Current Market Analysis
Last Month's Results
Statistics to Watch
Trends To Watch
What I'm Thinking and Doing
Personal News and Notes

Current Market Analysis

My thoughts about the first half of the year? Good riddance to bad rubbish. So far the old axiom of "Sell in May and go away" has proven to be very prescient, although I don't believe it has anything to do with seasonal slowdowns. It has everything to do with a shaky economy, the crisis in the Euro zone and the disaster in the Gulf. It has been almost unrelentingly bearish since the Dow hit 11,258 on April 26. First there was the plunge to 9,757, followed by a rally to almost 10,600. Then we broke through to a new low of 9,614 less than two weeks ago. It would be very constructive if the market could rise above 10,600 without falling to a new low. If so, a floor may have been set. If not, 9,400 could be the next support level.

More than anything else we need the employment picture to improve. Until that happens, I don't believe there can be any meaningful, broad-based, economic recovery. With job growth would come improvements in housing, retail and banking. Until then, it will continue to be one step up, two steps down, even while corporate earnings continue to improve.

So what do the charts tell us now? The chart of the Industrial average is at an important inflection point. The recent rally has brought the index to almost synchronicity with its 200-day moving average and above the 50-day average. It would be very bullish to rise above both and crest resistance at around 10,600. It would also be important for the 50-day average to rise back above the 200-day average. I wrote last month that "looking at the RSI would suggest a bounce may be forthcoming." This has happened. Now investors need to see some follow through to the upside.

Like the Industrial average, the Transportation average has rallied recently after a precipitous decline. It too is currently trading in the neighborhood of the two moving averages. The difference here is that the 50-day remains above the 200-day, if barely. A rally above resistance around 4,515 would be constructive.

Since last May, the yield on the 10-year treasury has traded between 3% and 4%. Each attempt to break out above the range failed. Then as the market turned negative in the second quarter, and investors fled stocks for Treasuries, the yield started to fall. That drop culminated with a yield of 2.8% last week with fear at its apex. Fortunately, the yield is back above 3% as stocks have rallied. For the sake of the stock market, let's hope the the trading range holds.

Last Month's Results

As always, I provide the following chart to show the raw results for the preceding month, the quarter-to-date and the year-to-date, not including dividends. The decline that began in May intensified in June as the stock market deteriorated into a near panic. Interestingly, the EAFE had a modest June decline but still finished with the worst quarterly result among the major indices. Bonds remained the only safe haven. I believe this quarter will see a better return in stocks than bonds.

Statistics To Watch

• According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended July 10 was 429,000, a decrease of 29,000 from the prior week. The four-week average was 455,250. The problem is that the unadjusted numbers remain stubbornly high. We're still waiting for these numbers to drop in a meaningful way.
• Non-farm payroll employment fell by 125,000 in June, as 225,000 temporary workers hired for the census were let go. The number of jobs added in April and May were both increased after revisions. Average hourly wages for blue collar workers remained at $19.00, and the average work week remained at 33.4 hours. There continues to be little job growth and no wage growth.
• In June, the total number of workers counted as unemployed fell to 14.6 million, and the unemployment rate remained dropped to 9.5%, because so many people simply left the reported labor force, unable to find work. The more comprehensive U-6 rate was 16.5%, down from 16.5%. 6.8 million people continued to be unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work fell to 8.6 million and the number of marginally attached workers jumped to 2.6 million. The number of people holding multiple jobs fell to 6.9 million. Overall, the employment picture remains lousy.
• The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $69 billion in June, leaving us with a deficit of about $1 trillion for the first nine months of fiscal 2010, which is $81 billion less than the record shortfall from 2009. The improvement is largely due to slightly higher tax revenues.
• The Census Bureau reported that the U.S. had a trade deficit of $42.3 billion in May, up from $40.3 billion in April. The trade gap has remained relatively stable for a while, and while modest deficit doesn't worry me very much, it is beginning to trend larger again.
• The Census Bureau reported that privately owned housing starts decreased 10.0% in May after April was revised down 3.9%, but was 7.8% higher than a year ago, to a seasonally adjusted annual rate of 593,000 units. New building permits were down 5.9% from last month and were up 4.4% from last year. This ends two months of improvements.
• The National Association of Homebuilders/Wells Fargo Confidence Index plunged 5 points in June to 17, or back to February levels. This dovetails with the drop in housing starts. Again, this does not bode well for near-term gains in the housing sector.
• The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in May plunged 32.7% from the prior month, and were down 18.3% from the same period last year, to only 300,000 units. The estimate of homes for sale was 213,000, which represents 8.5 months at the current rate of sales. The median sales price was $200,200, which is below the 12-month moving average price of $215,700, thanks to short sales and distressed sales.
• The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes in May fell 2.2% from April, but were 19.2% higher than a year ago, to a projected 5.66 million units. The estimate of homes for sale, at 3.89 million represents 8.3 months of supply at the current rate of sales. The median sales price rose to $179,600, which is slightly higher than the 12-month average of $173,400. The imminent expiration of the first-time home buyers credit didn't help boost the sales figures this month.
• The S&P/Case-Shiller Home Price Index (20-city index), which uses a three-month moving average to track the value of home prices across the US, increased fractionally in April to 157.37, breaking the sixth month losing streak. The price gains were modest, and concentrated in California.
• According to RealtyTrac, the number of foreclosures in June dropped 2.83% from May, and were 7.% less than a year ago. “The pace of properties entering foreclosure slowed as lenders pre-empted or delayed foreclosure proceedings on delinquent properties with more aggressive short sale and loan modification initiatives. Meanwhile the pace of properties completing the foreclosure process through bank repossession quickened as lenders cleared out a backlog of distressed inventory delayed by foreclosure prevention efforts in 2009."
• The Institute for Supply Management (ISM) index of manufacturing activity was 56.2 in May, a big drop from April. This marked the eleventh month in a row in which the manufacturing sector expanded. The ISM index of non-manufacturing activity was 53.8, also down from April, marking growth in the service sector for six consecutive months.
• The Federal Reserve reported that capacity utilization in the industrial sector increased in May for the eleventh straight month, to 74.7%. Capacity utilization is now 6.2% higher than a year ago but remains 5.9% below the average level of the period from 1972 through 2008. The industrial sector continues to lead a very weak economic recovery.
• The Conference Board reported that it's index of Leading Economic Indicators increased by 0.4% in May, following a flat April and a 1.4% increase in March. "The index points to continued, though slower, U.S. growth for the rest of this year."
• According to the Bureau of Economic Analysis, the "final" estimate of GDP growth in the first quarter was a very modest 2.7%, lower than the second estimate of 3.0%, and lower still than the first estimate of 3.2%. This is much lower than the 5.6% growth recorded in the fourth quarter. "The deceleration in real GDP in the first quarter primarily reflected decelerations in private inventory investment and in exports, a down turn in residential fixed investment, a deceleration in non-residential fixed investment, and a larger decrease in state and local government spending."
• The Federal Reserve reported that in May the amount of outstanding consumer credit decreased at an annualized rate of 0.4% from the prior month, to $2.415 trillion. This continues the trend of decreases in the use of consumer credit that has been in place for more than a year and a half.
• According to the Census Bureau, retail trade and food service sales decreased 0.5% in June, but were still 4.8% higher than a year ago. This was very disappointing to the market. Until the employment numbers show some sustained growth, retail sales will continue to lag.
• The Federal Reserve reported in that in June the supply of M-2 increased slightly from the prior month and was up only 1.3% during the prior six months. The supply of M-1, on the other hand, rose a slightly faster 2.3% over the same six months. This is further evidence that the the Fed is slowing the monetary expansion. Rate increases, though, do not seem to be anywhere on the horizon.
• The Conference Board Consumer Confidence Index fell 9.8 points to 59.2 in June, after rising for three straight months. Consumers remain concerned about the job market and their near term financial situation. We'll see if the trend can reverse back to positive in the next few months.
• According to the BEA, disposable personal fell in May, but the personal savings rate still managed to increase to 4.0% as fear caused people to save money, rather than spend it.
• According to the FDIC, 90 banks have failed so far this year, through July 14. It's likely that the failures in 2010 will eclipse the mark of 140 bank failures in 2009 that were either closed or merged into healthier banks. By comparison, 26 failed in 2008 and only 3 failed in 2007.

  Trends To Watch

  Last month I wrote that since "everyone is betting against the Euro...I expect the dollar to take a breather sometime soon and confound the herd." And that's exactly what has happened. After a 19.5% increase over six months, the dollar now is backing off a bit. Resistance will come in just north of 82. I don't expect the dollar to roll over and plunge back to lows just yet. Every rally needs a breather.

  

  The bull market in the price of gold is taking a breather right now. I think any price under $1,200/oz is an opportunity as I believe the next target for gold will be $1,300. 'Nuff said.

  

  Silver is consolidating right now after a strong bull run. And this rally continues to receive almost no press coverage. As I said last month, I look for silver to move above $20 per ounce before year-end.

  

  The price is copper is currently trading below both moving averages, and those averages recently crossed, which is very bearish. As we'll see below with the Baltic Dry Index, as goes China, so goes base metals.

• 

  At around $76/barrel, West Texas Crude it is now trading fractionally below both moving averages. The good news is that those averages have not crossed. $70 or so is a pretty strong support level and $80 would be a solid resistance level. Let's see what happens next.

  

  After briefly breaking out above the year-long trading range, the financial sector succumbed to the Euro crisis and plunged back to the bottom of the trading range before recovering a bit. The current price and both moving averages are now the same. The next few weeks will identify the trend.

  

  Like the financial sector, the housing sector dropped along with the rest of the market during the market sell off and fell back towards the bottom of its trading range before recovering slightly. The 200-day average just crossed above the 50-day, both of which are above the current price. Falling below support around 90 would be very bearish.

  

  The European market is trying to stabilize. Last month I wrote that after falling below the trading range, "the next support looks to be around 44." Well that support has held so far. Notice that the moving averages have crossed. Again, this is bearish.

  

  The Chinese stock market is suffering. And if China catches a cold, the rest of the world sneezes. The health of the Chinese economy, and by proxy, it's stock market, is very important to the world's economy as they buy much of the world's output of raw materials and produce most of the goods sold to the world. The Shanghai Composite has violated two support levels and is trading below both moving averages, which have crossed. This is all very bearish. Should the Chinese market roll over and head significantly lower, it could have very negative implications for the global economy. The next support level looks to be somewhat south of 2,100, or around 15% lower.

  

  The Baltic Dry Index has followed the Shanghai Composite down. The trading pattern has been broken as the index has slipped below the support level. The RSI is now massively oversold, so you could expect a bounce sometime soon. This could portend fears of deflation.

  

  The NYSE Bullish Percent Index represents the percentage of stocks listed on the NYSE that signal a buy. Contrarians would argue that extreme levels of exuberance is a bearish indicator, and vice-versa. Last issue I wrote that "the bearishness is so pervasive, and RSI is so oversold, that it's more likely that an upturn is around the corner." That has happened, although it isn't fully reflected in the chart, which suggests this rally may have further legs.

  

  By the middle of April, there was so little fear in the market that complacency had taken over. Over the next month the VIX more than tripled in a spasm of fear. In the subsequent month, the VIX has dropped by more than half, back into the "normal" range, which I predicted last month. I expect the VIX to remain in the normal range for a while as the market consolidates and digests Q2 earnings.

  

  What I'm Thinking and Doing

  Last month I told my clients, and my readers, not to panic. I reminded everyone that corrections are normal parts of the stock market cycle. Since then, we've had a bit of a relief rally. Now the market will likely consolidate somewhere between resistance at 10,600 and support at 9,600. I'm going to sit tight and wait for the technical situation to improve. I'd like to see the Dow Jones Industrial and Transportation averages to make intermediate highs concurrently. I'd also like to see the 50-day moving average move back above the 200-day average. Then I'd feel a little better about putting significant new funds to work.

  I'm made virtually no new purchases over the past month. As I said above, I'm waiting for the market turmoil to settle down and for some of the technical indicators to improve before I put fresh funds to work. In the meantime, my clients continue to collect their dividends and own some of the best companies in America.

  Personal News and Notes

  Summer is here in force. A massive heat wave has descended upon much of the country, but especially the East Coast. The kids are away, having a blast. And I'm enjoying a little adult time. Everybody's happy. Next weekend I get to visit Ezra and Lily at their respective camps. Nola is almost half way through her Western tour. In fact, she texted me this morning to let me know that she'll be flying from Seattle to Salt Lake City today. It would be nice to be my kids. :-)

  I have been spending my summer getting back in shape. I've been swimming 2-3 times per week and riding my bike another 1-2 times, at 20-25 miles per ride. In two weeks I'm going to enjoy a driving vacation. First I'll drive down to the Outer Banks were I'll spend a few days on the beach and riding my bike. Then off to Charleston, SC for two days of Southern hospitality. Then up to West Virginia for some rafting before I head home. If anyone has any suggestions for places to stay or eat, or things to do, I'm looking for great ideas.

  Don't forget that you can friend me on Facebook, connect with me on LinkedIn, or follow me on Twitter. I try to "tweet" the latest market and economic news every day. Following me is a very easy way for you to receive stock market updates in between my newsletters. I've been using these three sites because I'm actively seeking to make new business connections as well as maintain contact with friends old and new. So please look for me out in Cyberspace, and ask your colleagues, friends and family members to do the same.

  That's it for this month. I thank you, my readers, and remind you that this newsletter is for you. 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 investment needs, I'd be pleased to be of service. Simply give me a call or drop me an email.

  Best regards,

  
  

  Greg Werlinich
  President

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