ETF Watchlist for July 3, 2014

As we are now halfway through the year, let’s review some of the best performing ETFs over the past 6 months. Will these funds continue to outperform or sell-off over the coming months?

Market Vectors India Small Cap (SCIF) +66%

The big winners in the first half of the year were India ETFs, led by the small-cap India funds. SCIF had been in a solid recovery since September of last year, but accelerated when investors started to anticipate a victory by pro-business parties in the May elections. Those expectations were fulfilled and the result was a very rapid and pronounced move to the upside. Since September, SCIF is up roughly 160 percent and there has been no meaningful correction relative to those gains.  Odds are good that a sizable correction will unfold over the coming months.


 iPath DJ-UBS Coffee ETN (JO) +53.6%

Commodities also did very well over the first half of the year, with coffee being a standout. Even livestock performed well as iPath DJ-UBS Livestock (COW) rallied 22.5 percent. Unlike livestock, which hit a new all-time high recently, coffee prices are still well below their highs as can be seen in the chart below.

Agricultural commodities have generally traded in tandem. If inflation starts to impact prices, the whole group could move higher again. Since its well of its highs though, coffee could also rally by itself in the second half. Right now there’s some debate over the Brazilian output this year due to a drought. Coffee bulls are anticipating weaker production, while bears believe the drought concerns are priced in and may be excessive. If supply is constrained, the chart indicates coffee could rise quite a bit and still be well of its highs.

0702coffeeGlobal X Gold Explorers (GLDX) +45.5%

As the chart below shows, gold mining (and silver mining) shares may have reached an important bottom at the end of 2013. Since then, a big rally has ensued. Still, gold mining shares are further off from their highs than coffee prices.

It will take a further rise in gold prices for mining shares to move higher. On the bright side for the bulls is the widespread rally in commodities in the first half. If that trend continues, it should be good news for gold.

The other key factor is global market stability. The worst performance by the stock market over the past 4 years came in 2011, when investors were simultaneously concerned about the United States, Europe and China. Since that time, it has been smooth sailing for stocks. Meanwhile, gold went from a peak of $1900 down to $1150 at the end of 2013, a year that saw the S&P 500 Index up more than 30 percent. If volatility returns and investors are concerned about any one of these economies, they may expect central bank intervention. If this were to occur, it would be positive for gold prices.

If precious metals do well again in the second half, silver mining shares may be the leader as silver prices tend to be more volatile than gold. Pure Funds ISE Junior Silver Miners (SILJ) might be the winner if such a scenario plays out.



Guggenheim Solar (TAN) +25.7%

After TAN bottomed in late 2012, the fund saw outsized gains in 2013, when it climbed from approximately $15 to as high as $40 per share. This year it moved from $35 to as high as $50 before dropping during the spring sell-off in technology shares.

TAN needs to climb above $50 and move to a new high to signal the bull rally is still intact. If this uptrend holds, TAN could move up another 25 percent in the second half. If we have seen the high for 2014 and TAN falls below the low from May, TAN could erase all of its gains for the year and end up with a loss.  As a speculative play, there’s more risk and less reward than with coffee or gold mining shares.


Market Vectors Egypt (EGPT) +23.8%

We highly doubt many investors anticipated Egypt being one of the hot markets for 2014. The story here is mainly a political one: following the chaos of elections and the Muslim Brotherhood’s ineffectual rule, Egypt’s military took over and restored stability. While it is a bit difficult to see on the chart, EGPT bottomed in very late June 2013, about one week before the coup. The huge gray spike on the bottom of the chart shows buying volume increased at the time of the coup, which took place on July 3. What followed was an almost uninterrupted rally until late March 2014 as EGPT recovered lost ground.

EGPT has recovered almost all of its losses going back to the start of the Arab Spring. A push higher is needed to signal that this is not a recovery rally running out of steam. A move to new highs for the year will be a positive sign the fund can continue to move higher.


First Trust NYSE Arca Biotechnology (FBT) +21.9%

Some investors may not realize biotechnology is still one of the best performing sectors in 2014, even though it suffered a brutal sell-off in March and April. That drop came after an incredible vertical run in the first two months of the year. Nevertheless, biotechnology was still up for the year even at its lowest point in April. As with EGPT, we need to see a new high here. That seems likely in the second half and as long as the Nasdaq moves higher, biotechnology will likely see more gains.

Though gains are probable, a continued biotechnology rally may not be as strong as investors have come to expect. The fund has already experienced a multi-year bull market. The period of dominant leadership by the sector, like the vertical climb we saw in January and February, is unlikely to be repeated.


iShares PHLX SOX Semiconductor Index (SOXX) +21.4%

Semiconductors were a quiet winner in the first half of 2014. The fund performed solidly for much of the year and then accelerated its pace in May. As can be seen in the chart below for SOXX, the jump in performance was a direct result of Intel (INTC) shares moving higher in late May and then spiking in June when the firm indicated results in the second quarter would be strong.

Semiconductors have earnings momentum behind them thanks in part to Intel. Shares are overbought right now and SOXX is likely to underperform the broader market for a time. The upside is limited given semiconductors have enjoyed a multi-year bull rally.



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