All-Time Highs: Now What?
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 before the
market opens for trading, the Dow Jones Industrial Average
stands at 14,511, up 535 points,
or 3.8%, from when I wrote to you last month, and
up 10.7% year-to-date. Most importantly, after struggling with resistance for months, the venerable index finally
achieved its all time high on March 3rd and
has marched ever upward since then. It has taken five and
a half years to surpass the old level, and what a ride
it's been. At the same time, the Transportation average has also continued to
zoom to new peaks. As the two averages have concurrently
made new highs, this marks a bullish confirmation according to Dow
Theory. So for now, even with the bad news out of Cyprus,
it appears that the market is likely to continue even higher.
This month, I'm showing a
chart of the DJIA dating back to October 2007, the last time the index reached
an all time high. Clearly,
the first thing that strikes you is the precipitous plunge, thanks
to the financial crisis, that reached its nadir in March 2009.
Four years later, we've reached the promised land. Interestingly, there were market corrections
in the summer of 2010, 2011 and 2012. Hmmmmmm. The summer
of 2013 is just around the corner. That should give
Last month I wrote that the market was taking a
little breather before it was likely to move up. Indeed, I said that
"I wouldn't be surprised to see the new high before the month is
over." I was only off by three days. Given the accommodative Federal
Reserve (as well as most central banks around the globe) I expect
the rally to continue, at least for another month or so. Come
summer, we may see our next correction.
The Dow Jones Transportation Average has maintained its parabolic
rally. RSI continues to trade in overbought territory but may be correcting as we speak
(thanks to a huge earnings miss by Fed Ex yesterday). A modest correction
would not derail this rally, and indeed by provide
the spark for the next move higher.
Has anyone in the mainstream press mentioned
that the Dow Jones Utility Average has recovered the entire
correction from last fall and is poised to push through resistance around 500 to
new record levels? As far as I can tell,
I'm about the only one talking about it. It's a very positive development that the moving
averages have made a "Golden Cross" as the 50-day average has
moved above the 200-day. Relative strength might be a bit extended,
suggesting a small correction could be coming up, but I think there's
room for more gains.
I'm not sure what to make of
the chart of the 10-year Treasury. Clearly, Ben Bernanke
and the rest of the Federal Reserve is fighting tooth and nail to
keep a lid on interest rates. Yet over the last seven months the yield
has jumped from 1.4% to around
2.0%. Below you can see the two principal trading ranges outline
by red and blue lines, and the
resistance line at 2.1% (dotted green). Three times in the past couple
of months the yield failed to pierce that resistance. The
recent four month trend of 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've been saying for months: bond
investors should prepare for lean times.
Last Month's Results
The solid results in February
followed the superb gains in January. And the market has continued higher
to-date in March. All of the domestic averages has posted solid gains so
far this year, although the NASDAQ is a conspicuous laggard. Value is trumping growth
as investors search for yield to replace income lost in fixed income. The Dow
continues to surpassed both the S&P and the NASDAQ, reversing the results from last
year. Note that bond investors were basically flat for the year. A lot of people are
going to realize, too late I'm afraid, that you can in fact lose
money in bonds.
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 March 16 was 336,000, an increase of 2,000
from the prior week's revised figure. The four-week average of 339,750 is
about 11,000 lower than the prior month's tally. According to the
seasonal average, about 3.0 million people continue to collect unemployment insurance,
a drop of about 100,000 from the prior month.
payroll employment in February, for the most part, was
reasonably positive. The establishment survey reported that 236,000 jobs were added in the month, a
huge jump from January, while the household survey said that the unemployment rate fell
to 7.7%. Revisions to December added 23,000 more jobs while January revisions subtracted 38,000,
for a net loss of 15,000. The total number of workers counted as
unemployed remained at 12.2 million and
the labor force participation rate remained stable around 63.5%. The more
comprehensive U-6 "underemployment" rate dipped to 14.3%.
- 4.8 million people continued to
be unemployed longer than 27 weeks. The seasonally adjusted number of people who could only
find part-time work held at 8.0 million and the number of
marginally attached workers fell to 2.6 million. The number of people holding
multiple jobs jumped to 7.4 million. The average hourly wages for blue collar
workers rose to $20.04 while the average work week inched up to 33.8 hours.
Overall, the job increases are solid, and above estimates, 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 $205 billion in
February, and $495 billion for the first five months of the fiscal year, which is
$86 billion less than the record figure reported for the
same period of fiscal 2012. The CBO anticipates a full year
deficit of $845 billion, assuming no new tax legislation, or about $240 billion
let than last year.
- The Census Bureau reported that the U.S. trade deficit of
goods and services was $44.4 billion in January, up almost $6 billion from
December, after falling in November. In general, the trade deficit should continue to fall through the year.
- The Census Bureau reported that privately owned housing
inched up 0.8% in February, still far below the five year high
set in December. Housing starts are now 27.7% higher than a year ago, to a seasonally adjusted annual rate of 917,000
units. New building permits rose 4.6% from
the prior month, and were 33.8% higher than the year before, to easily the highest level
in more than a year. The recovery in the housing market continues.
The National Association of Homebuilders/Wells Fargo Confidence Index dropped for
the second straight month in March, to 44. This remains near the
highest level since May 2006. A healthy figure would be around 50 or above. It's odd that
builder confidence is shrinking in the face of a surging housing market.
- The Census Bureau reported that on a
seasonally adjusted annualized basis, 437,000 new homes were sold in January, a huge
15.6% higher than the December totals and 28.9% better than a year
ago. This was the highest figure since August '08. The
estimate of number of homes for sale
was 150,000, which represents a tiny 4.1 months of inventory at the current rate
of sales. The median sales price dropped to $226,400, which is well
below the rising 12-month moving average price of $241,758. Even though the average sales
price dropped this month, likely reflecting an increase in short-sales, the overall trend remains good
and a tight market augurs well for future price increases as
we move towards the spring selling season and continue to reduce the inventory
of foreclosures and short-sales.
The National Association of Realtors reported that on a
seasonally adjusted annualized basis, sales of existing
homes were virtually flat in January, at
4.92 million units, but remained 9.1% higher than a year ago. The
estimate of only 1.74 million homes for sale means there's only a
tiny 4.2 months supply on the market. The median
sales price dropped to $173,600, which is still above the rising 12-month
average of $177,025. 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, inched slightly higher in December. The composite posted a 5.9%
gain for the year. Before any strong momentum begins, I'd expect some
weakness again based on the February housing numbers.
- The Institute for Supply Management (ISM)
index of manufacturing activity was 43.2 in February, indicating
that economic activity in the manufacturing sector was
more robust in the month. In addition, the
ISM index of non-manufacturing activity was 56.0, which marked growth in the
service sector for 38 consecutive months.The service sector continued
its unabated expansion and the manufacturing sector is
looking a bit better. These were positive reports.
- The Conference Board reported
that it's index of Leading Economic Indicators increased
by only 0.2% in January following a healthy 0.5% gain in December.
Says Ataman Ozyildirim, economist at The Conference
Board: "The U.S. LEI rose again in January, pointing to a slow
but continued expansion in economic activity in the near term.
Despite continued weakness in manufacturers? new orders and
consumer expectations, improvements in housing permits and financial
components helped boost the LEI." Says Ken
Goldstein, economist at The Conference Board: "The indicators point to an underlying economy that remains relatively sound but sluggish. Credit use has picked up, driven in part by relatively strong demand for auto loans. The biggest positive factor is housing. The housing market is now at twice the level reached during its recessionary lows, and will likely continue to improve through the spring, delivering some growth momentum to the labor market and the overall economy. The biggest risk, however, is the adverse impact of cuts in federal spending."
- According to the Bureau of Economic
Analysis, the "second" estimate of GDP growth for Q4 2012 showed an anemic growth of 0.1%, which was better
than the decline of 0.1% in the advance estimate. for comparison, 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 doesn't portend a
likely increase in the final estimate coming up next week.
- The Federal
Reserve reported in that in January the amount of outstanding consumer credit was $2.79
trillion, up from the prior month and growing at a
7.0% annualized rate. Consumer credit grew for the sixth consecutive month, which should help retail sales,
which in turn, would boost the economy.
- According to the Census Bureau, retail
trade and food service sales increased a solid 1.1% in February,
and 4.6% year over year. Gas stations, general retail stores, food service and auto dealers led the way. This
is the first month where the increase in consumer credit appears to be spurring
higher retail sales. We'll see if this can continue in the coming months.
- The Conference Board's Consumer Confidence Index soared
in February, making up for the losses in previous months, rising to 69.6 from
58.4. Says Lynn Franco, Director of The Conference Board
Consumer Research Center "Consumer Confidence rebounded in February as the shock effect caused by the fiscal cliff uncertainty and payroll tax cuts appears to have abated. Consumers? assessment of current business and labor market conditions is more positive than last month. Looking ahead, consumers are cautiously optimistic about the outlook for business and labor market conditions. Income expectations, which had turned rather negative last month, have improved modestly"
- According to the FDIC, only 1 bank failed
in February, versus the 4 that failed last February, bringing the
total for the year to 3. I would be surprised if more than 25 or
30 banks go under this year.
The dollar index recently broke out of
the tight range between 78.5 and 81.75 (the two dotted red
lines) and is once again headed towards resistance around 84. I
wrote last month that "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." That's proven to be the case. The
dollar remains a "safe" currency in the face of global uncertainty, no matter how hard we try to
kill it. The government keeps pushing into
the future the fight over the debt ceiling and the federal budget as the fear
of the "sequester" fades from view. Look for the dollar to move
than looking ugly, the short term chart for gold doesn't really tell
us anything. The "death cross" of the moving averages is a negative. The price trading
below the interim resistance band (green lines) is negative. The distance from the
peak around $1,800 is a negative. Yet support around $1,525 has
held and $1,600 has been achieved, and that's positive. So
we sit and wait to see if it can move north of
Since the short term chart isn't speaking to
me, let's look at something a little longer. Below you'll see a
chart of the price of gold going back over 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) and is tightening each month.
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 higher. This could happen when the equity markets finally correct, or
if the problems in Cyprus spill over into the rest of
Like gold, the short term chart of the
price of silver is ugly as it has fallen below interim resistance at
30 and a "death cross" has occurred. Neither RSI or MACD are telling us
much. I expect when gold starts moving higher that silver will
What a difference a month makes. The price of
copper has plunged about 10% in the
last six weeks. Part of that can be explained by
the increase in the value of the dollar, and part
is suggested by weakness in China (see below). Either way, Dr. Copper
is flashing a warning sign that all is not well. RSI is very
oversold, indicating that we might see a rebound shortly.
The price of West Texas crude is sitting right on
its interim resistance around $93 (green dotted line) and just below
the 50-day moving average. The recent "golden cross" signal (red circle) suggests
that the price could move higher, if the strong dollar doesn't
get in the way.
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. It seems that only the
government can get in the way of this rally.
The housing index is also solidly bullish as the price remains above the trendline
and both moving averages and just surpassed the February peak to make a new high. 200 is
The index for the developed international markets
continues to move higher. Once again it is poised to
attack resistance at 62, a high achieved almost two years ago. With RSI calm and
the current price above both moving averages, the chart looks bullish.
What happened to the recovery
rally in the Shanghai index? After failing to breach resistance at around
2,478, the price has fallen about 8.5% in the past month or so. The
decline would certainly put pressure on the prices of base metals like copper.
Look for support around 2,135.
Now we come to our three contrarian market indicators,
which are a mixed bag. The NYSE Bullish sentiment index shows
too much bullishness right now, although RSI is no longer wildly overbought, and
is heading lower. History shows that when bullish sentiment gets this high, a
correction isn't far behind.
Next we see that only about 70% of stocks
traded on the New York Stock Exchange are currently trading above
their 50-day moving average, down from almost 90% two months ago.
This is good; it shows that some of the froth has been taken out of the market, even though
it's moved higher. It does though suggest the rally
has been a bit narrow. As long as the index remains above 50%,
we'll be ok. Below that and we'd likely be in the midst of
a decent sized correction.
Finally, the VIX, or the "fear index",
shows an almost complete absence of fear. This is utter
complacency. The VIX hasn't been this low since early 2007, shortly before the DJIA reach the
last peak. That's something to keep in mind. It won't take much to see the index
jump as I suspect traders have a short fuse right now.
Thinking and Doing
Right now, like many of you, I'm enjoying the
rally and rooting for it to continue ever higher. But I know
that all good things come to an end, and extended stock market rallies are no exception. So while the
market appears "reasonably priced" and the Fed remains highly accommodative, it wouldn't take much to turn things negative. The
fragile economies of Europe could quickly turn down, possibly led by
the solvency crisis in Cyprus. I'm also concerned about what's really going
on in China and why their market is doing poorly
while much of the rest of the world is soaring. And we
still have our own flat economy, and the negotiations over the debt ceiling
and the budget, to deal with. So all in all, I'd
say I'm cautiously optimistic for the next month or so but
concerned about the possibility of another summer correction to follow.
So where does all of that
leave me and my investors? Pretty much the same as the last few
months as we remain fully invested and enjoying the rally,
although to be honest, we've under performed a bit thanks to our 10%
position in gold. But I've got a feeling that before the year is
over, we will again be pleased with that allocation. I'm also
looking to raise a bit of cash from a few of my smaller positions,
and some of my commodity holdings, so that I have some purchasing
power during the next downturn. The strong dollar is causing some
headwinds in commodity sector.
Professional News and Notes
very pleased to announce that my new website
finally up and running. As with any new site,
there will likely be a few kinks to work out and a few bugs
to fix. But I'm very excited with its look and feel and
I'm anxious to hear what you have to say. So
please take a moment to visit the site and let me
know what you think by clicking here.
I was recently interviewed by
Greg Brown for a piece he wrote in the February edition of
Newsmax entitled "After the Gold Rush". In the article I discussed
my positive long-term view of the price of gold and gold mining
stocks. You can read the entire article in the "Media" section of my
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
investment needs, or if you know 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.
"News and Views", Copyright, Werlinich
Asset Management, LLC and www.waminvest.com. All Rights