All-Time Highs Ahead
Current Market Analysis
Last Month's Results
Statistics to Watch
Trends To Watch
What I'm Thinking and Doing
Professional News and Notes
Current Market Analysis
As I write this, the Dow
Jones Industrial Average stands at 13,976, up 327 points, or 2.4%,
from when I wrote to you last month, and up 11.0% in the last
three months. Most importantly, after surpassing the October 5
closing high of 13,610, the venerable index continued to move higher
until it crested at 14,018 just two days ago. That's only 189
points, or a mere 1.3%, from the all-time closing high of 14,164 set
on October 9, 2007. At the same time, the Transportation
average has zoomed to all time highs. This continues
the bullish confirmation signalled a month ago by Dow Theory. So for
now, it appears that the market is likely to continue higher.
Below you can see how the DJIA has reached a temporary
plateau around the 14,000 level after rising 8.5% since the end
of the year and about 12% since the November
low. Now that the DJIA reached a new multi-year high, and confirmed the achievement
by moving even higher, the
next step is to exceed 14,164. Last month I suggested that
"the market is due for a breather as the rally has
gotten a little extended." We might be looking at that breather right now.
This sideways movement has brought RSI below overbought levels. I wouldn't
be surprised to see the new high before the month
The Dow Jones Transportation Average has gone parabolic and
have achieved a new all-time high. Interestingly, RSI has pulled back from incredibly overbought
levels to now only mildly overbought. Should the market move sideways for a
bit, things could settle down before setting the stage
for the next big move up.
The Dow Jones Utility Average
continues to recover from the huge Fall sell-off. You'll
notice that the index has moved through interim resistance around 470 and is approaching the
next resistance level just below 490. The 50-day moving average has
moved sharply higher and is taking dead aim at the 200-day
average. Relative strength might be a bit extended, but I think there's
room for more gains.
This chart has got to worry
Ben Bernanke and the rest of the Federal Reserve. The yield on the
10-year Treasury has moved north of 2% for the first time since last
May, in spite of all the
efforts of the Fed to keep rates artificially low. Chairman Bernanke
has pledged to keep rates artificially low
at least through 2015, or until inflation rises above 2.5%, and we
are well away from that target as you'll see below.
The current rate increase coincides with the rise in equities, as
investors have taken money out of the safe haven
of treasuries and moved it into riskier assets like
stocks. It would be ironic if the very asset bubble created by
the Fed helps drive interest rates higher than their target levels.
I'll reiterate what I said last month: bond investors should prepare
for for lean times ahead.
Last Month's Results
Only a bond
investor could be displeased with the results from January. Gains across the broad
equity indices ranged from 4.1% - 6.6%. Interestingly, value held its own against
growth, which is atypical during rallies. The Dow surpassed both the S&P and
the NASDAQ, which reversed the results from last year, which was due in
part to the slide in the price of Apple. For the second straight month, government
bond investors lost money. This could be the year that the over-extended bond
bubble finally bursts.
Dow Jones Industrial
Europe, Australia, Far
* Return numbers include the reinvestment of dividends
- According to the Department of Labor, the figure
for seasonally-adjusted initial jobless claims for the week ended February 9 was
341,000, a decrease of 27,000 from the prior week's revised figure. The
four-week average of 352,500 is about 7,000 lower than the prior
month's tally. About 3.1 million people continue to collect unemployment insurance,
a drop of about 100,000 from the prior month.
- Non-farm payroll employment in January, once again, was a mixed bag.
The establishment survey reported that 1575,000 jobs were added
in the month while the household survey said that the unemployment rate was 7.9%. The
jobs added were consistent with the monthly gains for the past two years.
Revisions to November and December added back 86,000 and 41,000, respectively,
much larger than recent revisions. The total number of workers counted as unemployed
remained at 12.2 million and the
labor force participation rate remained at 63.6%. The more comprehensive U-6
"underemployment" rate also held at 14.4%.
- 4.7 million people continued to
be unemployed longer than 27 weeks. The seasonally adjusted number of people who could only
find part-time work inches up to 8.0 million and the number
of marginally attached workers rose to 2.8 million. The number of people
holding multiple jobs fell to 6.8 million. The average hourly wages for blue
collar workers rose to $19.97 while the average work week dipped to 33.6 hours.
Overall, the job increases are solid, if under whelming, but there are still far
too many people who can't find a highly paid full time job.
- The Congressional Budget Office (CBO) estimated that on a net
present value basis, the Treasury reported a federal budget deficit of $2
billion in January, and $275 billion for the first four months of
the fiscal year, which is $54 billion less than the record figure reported for the
same period of fiscal 2012. They claim that without shifts
in the timing of certain payments each year, the deficit would
have been about $84 billion lower this year. We'll see what happens as
the budget negotiations progress.
- The Census Bureau reported that the U.S. trade deficit of goods and services was $38.5 billion in December, down
almost $10 billion from November. It was also the smallest deficit since November
2010. The reduced deficit was due, in large part, to a big drop in energy imports.
- The Census Bureau reported that privately owned housing
starts jumped 12.16% in
December, following a small decline in November. Housing starts are now a whopping 36.9%
higher than a year ago, to a seasonally adjusted annual rate of 954,000 units, the highest level since June
2008. New building permits were flat after a 3.6% the prior month, but were still 28.8%
higher than the year before. The recovery in the housing market continues.
- The National Association of Homebuilders/Wells Fargo
Confidence Index held steady in January at 47, breaking the string of
eight straight monthly increases, but holds at the highest level since
May 2006. Builder confidence is slowly approaching a healthy figure of 50, which is considerable
progress from the desultory figure of 19 a little over a year ago.
- The Census Bureau reported that on a
seasonally adjusted annualized basis, 369,000 new homes were sold in December, about
7.3% fewer than the revised November totals
and 8.8% better than a year ago. The estimate of number of homes for
sale was 151,000, which represents a slim 4.9 months of inventory at
the current rate of sales. The median sales price rose to $248,900, which
remains above the rising 12-month moving average price of $241,033. Even though the number of
homes sold dropped this month, the overall trend remains good and
a tight market augurs well for future price increases as we move towards
the spring selling season.
- The National Association of Realtors
reported that on a seasonally adjusted annualized basis, after significant revision
to the full year, sales of existing
homes were 1.0% lower in December,
to 4.94 million units, but remained 12.8% higher than a year ago.
The estimate of only 1.82 million homes for sale means there's only
a tiny 4.4 months supply on the market. The
median sales price rose to $180,800, which is above the rising 12-month
average of $175,492. As with new homes, the existing home
market is getting tighter and tighter, which suggests a bright future in
- The S&P/Case-Shiller Home Price 10-city index, which uses a three-month
moving average to track the value of home prices across the
US, dropped slightly in November, mostly due to seasonal factors, but remains 4.5%
higher than a year ago. I expect the general trend of the
index to move higher in the months ahead.
- The Institute for Supply Management (ISM)
index of manufacturing activity was 53.1 in January,
indicating that economic activity in the manufacturing sector
was more robust in the month. In addition, the ISM index of
non-manufacturing activity was 55.2, which marked growth in the
service sector for 37 consecutive months.The service sector
continued its unabated expansion. These were positive reports.
- The Conference Board reported that it's index of Leading
Economic Indicators increased by 0.5% in December after a decrease
of 0.2% in November. Says Ataman Ozyildirim, economist at The
Conference Board: "The
U.S. LEI rose sharply in December, led by a large improvement in
initial claims for unemployment insurance and positive
contributions from the interest rate spread and the Leading
Credit Index. The increase in the LEI brought its six-month growth rate
well above zero, with roughly two-thirds of the components advancing in
the last six months. However, consumer expectations and
manufacturers' new orders remain weak." Says Ken
Goldstein, economist at The Conference Board: "The
latest data suggest that a pickup in domestic growth is now more
likely, compared to a few months ago. Housing, which has long been
a drag, has turned into a positive for growth, and will help
improve consumer balance sheets and strengthen consumption.
However, for growth to gain more traction we also need to see
better performance on new orders and an acceleration in capital
- According to the Bureau of Economic Analysis, the "advance" estimate
of GDP growth for Q4 2012 showed a decline of 0.1%, whereas growth was 3.1%
in Q3, 1.3% in Q2 and 2.0% in Q1. It is also far worse than the 3.0% growth
recorded in Q4 2011. The decrease primarily reflected negative contributions
from private inventory investment, government spending and exports. This
could be a sign of weak growth expectations for 2013.
- The Federal Reserve reported in
November that the amount of outstanding consumer credit was $2.78 trillion, up from
the prior month and growing at a 6.25% annualized rate.
Consumer credit grew for the fifth consecutive month, which should be helpful to retail sales,
which in turn, would boost the economy.
- According to the Census Bureau, retail trade and food service sales increased a
meager 0.1% in December, and 4.4% year over year. General merchandise retailers
and sporting goods stores led the way but overall, these results are disappointing.
- The Conference Board's Consumer Confidence
Index fell for the third month in a row in January, from 65.1 to
58.6. Says Lynn Franco, Director of The Conference Board
Consumer Research Center "Consumer
Confidence posted another sharp decline in January, erasing all of
the gains made through 2012. Consumers are more pessimistic about
the economic outlook and, in particular, their financial
situation. The increase in the payroll tax has undoubtedly
dampened consumers' spirits and it may take a while for confidence
to rebound and consumers to recover from their initial paycheck
- According to the FDIC, only 2 banks failed
in January, versus the 7 that failed last January. I would be
surprised if more than 25 or 30 banks go under this year.
The dollar index continues to be bound in
a tight range between 78.5 and 81.75 (the two
dotted red lines). Most of the world is in a race to devalue
their currencies, so I wouldn't expect the dollar to get much weaker any time
soon. Indeed, I'd expect it to remain basically where it is for a while. The
only reason it might drop much
would be if there is no meaningful resolution to the "sequester" or the debt situation.
If a reasonable deal is finally reached, the dollar index could move
For more than a year and a half the price
of gold has ping-ponged between $1,500 - $1,800/oz. During this period, there
seems to be two bands of interim support or resistance, around 1,625 and 1,700 (the
two green dotted lines). This band has formed a new trading range for
the past two and a half months. Ominously, the 50-day moving
average has fallen perilously close to the 200-day average. Gold
bulls, of which I am one, would like to avoid the "death
To put the
move in gold into greater perspective, below you'll see a
chart of the price of gold going back four years. You'll
notice that gold has been consolidating for more than a year, during which time a
declining triangle pattern has formed (red lines). While this is
normally a bearish trend I expect a powerful reversal to occur at
some point this year, after which the price will move sharply
Like gold, the
price of silver is creeping lower and headed towards a "death cross" with
resistance just south of $30. Neither RSI or MACD are telling us much.
So we simply sit and wait for a sign of what's
The chart of
the price of copper suggests that there continues to be economic
growth in the world. The current price continues to move
higher and is above both moving averages. RSI and MACD show neither
strength nor weakness, suggesting stability. On the whole, this is very bullish. Let's
see if the price can penetrate resistance around $3.85.
The chart of West
Texas crude continues to improve. The price is above interim resistance around
$93 (green dotted line) and above both moving averages. Even better, we
just got the bullish "golden cross" signal (red circle). While
I'm a longtime oil bull, I'd prefer the price to
remain between $95 - $100. Anything above $100 would likely cause
damage to the economy.
The financial index continues to move onward
and upward to new highs as the
bull remains solidly in control. The current price remains well above
the trendline and both moving averages. If you want to quibble, RSI is
mildly overbought, suggesting the next consolidation may be forthcoming.
The housing index is also solidly bullish as
the price remains above the trendline and both moving averages. The next big move would be to
for the developed international markets continues to move higher.
Indeed, it is poised to attack resistance
at 62, last achieved almost a year and a half
ago. Investors seem to be discounting all the potential problems in the Euro zone,
which is kind of hard to believe. But charts don't lie.
The Shanghai index continues to
rally, up about 25% in just over two months. The next big
resistance level comes in around 2,500. Clearly, the rally I called for in December
is in full swing. This can only be good news for the
rest of the world's markets.
Now we come to our three contrarian market
indicators. And to be honest, they give one pause. The NYSE
Bullish sentiment index shows an extreme level of bullishness right now. RSI
is wildly overbought. History shows that when bullish sentiment gets this high, a
correction isn't far behind.
Next we see that about 81% of stocks traded
on the New York Stock Exchange are currently trading
above their 50-day moving average, down from almost 90 a month ago, and
trending lower. Recent history suggests that we're likely to fall further if this
is a real correction.
Finally, the VIX, or the "fear index", shows the
absence of fear, or utter complacency. The VIX hasn't been this low since early 2007, shortly
before the DJIA reach 14,164. That's something to keep in mind.
Thinking and Doing
Right now, I'm enjoying the rally and rooting it
on to achieve a new all time high. At the same time, I'm worried about the fragile underpinnings of
the market. In a way, the market appears "reasonably priced"
according to metrics light price-to-earnings (PE ratio) and returns relative to
treasuries. Corporate balance sheets are as flush as they've
ever been and earnings have been solid, if unspectacular. The Fed continues
to provide fiscal stimulus at unprecedented levels. There is some certainty as to tax
policy for at least the next year or two. The developed
and emerging markets are moving towards recent highs and China is
moving steadily higher. The good news is plentiful and impressive.
with all the good news, I remain somewhat nervous. I don't believe
things are as good in Europe as the equity markets would have us believe. I'm always dubious about what comes
out of China. There is still much work to be
done in the US to fix our debt crisis, and
all of it will likely negatively impact the economy. There is
too much exuberance in the market, as evidenced by
the three charts above, and things could easily come tumbling down if
corporate earnings come in weaker than expected this year.
So where does all of that leave
me and my investors? Pretty much where I left things last month. We
remain basically fully invested in the market and enjoying the
rally. I've taken new positions in a REIT (real estate
investment trust) and a BDC (business development company). The
former yields about 6.75% and the latter distributes a rich 12.5%.
Both securities fit nicely in my strategy to maximize
income. According to Ibbotson, about 45% of the historical
return from equities comes from dividends. And dividends provide a
nice cushion against the inevitable downturns.
Professional News and Notes
It looks like I'll be introducing my new website
on March 1. I'm very pleased with the look and the content. My new
webmaster is putting the final touches on it, although I expect that
I'll continue to refine certain things even after it goes
"live". I can't wait to unveil it to all of you. I hope
you'll let me know what you think.
I continue to add
content to my blog. I've now written more than 30
articles on topics ranging from the politics, the economy, the Fiscal Cliff and debt negotiations, taxes,
gold, and of course, the stock market. I'm very excited to expand on that exciting
beginning. Please join me in a dialogue about what interests you and what you need to
know in order to protect and increase your wealth by clicking here.
As always, I thank you, my readers, and remind
you that this newsletter is
for you. I have been writing News and Views for over nine years
now. If you'd like to read any prior edition, simply go to my website
and click on the link to my newsletter archives. I hope you have learned
something about our economy and our stock market, and that you
will continue to follow along with me in the future. If you
have any thoughts or suggestions on how to make it better, please let
me know. And if you'd like to speak with me about your
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"News and Views", Copyright, Werlinich
Asset Management, LLC and www.waminvest.com. All Rights