Werlinich Asset Management, LLC

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March 13, 2015

Neither A Buyer Nor A Seller Be

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

Current Market Analysis

As I write this shortly after the market opens for business, the Dow Jones Industrial Average stands at 17,787, down a slim 75 points from when I last wrote to you. But as you can see below, a lot has happened in the intervening thirty days, with the #DJIA hitting an all-time high just two weeks ago. In general, the market appears more and more choppy these days as it tries desperately to figure out if, and when, the Federal Reserve will begin to raise interest rates. Given that uncertainty, and realizing that the broad market averages remain near record highs, I still believe that the best course of action right now is to do nothing. Therefore, I'll reiterate what I've said for the past two months: investors need to be patient. Sometimes the best action is no action and I think this continues to be one of those times. 

Regardless of the daily price swings we're experienced over the past few months, the big picture is that the #DJIA remains solidly bullish with the current price well above the 200-day moving average and the bottom range of the upward moving trading channel. Interim support (green line) seems strong around 17,250. 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. 

The Transportation Index, the other key component of Dow Theory, is struggling a bit as it has consolidated over the past four and a half months. It also failed to confirm the bullish signal suggested when the #DJIA hit a record on March 2. The last time the #DJTA made a new high was back in December. This is mildly, but not seriously worrisome. The good news is that the current price of the #DJTA is right around the 50-day moving average and well above the 200-day average. It also remains comfortably above the interim support (green line) around 8,700. I'm still convinced that this remains a core sector.

Is the bull market over for the Dow Jones Utility Average, or is this simply a natural correction after a lengthy period of outperformance? I think the primary reason the sector has sold off this year is fear that if rates rise, utility yields will be relatively less attractive. Still, I believe it's still worth owning utilities as the average yield continues to be much better than that of the 10-year treasury and I'm not convinced rates will be much higher in the next few months. Still, I'm not issuing a "buy" here. I want to see if support (green line) holds at 570, or it sinks down to test the 530 level. It is a bearish signal that the current price is below both moving averages, so we'll have to wait a bit to see what the next move will be.

After falling in almost a straight line for over a year, the yield on the 10-year Treasury may have finally made a bottom. Rates have spiked over the past couple of weeks as traders anticipate a rate increase from the Fed, possibly as soon as their June meeting. I'm not convinced that rates will rise that quickly, but I think rates could trade between interim support (2.0%) and resistance (2.4%) for a few months as things get sorted out.

Last Month's Results

After starting 2015 with a thud in January, the major averages roared back to life with big gains in February. Growth stocks outperformed value stocks, which is no surprise during a big rally. Even European stocks enjoyed a big increase. About the only sector that didn't advance last month were bonds, which dropped as rates rose. Could this be the inflection point where the great bond rally finally peters out and rates begin a steady, if slow, climb? While I don't think that rates are moving much higher any time soon, I do think we've likely seen the bottom.

Name of Index





S&P 500




Large-cap stocks

Dow Jones Industrial Average




Large-cap stocks

NASDAQ Composite




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

Barclays Aggregate




US government bonds

Barclays High Yield




High-yield corporate bonds

* Return numbers include the reinvestment of dividends

Statistics To Watch

  • According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended March 7 was 289,000, a big decrease of 36,000 from the prior week's revised figure, and much lower than the figure from this time last month. The four-week average of 302,250 is above the tally from a month ago. About 2.42 million people continue to collect unemployment insurance, which is about 67,000 more than last month. There really isn't much to be taken from these numbers.
  • The non-farm payroll employment report in February beat expectations as the establishment survey reported that 295,000 jobs were added in the month, while revisions actually subtracted 18,000 from the January tally. The household survey reported that the unemployment rate fell to 5.5% but the labor force participation rate ticked back down to 62.8, so where is the real growth? The comprehensive U-6 "underemployment" rate also decreased to 11.0%. A dwindling 8.7 million workers were still counted as unemployed (three hundred thousand less than last month).
  • 2.7 million people remained unemployed longer than 27 weeks, slightly less than last month. The seasonally adjusted number of people who could only find part-time work fell to 6.6 million and the number of marginally attached workers held at 2.2 million. The number of people holding multiple jobs fell to 7.22 million. Average hourly wages for blue collar workers remained at $20.80 and the average work week stubbornly held at 33.8. So jobs are being created, but the length of the work week and hourly wages remain stagnant. To me, this is not a real indication of strong economic growth.
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $192 billion in February, leaving the five-month deficit at $386 billion, about $10 billion more than the shortfall recorded in the same period last year. It's anticipated that the full year deficit will be around $486 billion, similar to the deficit of $483 billion in fiscal 2014.
  • The National Association of Homebuilders/Wells Fargo Confidence Index dipped two points in February to 55. This marks the fourth straight month that the index has hovered in the upper 50s range, and the second monthly decline. "For the past eight months, confidence levels have held in the mid- to upper 50s range, which is consistent with a modest, ongoing recovery," said NAHB Chief Economist David Crowe. "Solid job growth, affordable home prices and historically low mortgage rates should help unleash growing pent-up demand and keep the housing market moving forward in the year ahead."
  • The Census Bureau reported that privately owned housing starts fell 2.0% in January, to a seasonally adjusted annual rate of 1,065,000 units, which was 18.7% higher than a year ago, and just below record levels. New building permits fell 0.7% from the prior month but remained 8.1% higher than the year before. Given the harsh winter, these numbers aren't too bad.
  • The Census Bureau reported that on a seasonally adjusted annualized basis 481,000 new homes were sold in January, essentially unchanged from December but still up 5.3% from a year ago. The estimate of the number of homes for sale is 218,000, which represents only 5.4 months of inventory at the current rate of sales. The median sales price rose to $294,300, a small decrease from the prior month (revised), leaving it near the highest level recorded in the past 10 years, and well above the 12-month moving average price of $285,458. Nothing concerns me here.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, 4.82 million existing homes were sold in January, a decrease of 250,000, or 4.9%, from December, but up 3.2% from a year ago. The estimate of homes for sale is 1.87 million, which represents a slim 4.7 months of inventory at the current rate of sales. The average selling price has fallen five of the past six months and is now down to $199,600, which is below the still rising 12-month average of $207,675.
  • According to the Institute for Supply Management (ISM), economic activity in the manufacturing sector dipped again in February to 52.9, which still marked overall growth for 21 straight months. This was the lowest reading since January 2014 and marked the fourth consecutive monthly decline. The ISM index of non-manufacturing activity increased to 56.9, which signaled growth in the service sector for 61 consecutive months. These numbers demonstrate modest economic growth. The fact that the service sector is doing better than the manufacturing helps explain why wages aren't growing.
  • The Conference Board reported that its index of Leading Economic Indicators (LEI) increased 0.2% in January, following a gain of 0.4% in December. "The U.S. Leading Economic Index increased again in January, but its pace of growth has moderated in recent months," said Ataman Ozyildirim, Economist at The Conference Board. "While the LEI suggests a positive short-term outlook in 2015, the lack of strong momentum in residential construction, along with a weak outlook for new orders in manufacturing, poses a downside risk for the U.S. economy."
  • According to the Bureau of Economic Analysis, GDP increased at an annual rate of 2.2% in Q4 2014 according to the "second" estimate, down from the advance estimate of 2.6% and a substantial drop from the 5.0% and 4.6% growth rates in Q3 and Q2 respectively, but well above the anemic decline of 2.1% in Q1. I still expect GDP growth going forward to be in the 2.5% to 3.0% range.
  • The Federal Reserve reported that in January the amount of total outstanding consumer credit grew at an annualized rate of 4.25%, up to $3.328 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 it's better to borrow cheaply and spend rather than save.
  • According to the BLS, the seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) declined 0.7% in January, after falling 0.4% in December. If you take out food and energy, CPI actually rose 0.2%. Falling energy costs and gasoline prices overwhelmingly caused the decline in the all items index. Over the last 12 months, the index decreased a tiny 0.1%. This is another example that the economy is far from overheating, which should help temper the need for the Fed to increase rates.
  • The Conference Board's Consumer Confidence Index, which increased in January, fell again in January from 103.8 to 96.4. Says Lynn Franco, Director of The Conference Board Consumer Research Center, "After a large gain in January, consumer confidence retreated in February, but still remains at pre-recession levels (September 2007, Index, 99.5). Consumers’ assessment of current conditions remained positive, but short-term expectations declined."

Trends To Watch

The dollar is the best performing asset class this year. In fact, some pundits are comparing the almost parabolic ascent of the greenback to the move by internet stocks in the late 1990s. While I'm not prepared to make that comparison, it is a powerful image. Currencies don't usually have such impressive moves in such a short period of time. As the dollar powers every higher we continue to see the negative repercussions for commodity prices (oil, precious and base metals) and the earnings of companies that generate significant overseas sales. On the other hand, it's great for importers and travelers.

The price of West Texas Crude remains in a severe downtrend. It is crucial that the price holds above major support at $40. Given the relentless appreciation of the dollar, and the massive over-supply of oil and gas in this country, I don't expect prices to rise for at least a few months. But later this year, as supply is reduced dramatically, thanks to a rapidly dwindling rig count, and demand increases during the summer months, I think that prices will firm and rebound. A major buying opportunity is coming up later this year.

This is getting very ugly again. The appreciation of the dollar is killing the price of gold. Last month I said that "barring any new announcements from the Fed, I would stay out of this trade because gold could be headed back down." For traders, if support holds at $1,140, this could be a quick buying opportunity. For investors, I'd stay away because as rates rise later this year, gold gets less appealing. 

The strong dollar is certainly no friend to the price of copper, which remains below major support at $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 in the global economy MUCH better now than they were during that crisis. Things continue to be build, suggesting that copper continues to be needed. That suggests to me that a buying opportunity isn't far away. I realize the strong dollar controls it's fate, yet some real profits may await the investor who's 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 March 10, 2000. On March 2 it closed just 40 points below that hallowed level before falling back a bit. The index is now only 185 points below the record. It's been a VERY LONG road to get to this point. I'm on record 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 portfolios late last year and earlier this year.

Last year I made two well-timed two "buy" calls on the financial sector. In January I wrote that if the price approached 23.5 it would be a good entry price; and that too has proved correct. The index remains solidly within the trading range and above both moving averages. RSI is stable and after a brief dip, MACD has turned up. Most of the major banks passed another "stress test", allowing them to increase their dividends, providing further fuel to the ascent. So for now, everything looks fine.

Looking at the chart of the housing index we can see a powerful ascending triangle formation that has formed over the past six years. This pattern suggests that the price will soon break above resistance around 240 and achieve a level not attained since the beginning of 2007. Last month I wrote that I thought resistance will be broken before Memorial Day and I'm sticking with that prediction.

In December I suggested that you avoid the developed international markets. Shortly thereafter the index fell below support before rallying in January and February. It appeared that my call was ill-timed. But the index bounced off resistance (pink line) and is again heading lower. Even though some of these markets are benefiting from positive currency translations, I'm still not comfortable investing outside the U.S. right now so I'm staying away.

After a meteoric rise over seven months, the Shanghai Index seems to be consolidating just above major resistance around 3,200. If this can hold for a while, that will become support as the index seeks higher levels. China is trying to move their companies off the government teat (as it were) and have more of them go public. This could be a good thing as the weak will fail and be absorbed by the strong. If the index can consolidate for a while, rather than fall back, it will be hugely bullish for the long-term.

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. Over the past two months I said "the market could go either way in the near-term, so I wouldn't be a buyer or a seller right now." Looking at this chart, which offers no discernible clue about current sentiment, I'm inclined to continue waiting.

Like the Sentiment Index above, the VIX appears fairly sanguine right now, holding right at the midpoint of the primary trading range (green line). This too suggests that it's just time to be patient, collect your dividends and wait for the next buying opportunity.

What I'm Thinking and Doing

I think we have entered a period in which the market will be increasingly volatile, both daily as well as weekly and monthly. Factors including the acceleration in the value of the dollar, the falling price of oil, and the uncertainty surrounding the future of Fed interest rate policy will all contribute to increased market volatility. Then by the fall we'll have the joy of strapping in for a year of gearing towards the presidential election, and all uncertainty that entails. And we all know how the market hates uncertainty. I think we all better get used to large price swings again.

Still, 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. Europe is doing better, as is China. The financial sector appears to be in very good fiscal shape. Corporate balance sheets are flush with cash and paying much lower rates on their debt. Consumers are also doing better as more have jobs and everyone is enjoying a big break on gas prices. Given all of that, things really are pretty good in this country. And against that backdrop, it's hard to be too gloomy. The market has been bullish for six years and I don't think the party is over just yet. While we are certainly due for a correction, I don't see any reason for the bear to rear it's ugly head any time soon.

I'm now celebrating 18 years in business. And in all that time I don't think I've experienced any quarter in which I have placed fewer trades than this one. As I've been saying for months, there is simply no compelling reason to buy, or sell, anything right now. So I remain disciplined by not chasing stocks, knowing that a time will come when they'll drop in price to more profitable buying levels. I prefer to simply hold my existing positions, collect my dividends and wait for better opportunities. It is perfectly acceptable sometimes to sit tight, build up some cash and be patient. There likely will be a much better buying opportunity sometime in the next few months, especially in the beaten down energy sector. When the time comes, I'll be ready to act.

News and Notes

I know I've been talking a lot about philanthropy over the past few months, and this will be no exception. In fact, I hope you won't mind a little bragging, and a personal appeal, this month. First the bragging. Two days ago my son Ezra was honored as the "Future Leader of the Year" by the Association of Development Officers. ADO is a nonprofit organization dedicated to the advancement of fundraising and philanthropy in the Hudson Valley region. It was a tremendous achievement for Ezra as the ADO recognized the seven years that he has worked at a local soup kitchen, which is half his life! He delivered a heartfelt, intelligent and funny speech that was well received by the more than 200 people in attendance. Our entire family is incredibly proud of him!

Now the appeal. Last month I mentioned that Kathiryn and I have agreed to co-chair the annual fund-raising gala this fall for Cluster, a nonprofit that's celebrating its 40th anniversary this year. We were very saddened a month ago to learn that due to the very unexpected elimination of County funding, Cluster had lost $45,000 of the $60,000 annual budget for their Study Buddy Program. We believe that the work they do is far too important to be canceled due to something so capricious. So we offered to help. Along with their Board of Directors and Advisory Council, we are offering to match every new dollar donated, up to $15,000. That means that Cluster will receive $3 for every $1 in new donations. So please, help us ensure that the Study Buddy Program will continue to help less advantaged teenagers graduate high school and prepare for college and careers. To learn more about this organization and what we're trying to do, simply click here. If you feel that you've heard enough and are ready to donate, just click here and designate the money for "Study Buddy". Thank you in advance for your consideration.

The rising temperatures, and Daylight Savings Time, also means it's time for the big swim meets. After almost six months of virtually non-stop training, five days a week, regardless of the temperature outside, it's time to see if the work was worth it. Next weekend I head up to Harvard for the New England Championships. This is always a very competitive meet with lots of fast swimmers and I'm sure this year will be no exception. Then one month later I'm off to San Antonio for the National Championships. Then . . . . some much needed rest!

That's 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.

Best regards,

Greg Werlinich

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