Doing Nothing Is The Best Move Now
Current Market Analysis
Last Month's Results
Trends To Watch
What I'm Thinking
News and Notes
Current Market Analysis
As I write this before the market opens for
the Dow Jones Industrial Average stands at 17,862, up a modest 125
points from when I last wrote to you, but as you can see below, it
certainly hasn't been a slow and steady rise. After extraordinary
volatility in January the market has settled down a little so far in
February. As I watch this market, soak in the Q4 earnings results and
scan the global economic and political headlines I'm convinced that the
best course of action right now is to do nothing. Therefore, I'll
reiterate what I said last month: investors
need to be patient. Sometimes the best action is no action and
I think this is one of those times.
When looking at the chart of the #DJIA, the first
that jumps out at me is the extreme volatility over the past six
months, especially as compared with the
prior six months. And yet with all of the swings
since the October swoon, the index has remained within the trading
range and mostly above interim resistance (beige line) around 17,350.
The current price is also above both moving
averages. So this chart tells me all is fine, and it's time to simply
sit and the sidelines with my current holdings and watch and wait for
the next signal.
Like the Industrials, the Transportation
Index, the other key component of Dow
Theory, also remains in bullish mode, although not wildly so. The good
news is that the current price of the #DJTA is right around
the 50-day moving average and above the 200-day average. Overall, I remain unwavering in my
belief that this remains a core
sector for investors.
The #DJUA continues
on its slow and steady bull run, yet there is weakness right now,
thanks to the belief that the Fed will begin to raise rates this
summer. As I don't think rates will be lifted any time soon I believe
this will be a buying opportunity. The current price
is above the 50-day moving average but above the
200-day averages and trading in the upper end of
the trading range. Both RSI and MACD look weak, so I wouldn't do
anything just yet. But if the index falls below 600 I would be a buyer.
The yield on the 10-year Treasury continues to be
one of the most important investment themes I follow. The
yield has fallen near, but not quite down to, historic lows. Under
normal circumstances, it's hard to understand why investors would
choose to accept a return of less than 2% over ten years, but these are
not normal circumstances. More than a dozen countries are now charging
investors to own their debt or hold balances in their bank accounts. In
that light, 2% looks awfully good. Last month I wrote that "I now
believe that yields will fall even further, perhaps
even challenging the historically low yields from 2012. Amazingly, the
bull market in bonds is not over yet." I stand by those words.
2015 started with a
thud, as all the major indices fell in January. Interestingly, the
worst performing sector was large-cap value stocks and the best
performing group was government bonds. And EAFE (temporarily) bucks the
downward trend by gaining 0.5%. I expect the EAFE to turn south long
before the year is over. Bonds will likely tread water for the year as
rates stabilize. Equities will likely go up this year, but it's going
to be a challenge to make steady profits.
Name of Index
Dow Jones Industrial Average
Large-cap tech stocks
Russell 1000 Growth
Large-cap growth stocks
Russell 1000 Value
Large-cap value stocks
Russell 2000 Growth
Small-cap growth stocks
Russell 2000 Value
Small-cap value stocks
Europe, Australia, Far East
US government bonds
Barclays High Yield
High-yield corporate bonds
* 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 7 was 304,000, a big increase of 25,000 from the
prior week's revised figure, and higher than the figure from
time last month. The four-week average of 289,750 is the same as the
tally from a month ago. About 2.35 million people
continue to collect unemployment insurance, which is about 100,000 less
than last month. There really isn't much to be taken from these
The non-farm payroll employment report in January handily beat
expectations as the establishment survey
reported that 257,000 jobs were added in the
month, while revisions added an astonishing 147,000
to the prior two months. The household survey reported
that the unemployment rate ticked up to 5.7% as job applicants flooded
the workforce. The more comprehensive
U-6 "underemployment" rate also increased slightly to 11.3%.
million workers were still counted as unemployed (three
hundred thousand more than last month). The labor force participation
rate rose to 62.9%. Can this finally be the month where the
participation rate finally begins to move higher? We'll see.
2.8 million people remained unemployed longer
than 27 weeks, the same as last month. The seasonally adjusted
number of people who could only find part-time work stayed at 6.8
million and the number of marginally attached workers dropped to 2.2
million. The number of people holding multiple jobs fell to 7.29
million. Even the average hourly wages for blue collar workers
increased by $0.07 to $20.80 while the average work week
stubbornly held at 33.8. So jobs are being
created, but workweeks are being held back, possible by companies
seeking to stay below Obamacare guidelines.
Congressional Budget Office (CBO) estimated that on a net present value
basis, the Treasury reported a federal budget deficit of $195
January, leaving the four-month deficit at $195 billion, about
billion more than the shortfall recorded in the same period last year.
It's anticipated that the full year deficit will be around $468
billion, down from a deficit of $483 billion in fiscal 2014.
National Association of Homebuilders/Wells Fargo Confidence
Index dipped one point in January to 57. This marks the third straight
month that the index has hovered in the upper 50s range. “After seven
months above the key 50 benchmark, builder sentiment is reflecting the
gradual improvement that is occurring in many markets throughout the
NAHB Chairman Kevin Kelly, a home builder and developer from
Wilmington, Del. Slow and steady wins the race.
The Census Bureau reported that privately owned housing starts
rose 4.4% in December, to a seasonally adjusted annual rate of
1,089,000 units, which was 5.3% higher than a year ago, and back
to their record levels. New building permits fell
1.9% from the prior month but remained 1.0% higher than the
year before. As these are cold winter numbers, I'm not worried and I
expect January will be mediocre as well.
The Census Bureau reported that on a seasonally
adjusted annualized basis 481,000 new homes
were sold in December, up 11.6% from November and 8.8% from a year ago.
The estimate of the number of homes for sale is
219,000, which represents 5.5 months of inventory at the current rate
of sales. The median sales price rose to $298,100, an increase of
from the prior month (revised), leaving it at the
highest level recorded in the past 10 years, and well
above the 12-month moving average price of $282,300. This
appears to be a pretty healthy housing market.
The National Association of Realtors reported that on a seasonally
adjusted annualized basis, 5.04 million existing homes
were sold in December, an increase of 120,000, or 2.4%, from November
and up 3.5% from a year ago. The estimate of homes for sale
million, which represents a very slim 4.4 months of inventory
at the current
rate of sales. After falling for five straight months, the average
selling price inched higher to $209,500, which is slightly higher
than the rising 12-month
average of $206,808.
According to the Institute for Supply Management (ISM), economic
activity in the manufacturing sector dipped at bit again in
January to 53.5, but still marked overall growth for twenty
straight months. The ISM index of non-manufacturing activity increased
to 56.7, which still signaled growth in the service sector
for 60 consecutive months. These numbers
demonstrate modest economic growth.
Conference Board reported that its index of Leading Economic
Indicators (LEI) increased 0.5% in December, following a gain
of 0.4% (revised) in November. "December’s gain in the LEI was driven
by a majority of its components, suggesting the short-term outlook is
getting brighter and the economy continues to build momentum,” said
Ataman Ozyildirim, Economist at The Conference Board. “Still, a lack of
growth in residential construction and average weekly hours in
manufacturing remains a concern. Current economic conditions measured
by the coincident indicators show employment and income gains are
helping to keep the U.S. economy on a solid expansionary path despite
some weakness in industrial production."
According to the Bureau of Economic Analysis, GDP increased at an
annual rate of 2.6% in Q4 2014 according to the "advance" estimate, a
substantial drop from the estimates of 5.0% and 4.6% in Q3 and Q2
respectively, but well above the anemic
decline of 2.1% in Q1. I would expect GDP growth going forward to be in
the 2.5% to 3.0% range.
The Federal Reserve reported that in December the amount of total
outstanding consumer credit grew at an annualized rate of 5.5%, up to
$3.312 trillion. The amount of outstanding consumer credit has
increased every month since July 2012 and is at the highest level since
I started tracking this in 2004. With interest rates near zero there is
virtually no incentive to save any longer.
According to the BLS, the seasonally adjusted Consumer Price Index
for all Urban Consumers (CPI-U) declined 0.4% in December, after
falling 0.3% in November. If you take out food and energy, CPI was
unchanged in December. Over the last 12 months, the index increased
a mere 0.8%. The drastic (9.4%) decline in the price of
gasoline helped cause the drop, even as the cost of food,
medical care and travel all increased.
The Conference Board's Consumer Confidence Index, which increased in
December, rose sharply in January 93.1 (adjusted) to 102.9. Says Lynn
Franco, Director of The Conference Board Consumer Research Center,
"Consumer confidence rose sharply in January, and is now at its highest
level since August 2007. A more positive assessment of current business
and labor market conditions contributed to the improvement in
consumers’ view of the present situation. Consumers also expressed a
considerably higher degree of optimism regarding the short-term outlook
for the economy and labor market, as well as their earnings."
In order to put the
gains enjoyed by the dollar into the proper perspective I've had to
broaden the time frame to thirteen years. Doing so allows us to see
that the dollar index hasn't been this high since the end of 2003. The
dollar simply continues to appreciate against almost all other
currencies. We are already seeing the negative repercussions for
commodity prices (oil, precious
and base metals)
as well as the reduced earnings of companies that generate
significant sales from overseas. This will continue to be an
investment theme this year. Notice all the companies that have reduced
their guidance for 2015 based on negative currency translations. It
won't be good for their stock prices.
Here is the other incredibly important chart. The price of West Texas
Crude remains in a severe downtrend. What is important is
if the price can remain above major support at $40. Last week
the price fell to $43 before bouncing above where it holds today. If
this support holds multiple assaults I may gain some comfort that a
bottom will have been made. Until then, I patiently wait and
Last month I said if the price of gold got above
$1,225 it might be a signal to buy. As you can see below, the price
broke $1,300 before falling back to $1,225. For now, barring any new
announcements from the Fed, I would stay out of this trade because gold
could be headed back down.
The strong dollar is certainly no friend to the
copper, which has now fallen below major support around $2.80. The next
level of support is the financial crisis low of $1.25. I can't help but
think that copper has simply fallen too far. Things are MUCH better now
than they were during that crisis. That suggests to me that a buying
opportunity isn't far away. I realize the strong dollar controls it's
fate, yet some real profit awaits the investor who is willing to buy
copper stocks sometime in the next few months.
The Nasdaq Composite continues its
relentless climb to surpass the record closing price of 5,048.62 from
2000. The index is now only 210 points, or about 4%,
below the record. It's been a VERY LONG road to get to this point. I'm
saying I expect the tech-heavy index to finally
push through that level sometime in the first half of this
year. Accordingly, I increased the tech exposure in my
Last year I made two well-timed two "buy"
calls on the financial sector. Last month I suggested that if the price
approaches 23.5 it would be a good entry price, and so far, that's
proven correct. The index remains solidly within the trading range and
well above the 200-day moving average. RSI is stable and MACD has
turned up, so for now, everything looks fine.
This month I've widened the horizon on the chart of
the housing index to give you a greater perspective on the price
action. It has taken more than eight years, but the index has finally
returned to a level not seen since the beginning of 2007. I think
resistance will be broken before Memorial Day.
In December I told you to avoid
the developed international markets. After falling further in
early January it's rebounded strongly over the last month, but it
hasn't yet been able to pierce resistance at 65. Since I don't expect
things to improve any time soon I'm reiterating the
call to stay away from this sector.
The Shanghai Index has gone parabolic over the last
seven months. And looking at the chart now, seeing that RSI
and MACD are both extremely
overbought, I would sit and wait for the inevitable
correction. Because when it comes, it's going to be a doozy. In fact,
maybe it's already begun.
The NYSE Bullish sentiment index proved to be a
very good contrary indicator last year. If you bought near the
bottom of each of the four declines you would have done very
well. Last month I said "the market could go either way in the
near-term, so I wouldn't
be a buyer or a seller right now." Since the market seems neither
bullish nor bearish right now, I'll reiterate that advice.
The VIX is fairly sanguine right now, showing
neither fear nor complacency. This further validates my belief that
investors should just be sitting tight right now, collecting their
dividends and waiting for the next buying opportunity.
What I'm Thinking and
I think the US economy remains one of the few
bright spots of the developed world, and our consumption continues to
drive the growth
of the less developed countries. That's a good thing. The increased
value of the dollar
relative to other currencies will provide a headwind to the
profitability of US corporations this year. That's not a good thing, at
least in the short-term. Regardless, I think the US economy will
continue to hum along, at least until summer. Then we'll do battle with
the rumors of increased interest rates alongside the traditionally weak
summer selling season. I also believe that Europe will struggle more
than most observers expect, so I would focus my investments on
companies in the US. I expect the Fed will leave short-term
rates unchanged for longer than anticipated so as not to risk dampening
the modest GDP growth and giving a further boost to deflationary fears.
Therefore rates will remain quiescent, and could fall to as low as
a result, interest rate
sensitive sectors like REITs and utilities will continue to do
well, as will investments that pay generous dividends.
So what am I doing right
now? As you might have guessed, nothing. I don't think I've placed five
trades yet this year. I'm simply holding my existing positions,
dividends, and waiting. I'm in no hurry to buy anything, nor am I
compelled to sell anything. I feel the best thing to do now is to sit
tight, build up some cash and be patient. There will be a buying
opportunity sometime in the next few months. When that time
comes, I'll be
ready to act. I expect sometime in the next few months I'll be ready to
buy some selected stocks in the beaten down energy
sector at bargain
basement prices. That may be my next big purchase.
2015 has begun with sleet, snow and unrelenting
freezing temperatures. Other than that, things are going well. I've had
two local swim meets, both of which went pretty well. My times are
about where they should be for this time of year. Now it's all about
getting ready for my big meets in March and April.
Last month I wrote that "I made philanthropy a much
more important part of my life last year, with both my time and my
money. Going forward, that commitment will only become more important
meaningful [and that] we all need to step outside of our own selfish
needs and try to help those less fortunate and make a difference in the
lives of those around us. If we each do that, in ways large and small,
we can all play a part in improving all of our lives." I would be very
pleased to speak with any of you about this, and how you could join my
effort to enrich the lives of others by giving back to those in need.
Along those lines, I'm incredibly excited and proud
that Kathiryn and I have been asked to co-chair the annual fund-raising
gala for an organization called Cluster that provides a wide range of
much needed community services in Yonkers, NY where the need in
Westchester is greatest. This year will celebrate the 40th anniversary
of the formation of Cluster, so the gala is sure to be a big one. To
learn more about
this organization, please click here. I'll provide more
details about the event
later this year.
it for this month. As always, I thank you for reading. If you'd like to
speak with me about your investment needs, or if you know of someone
that might benefit from my guidance, I'd be pleased to be of service.
Simply give me a call or drop me an email.
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