What I'm Thinking
We are in the midst of a very nice
rally right now, with the Dow Jones Industrial Average rising about
850 points, or about 8.5%, from the late August low. We've
broken above significant resistance levels (see below) and there is
a little bit of optimism about the economy. Personally, I believe a
lot of the better feelings in the country that have translated into
the market are due to the spill in the Gulf being capped. That was
such a disaster, and coverage of it was so gloomy and so
all-encompassing, that now that the well has been "killed" people
can focus on the slightly better, and improving (albeit slowly)
economy. I wrote in July that "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." Well, the market has indeed broken above both 10,600 and
I have been writing for months
that more than anything else we need the employment picture to
improve and until that happens, there can't be any meaningful,
broad-based, economic recovery. With job growth would come
improvements in housing, retail and banking. Well, recently, as I'll
describe below, there have been subtle indications that the
employment picture may indeed be improving. If so, it is hugely
bullish for the overall market going forward.
So what do the charts tell us now?
The chart of the Industrial average has broken above two resistance
levels and is taking aim at the next one, which is around 10,900.
The big one though is around 11,258. If that level can be surpassed,
then we could be in for a really huge rally. Also bullish is that
the Industrial index is now trading above both moving averages. It
will be additionally bullish if the 50-day average can rise back
above the 200-day average. I don't expect the next big move to
happen without a pullback, but things look pretty good right
The Transportation average is
about 13 points below its August high, so it has not yet confirmed
the new high set by the Industrial Average. But it has moved higher
than both moving averages. Look for a move above 4,524 in the next
few days to confirm the strength of the overall market.
From May '09 to June '10 the yield
on the 10-year treasury 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, culminating with an unbelievably low yield of
2.4% last month, coinciding with the low of the stock market. As the
market has rallied, treasuries have sold off somewhat, and the yield
is headed back towards 3%.
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. As
you can see by the results below and the chart above, August was a
lousy months for stocks across the board, with growth and technology
leading the way down. Bonds, as we saw in the chart above, remained
the only safe haven. I wrote in the July newsletter that I believed
stocks would outperform bonds; with about a week left in the quarter
I think that prediction will be accurate.
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
September 18 was 465,000, an increase of 15,000 from the prior
week's revised figure. The four-week average was 463,250. This was
the first increase in five weeks. The actual, unadjusted, initial
claims were much lower: 379,369. Overall, while not great, there
is some room for optimism.
- Non-farm payroll employment fell by 54,000 in August, as
114,000 temporary workers hired for the census were let go. 67,000
private sector jobs were actually added. Total job losses in June
and July were revised lower. Things actually look to be improving.
Average hourly wages for blue collar workers were up slightly to
$19.08, and the average work week inched up to 33.5 hours.
- In August, the total number of workers counted as unemployed
increased to 14.9 million as more people attempted to rejoin the
labor market. Therefore, the unemployment rate increased to 9.6%
from 9.5%. The more comprehensive U-6 rate was 16.4%, down from
16.5%. 6.2 million people continued to be unemployed longer than
27 weeks, a drop of over 300,000. The seasonally adjusted number
of people who could only find part-time work rose to 8.9 million
and the number of marginally attached workers fell to 2.4 million.
The number of people holding multiple jobs fell to 6.5 million.
Overall, the employment picture is poor, but improving slightly.
- The Congressional Budget Office (CBO)
estimated that on a net present value basis, the Treasury reported
a federal budget deficit of $95 billion in August, leaving us with
a deficit of about $1.3 trillion for the first eleven months of
fiscal 2010, which is $100 billion less than the record shortfall
from 2009. Tax revenues are up while expenditures are down. That's
a step in the right direction.
- The Census Bureau reported that the U.S. had a trade deficit
of $42.8 billion in July. 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 increased 1.7% in July after an 8.7% drop in June, and
was still 7.0% lower than a year ago, to a seasonally adjusted
annual rate of 546000 units. New building permits were down
3.1% from last month and 3.7% from last year. Housing remains very
- The National Association of Homebuilders/Wells Fargo
Confidence Index dropped 1 point in August, to 13, and stayed
there in September, holding at the lowest level since March '09.
This suggests prolonged weakness in the housing sector going
- The Census Bureau reported that on a seasonally adjusted
annualized basis, sales of new homes in July dropped 12.5%
from the prior month, and were down 32.4% from the same period
last year, to a meager 276,000 units. The estimate of homes for
sale was 210,000, which represents 9.1 months at the current rate
of sales. The median sales price was a low $204,000, which is
below the 12-month moving average price of $217,683, thanks to
short sales and distressed sales.
- The National Association of Realtors reported that on a
seasonally adjusted annualized basis, sales of existing
homes increased 7.6%, after plunging 27.0% in July, and were
still 19% lower than a year ago, to a projected 4.13 million
units. The estimate of homes for sale, at 3.98 million represents
whopping 11.6 months of supply at the current rate of sales. The
median sales price fell to $178,600, which is slightly higher than
the 12-month average of $173,225. The expiration of the first-time
home buyers credit killed home sales. The program was a waste.
- The S&P/Case-Shiller Home Price Index (10-city index),
which uses a three-month moving average to track the value of home
prices across the US, has increased incrementally in each of the
past three months, through June. While prices have rebounded a bit
since the crisis lows, they will likely be negatively impacted by
the expiration of the tax credit.
- According to RealtyTrac, the number of foreclosures in August
increased 4.2% from July, and were 5.0% less than a year ago. “The
trend lines of decreasing default notices and increasing bank
repossessions converged in August, with virtually the same number
of new default notices and bank repossessions for the month — a
clear indication that the clogged foreclosure pipeline is being
carefully managed on both ends by lenders and servicers. On the
front end, seriously delinquent loans are rolling into foreclosure
at an unusually slow rate, while on the back end the dammed-up
inventory of properties already in foreclosure is moving to REO in
steady stream rather than a flood — presumably to prevent further
erosion of home prices.”
- The Institute for Supply Management (ISM) index of
manufacturing activity was 56.3 in August. This marked the
fifteenth month in a row in which the manufacturing sector
expanded. The ISM index of non-manufacturing activity was 51.5,
down from July, but still marking growth in the service sector for
ten consecutive months.
- The Federal Reserve reported that capacity utilization in the
industrial sector increased in August for the fourteenth straight
month, to 74.7%. Capacity utilization is now 4.7% higher than a
year ago and only 5.9% below the average level of the period from
1972 through 2008. The industrial sector continues to lead the
- The Conference Board reported that it's index of Leading
Economic Indicators increased by 0.3% in August, following an 0.1%
increase in July and a decrease of 0.3% in June. "While the
recession officially ended in June 2009, the recent pace of growth
has been disappointingly slow, fueling concern that the economic
recovery could fade and the U.S. could slide back into recession.
However, latest data from the U.S. LEI suggest little change in
economic conditions over the next few months. Expect more of the
same – a weak economy with little forward momentum through 2010
and early 2011."
- According to the Bureau of Economic Analysis, the "second"
estimate of GDP growth in the second quarter was a lethargic 1.6%,
lower than the "advance" estimate of 2.4%, and lower still than
the first growth of 3.7%. Overall economic growth is clearly
- The Federal Reserve reported that in July the amount of
outstanding consumer credit decreased at an annualized rate of
1.75% from the prior month, to $2.419 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 increased 0.4% in August, and were 3.6% higher than a year
ago. This was mildly disappointing to the market, which was hoping
in vain for more robust numbers. I believe that until the
employment numbers show some sustained growth, retail sales will
continue to lag.
- The Federal Reserve reported in that in August the supply of
M-2 increased slightly from the prior month and was up only 2.5%
during the prior six months. The supply of M-1, on the other hand,
rose a slightly faster 3.6% over the same six months. It appears
that the rate of monetary expansion may again be increasing,
albeit slightly. The problem is that this money is not circulating
through the economy quickly enough.
- The Conference Board Consumer Confidence Index increased 2.0
points to 53.5 in August, but still has a ways to go. Consumers
remain concerned about the job market and their near term
- According to the BEA, he personal savings rate in August fell
to 5.9% from 6.2% in July. This is still much higher than it has
been in recent years. I would expect this rate to drop in
September as the stock market has rallied.
- According to the FDIC, 125 banks have failed so far this year,
through September 17. It's very likely that the failures in 2010
will eclipse the mark of 140 banks that were either closed or
merged into healthier banks in 2009. By comparison, 26 failed in
2008 and only 3 failed in 2007.
In July 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 dropping hard and fast, breaking below
resistance around 82. While I don't expect the dollar to roll over
and plunge back to historic lows just yet, it could go a little
lower. The next resistance level will be around 78.
After taking a breather over the
summer, the bull market in gold has resumed with a vengeance.
The price of the yellow metal has broken above the resistance at
$1,265 and soared to a new all time high (unadjusted for
inflation) of about $1,295/oz. I wrote in July that "any price
under $1,200/oz is an opportunity as I believe the next target for
gold will be $1,300." I hope you took advantage of that advice
because $1,300 could occur any day.
While gold is getting all the
headlines, silver continues to do equally well. Indeed, after
consolidating for most of 2010, the price of silver has also moved
to a new high of about $21/oz. In July I wrote that "I look for
silver to move above $20 per ounce before year-end." Well that
didn't take too long. The question now is will silver rise to
$25/oz? I will likely be a buyer if the price falls below $19/oz
during the next pullback.
The price is copper has moved to
the top end of the trading range, and has moved above both moving
averages. Equally important from a technical perspective is that
the 50-day average has moved higher than the 200-day average. All
of this suggests that the price of copper could be moving higher,
which is bullish for mining and industrial
At around $75/barrel, West Texas
Crude it is now trading fractionally below both moving averages
and at roughly the midpoint of the most recent trading range
(below in purple). $70 or so is a pretty strong support level and
$84 is a solid resistance level. Let's see what happens next.
The financial sector has
returned to the trading range in place for the better part of the
last year and a half. The current price is roughly in line with
both of its moving averages. I have been negative on the financial
sector since the Lehman failure in '08, and there is nothing going
on now to dissuade me from that stance.
If you read any of the
statistics that I reported above on the housing sector, it
shouldn't surprise you that the housing sector isn't doing very
well. What surprises me is that it's not doing even worse. With
the index trading near the bottom of the range, and the 200-day
average well above the 50-day average, the technical picture is as
gloomy as the fundamental outlook.
The European market has not only
stabilized, but seems to be trending back to health after the Euro
crisis from the summer. Support at around 46 has held, the price
is trading above both moving averages and the 50-day looks to try
to overtake the 200-day average. Look for resistance around 57-58.
I don't believe the crisis is over by any means, but for now,
things look more sanguine.
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, while better recently, is still not in great
shape. The moving averages have crossed and the index is below
both. This is all very bearish. Should the Chinese market roll
over and violate support below 2,400 it would be very ominous and
have very negative implications for the global economy. There
looks to be resistance around 2,800 on the upside. So there is
your range; pay attention.
The Baltic Dry Index tracks the
Shanghai Composite very closely. Based on the trading patterns
from the past year, you would expect the BDI to next head lower,
after the bounce from a highly oversold position that I called in
the July letter.
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. After the very strong
rally from the last month, it's to be expected that RSI is close
to oversold levels. This would suggest a sell off, or at the very
least, a period of consolidation to allow some of the exuberance
to wear off.
As I predicted back in July, the
VIX has returned to the middle of it's "normal" trading range.
Barring unexpectedly bad economic or political news, or very bad
q3 earnings, I would expect the VIX to remain relatively quiescent
for the rest of the year.
What I'm Thinking and
Investors who did not panic
during the spring sell off or the two summer swoons are now being
rewarded by a move back into equities. Corrections are normal
parts of the stock market cycle. I wrote last time that the market
would likely consolidate somewhere between resistance at 10,600
and support at 9,600. It did that and has now broken to the
upside. The technicals right now look better. Corporate profits,
by and large, are growing and companies are increasing their
dividends. We could be in for a very nice rally. And while we will
certainly have another correction along the way, I think the
market is poised to go higher.
I made very few changes to my
portfolios over the summer. I was content to sit with my core
holdings, collect my dividends, and wait for a better sense of the
near term direction of the market. I may use this rally to sell a
couple of my weaker holdings on an up tick and redirect those
funds to stronger positions. I'm also going to start looking at
the gains/losses so far this year to make sure my clients pay
little to no taxes next year.
Personal News and
Well, summer is officially over,
which makes me very sad. The good news is that we're having a very
pleasant Indian summer in the NY area right now, and the weather
is beautiful. The Jewish holidays are over and the kids are back
to school full time after their fantastic summer adventures. Nola
is now in 10th grade, Lily is in 7th and Ezra is in 5th. They all
seem to right back in the groove. And Lily is about to start the
Bar/Bat Mitzvah circuit, with her own coming in May. My baby girl
is growing up.
I had a really nice summer,
culminating with super fun vacation in West Virginia and the Outer
Banks of NC. I have to admit, I am sad to see summer go. I am SO
not ready for the cold weather. I will have to go find the sun a
few times throughout the winter.
I am back in the water, training
full time again. I'm going to do my best to get in tip-top shape
this season and enter a few local and regional meets before
heading off to Arizona in early May to compete in the Masters
National Championships. My goal is to finish a few events in at
least the top 20, and maybe slip into the Top 10 once or twice.
That's seven months from now, so we'll see what
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.
"News and Views", Copyright©, Werlinich Asset Management,
LLC and www.waminvest.com. All