All Roads Lead to Big Caps, Gold and Select Miners, and the BRICs

We reviewed a host of ETFs this weekend, hoping to find areas that are not yet apparent that could join the market’s thin leadership in a broadening rally should it occur. What we found is that there are no surprises at all.

We were shocked, for example, at how well a steel ETF is holding up given the poor posture of many steel stocks. But nearly 25% of the ETF is comprised of two iron ore stocks, Rio Tinto (RTP) and Vale (VALE). Iron ore is a key ingredient in the steelmaking process and these stocks are in strong uptrends, near 52 week highs. RTP is well situated to sell into China, and VALE is Brazilian. Another 10% is in Brazilian steelmakers CSN (SID) and Gerdau (GGB) and 6% in South Korean maker Posco (PKX), which is contiguous to China. Brazil and China, of course, are two of the BRIC markets leading the rally. Other than that there isn’t much happening in the world of steel, but the theme is clear, ore and BRIC companies or companies well placed to sell into BRIC markets. And, oh yes, they all happen to be Big Caps.

We looked at two retail ETFs and noticed a divergence between RTH and XRT. The former is at new highs while the latter has mounted a feeble rally attempt off its 50 MA. What’s the difference? The RTH is biased toward big caps retailers; It includes stocks at or near 52 week highs like Walgreen (WAG), Costco (COST), Gap (GPS.) and the parabolic Amazon (AMZN). The top 10 holdings account for over 80% of the fund. The top 10 holdings of RTH, which is packed with out of favor smaller cap companies, account for little more than 17%.

The tech ETF XLK is at new highs. Its 10 largest holdings account for over 60% of the ETF and include market leaders such as Apple (AAPL) and Google (GOOG). These two stocks have scored impressive gains since March and remain on the rampage. But it doesn’t hurt that stocks like Cisco (CSCO), Hewlett (HPQ), Microsoft (MSFT) and IBM (IBM) are included and are at or new 52 week highs.

Gold and gold miners speak for themselves. They have led since gold began its break out move in early September.

Only 119 stocks made fresh 52 week highs in Friday’s trading. That’s a sign the rally is mature and nearing its conclusion, but that doesn’t mean that the increasingly crowded new highs won’t go higher. Indeed, if the market doesn’t stage a broad sell off the parade of money into a decreasing number of stocks could well lead to impressive gains during the rally’s last days or weeks. It’s no accident that institutional money is finding its way into the most liquid stocks in the market.

We still recommend a cautious stance but can’t argue against joining the parade of money into big cap leaders, and we’ll post some suggestions on our sister blog. Many are not offering the kind of entry points that would make us comfortable for a multi-month hold. But as long as you are willing to keep a tighter reign during sell offs there exists the possibility of further gains to be had in a market that might not yet be ready to succumb.