Tuesday, September 8, 2015

Soaring to New Heights

Friday’s Jobs Report, like modern art, was subject to much interpretation with the fall in the unemployment rate to 5.1% contrasting sharply with the much lower than anticipated growth in private payrolls.  And while there might have been something for doves and hawks alike to love in the report, it capped an already disappointing week of economic data that failed to shift the market out of its well-established rut; up one week, and then down again the next.  It may be nothing but doom and gloom in the financial media with the S&P 500 unable to manage two up-weeks in a row since the beginning of May, but some pockets of strength have recently emerged in strange places as investors reorient themselves - perhaps opening new opportunities to brave stock pickers.

The Jobs Report may not have provided any support to the utilities and REIT sectors that underperformed the broader market for a second straight week but one new fund did manage to take-off even in those trying circumstances, the recently launched U.S. Global Jets (JETS) ETF which has nearly 85% of its portfolio in those high flying (pun intended) airline stocks that have pulled away from the broader equity market.  Airlines have historically been among the least profitable sectors of the economy but crashing oil prices have helped drastically reduced the cost of operations while the slight increase in hourly earnings might give a boost to the slow but steady increase in real disposable personal incomes that has already been recorded in 2015.  JETS is a concentrated portfolio of 34 names and part-of last week’s 1.66% gain was due to the strong performance of two names, American Airlines (AAL) and  JetBlue (JBLU), that make up 11.6% and 4.3% of the portfolio respectively as increases in passenger traffic combined with lower fuel expenses to create strong lift for the stocks.  Our technician friends are likely to point out that with JBLU less than 4% away from its 52 week high compared to the S&P 500’s 10%, gravity might soon take hold of the situation.

Airline stocks weren’t the only winners last week as back here on the ground, the prospect of higher consumer incomes help bring investors back to the table to sample select restaurant and gaming stocks.  The biggest winner for the week was the adult Chuck E Cheese, Dave & Busters Entertainment (PLAY), which experienced a 6.6% surge as investors continued to look at the 17.6% drop the stock experienced in the first half of August as a buying opportunity after Piper Jaffray reaffirmed its $55 price target.  With a market cap of just $1.5 billion, PLAY isn’t a major component of many ETFs, but one fund where it is prominently feature is the PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ) which in addition to having a 2.8% allocation to the stock also has nearly 32% allocated to airlines giving it a sector weighting to the greater than transportation funds like the iShares DJ Transportation Average ETF (IYT) or even the SPDR S&P Transportation ETF (XTN).  While airlines and restaurants helped lift PEJ up .71% last week, there’s more to the fund with one of the biggest gainers in its portfolio last week being Isle of Capri Casino’s (ISLE) whose strong quarterly earnings release help push the stock up 9.6% last week to take the YTD gain to 130%.

Thanks to that powerhouse lineup that includes some of last week’s biggest winners, PEJ has quickly climbed into the ETFG Behavioral Top 25 list although the fund’s overall ETFG Quant score changed only slightly for the week due as the rising price reduced its fundamental attraction.  IYT is the only one other airline heavy fund makes the top 25 with much of the list being dominated by biotech and other healthcare fund with the only other major trend being a strong domestic focus.  For those investors who believe that the run-up to the next FOMC meeting is an opportunity for the board members to talk down the possibility of a rate hike and looking for the most oversold funds hoping for a quick bounce should rate hikes not materialize; you might want to readjust the ETFG Quant report to examine the funds with the lowest behavioral scores and then re-rank the report to just study price momentum.  Emerging market exposure is the common characteristic of the worst performers with the lowest of the low being the WisdomTree Emerging Markets Consumer Growth Fund (EMCG), a diversified fund hit hard by a large allocation to China.  With the outflows coming from the EM sphere so strong even the Fed might not be able to stop them, investors might be better off keeping their dollars closer to home and enjoying a strong drink at Dave & Buster’s instead.

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