What I'm Thinking
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
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.
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.
Name of Index
Dow Jones Industrial
Europe, Australia, Far
- 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
- 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
- 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
- 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
- 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 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.
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
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
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
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
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
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on LinkedIn, or follow me on Twitter. I try to "tweet"
the latest market and economic news every day. Following me is a
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actively seeking to make new business connections as well as
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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.
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Management, LLC and www.waminvest.com. All