S&P Biotech SPDR (XBI – NYSE).
This ETF groups smaller biotech companies that are supposed to have intriguing products moving through their pipelines.
Occasionally you’ll see currently profitless companies, but the potential for explosive growth is always there. And indeed, one of the two option plays we selected for subscribers is already running this week. By the time you read this, it may already be logged in the portfolio’s gains column.
But beyond the specific components, you may want to take a look at the XBI as a pure stock play.
XBI Strong in Both Long and Short Term
The chart for the XBI (below) has been in an upswing since August 2011. As you can see, it has gained as much as 132% over that stretch.
But within that uptrend, the XBI has offered up 11 different 3x Buy Signal Stacks, with the latest coming just this week. The median follow-on gain for the first ten stacks was 17.80% and the average follow-on gain was 20.27% A similar gain now would see the XBI reach $136.87, for net gains from current price of 15.63%.
Now, 15% may not compare to the sort of gains you can get out of leveraged option plays. But at the same time, there is no threat of declining time value on a pure stock play like this.
Plus, it can be difficult to follow these small biotech companies one by one – especially as they move their drugs through the FDA’s hoops.
In the end, this is a very simple way to gain exposure to one of the only stock sectors that’s really bucking the Dow’s broad downtrend.
Just keep in mind that this is a very speculative business. If two of the companies on this list get turned down by the Feds in one week, it can drag down the whole group. But on the flip side, one approval can send the whole ETF flying.
That’s your “sizzle” play for today.
Now, let’s take a look at some real meat and potatoes.
Vanilla Goes Sour
I’ve been told that the most boring ETF in the world just has to be the Consumer Staples SPDR (XLP – NYSE).
Seriously, folks have been known to face plant on the table when I bring it up in meetings and conferences. But that’s their loss, because there really is some serious intrigue going on behind the scenes in this “vanilla” ETF.
Let’s start with the XLP’s chart…
Over the past year, the XLP has gained as much as 26.6%. That’s some serious gains for “mere groceries.”
However, this summer, the ETF took a real “double tap” to the head, with a double top at the top of the trend and two full 3x Sell Signal Stacks.
Price has already dropped back as much as -6.3%, and it will hit short-term support at the 38.2% retracement marker at $38.60 shortly. This is a real line in the sand. If it doesn’t hold, then the XLP will quickly double its losses.
What could be plaguing this sector that used to be considered as stable as the rock of Gibraltar?
The top four components of the XLP are really in very different businesses…
- Procter & Gamble (PG – NYSE): PG manufactures and sells five segments of branded consumer packaged goods under brand names such as Head & Shoulders, Gillette, Crest, Vicks, Dawn, Downy, Duracell, Febreze, Gain, Tide, Bounty, Charmin, Pampers, and Iams dog food.
- Coca-Cola Company (KO – NYSE): Coke is an icon unto itself, but the company also manufactures, markets, and sells Diet Coke, Coca-Cola Light, Coca-Cola Zero, Sprite, Fanta, Minute Maid, Powerade, Aquarius, Dasani, Glacéau Vitaminwater, Georgia, Simply, Del Valle, Ayataka, and I Lohas.
- Philip Morris International (PM – NYSE): PM manufactures and sells “the evil weed.” We’re talking about cigarettes and other tobacco products like Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, and Philip Morris, both here in the U.S. and overseas. They also own various local cigarette brands, such as Sampoerna, Dji Sam Soe, and U Mild in Indonesia; Fortune, Champion, and Hope in the Philippines; Diana in Italy; Optima and Apollo-Soyuz in Russia; Morven Gold in Pakistan; Boston in Colombia; Belmont, Canadian Classics, and Number 7 in Canada; Best and Classic in Serbia; f6 in Germany; Delicados in Mexico; Assos in Greece; and Petra in the Czech Republic and Slovakia.
- Wal-Mart (WMT – NYSE): WMT is the odd man out in this set. It makes nothing, but sells everything imaginable from milk and butter to eyeglasses to gasoline and truck tires through 10,800 stores under 69 banners in 27 countries and e-commerce sites in 10 countries. To give you a sense of Wal-Mart’s vast scale, revenue for the past 12 months was some $473 billion.
So, what could damage four different colossi — all in different businesses, but all ostensibly locked into households across America and indeed around the world?
One ugly fact ties them all together here in the States: Their customers are getting poorer across the board.
The Recession That Just Won’t Quit
According to the latest Pew poll, median American income is actually lower now than it was during the Great Recession.
In 2009, median income of U.S. households was $52,195. And in the two years since the end of the recession, median household income has fallen by 4.1%.
In fact, for many families the recession never ended, because the drop in household income from 2009 to 2011 was almost exactly the same as the drop in income in the two years of the “official” recession.
Here’s the chart that Pew used to illustrate just how bizarre and unusual this is:
The Real Jobs Situation
Pew’s lead researcher, Rakesh Kochhar, concluded that the full extent of job losses did not peak during the recession. Rather, the share of families with at least one unemployed member nearly doubled during the Great Recession — and remains at a high level today.
In 2007, 6.3% of the nation’s families had at least one unemployed member. That share jumped to 12.0% in 2009 and declined modestly to 11.5% in 2011.
Pew’s facts are confirmed by the latest estimates from the Federal Reserve, which reveal that median household holdings fell from 39% between 2007 and 2010.
Kocchar concludes that…
Overall, on the basis of some indicators, such as income and poverty, the economic health of American families deteriorated further in the first two years of the recovery from the Great Recession. Other indicators, such as unemployment, showed minimal improvement, if any.
This ties directly back to our “unstoppable” grocery ETF.
These companies’ enormous scales expose them to broad demographic shifts like this. They can withstand any given brand fading, because they usually sell the alternative as well. But when folks cut their budgets across the board, it can dig deep into profits whether you sell soap, cigarettes, soda — or all of the above.
As always, the charts tell all.
Sincerely,
Adam Lass
Bottarelli Research Newsletter
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