Werlinich Asset Management, LLC

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April 22, 2014

I'm Still Bullish

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, the Dow Jones Industrial Average is trading at 16,537, up 472 points, or 2.9%, from when I wrote to you last month. This leaves the venerable index only 39 points shy of the all time high registered on December 31 of last year. At the same time, the Dow Jones Transportation index is currently trading at a new high, and the S&P 500 is just 9 points away. So as you can see, things are pretty good. Yet if you listen to the news or watch the TV, the mood does not match the reality. It appears to me that the majority of market observers are negative on the market. I think that's good news as the market continues to "climb a wall of worry". 

Last month I wrote that the "uncertainty [in Crimea} is roiling world markets, and various currencies, and could provide the next good buying opportunity." That turned out to be exactly the case; I hope you took advantage of the drop to pick up some shares of your favorite companies. 

Looking at the chart of the DJIA, we see the January drop followed by the rally in February. March was a bit volatile, but ended nicely. Now we just have to wait and see if the current rally can propel the index to a new closing high, above the teal line. I view this chart as very bullish and I expect the new high to happen shortly, maybe even this week. 

The chart of the Dow Jones Transportation Average also remains bullish, closing yesterday just a few points below the all time high. But as I said earlier, it is trading today at new record levels. And a growing transportation sector is generally thought to be a good harbinger of economic growth. So again, this is very bullish.  

The action on the Dow Jones Utility Average this year has been tremendous, as you can see below. The index has moved almost straight up since my December call (see below) not to abandon the sector. I pulled up a longer-dated chart to see if this recent high is an all time high. What I found was very interesting. The current price has almost exactly matched the all time record, set in December 2007! The utility index proceeded to lose about 50% of its value over the next fifteen months, bottoming with the rest of the market in March of 2009. It has taken almost exactly five years for the price to regain its old glory. Yield hungry investors should drive the index even higher before this year is over. 

After peaking at around 3% on December 31st, the yield on the 10-year Treasury plunged to around 2.5% by the end of January. Since then, the yield has remained in a tight range between 2.5% and 2.8%. There's no reason to believe anything will change dramatically in the immediate future. 

Last Month's Results

The market provided very mixed results in March. The value indices provided solid, if unspectacular, results in the month while the tech sector, and growth in general, performed miserably. The sell off began in the biotech sector then rolled over to the high multiple growth "story" stocks. Investors fled those risky investments and turned to boring old value stocks, which is right up my investment alley. 

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 April 5 was 300,000, a decrease of 32,000 from the prior week's revised figure. The four-week average of 316,250 is about 14,250 lower than the tally from a month ago. According to the seasonal average, about 2.77 million people continue to collect unemployment insurance, which is a decrease of about 74 thousand people from last month. Progress continues to be made.
  • The non-farm payroll employment report in March showed reasonable strength as the establishment survey reported that an even better 192,000 jobs were added in the month, and revisions added another 37,000 to prior months, while the household survey reported that the unemployment rate remained at 6.7%. The more comprehensive U-6 "underemployment" rate returned to 12.7%. 10.5 million workers were still counted as unemployed, as more people continue to be look for work, while the labor force participation rate increased to 63.2%.
  • 3.7 million people were counted as being unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work held at 7.4 million and the number of marginally attached workers fell to 2.2 million. The number of people holding multiple jobs was steady at 7.1 million. The average hourly wages for blue collar workers fell $0.02 to $20.48 while the average work week rose to 33.7 hours. Overall, this is the second monthly improvement as it appears that more people are entering the work force, finding jobs and working longer hours.
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of only $36 billion in March, which means that for the first six months of fiscal 2014 the cumulative deficit is $413 billion, $187 billion less than the same period in the prior year, thanks to a 10% increase in tax receipts and government expenditures that were 3% lower.
  • The Census Bureau reported that the U.S. trade deficit of goods and services rose for the third straight month to $42.3 billion in February. I imagine the ongoing struggles in the emerging economies continue to negatively impact the trade gap.
  • The National Association of Homebuilders/Wells Fargo Confidence Index ticked up 1 point to 47 in April from a downwardly revised 46 in March. “Builder confidence has been in a holding pattern the past three months,” said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Del. “Looking ahead, as the spring home buying season gets into full swing and demand increases, builders are expecting sales prospects to improve in the months ahead.”
  • The Census Bureau reported that privately owned housing starts rose 2.8% in March from an upwardly revised figure in February, to a seasonally adjusted annual rate of 946,000 units, a level 5.9% below a year ago. New building permits fell 2.4% from the prior month but remained 11.2% higher than the year before. I remain convinced that these numbers will begin to improve starting in April. 
  • The Census Bureau reported that on a seasonally adjusted annualized basis, 440,000 new homes were sold in February, down 3.3% from January, and 1.1% from a year ago. The estimate of the number of homes for sale is 189,000, which represents a more reasonable 5.2 months of inventory at the current rate of sales. The median sales price inched up to $261,800, which is below the 12-month moving average price of $265,100. The harsh weather is certainly depressing sales, a trend that will likely continue in March.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, only 4.6 million existing homes were sold in February, the lowest figure in a year and a half, down slightly from January but 7.1% lower than a year ago. Sales have fallen by over 760,000 since last July and the average selling price has dropped by about $25,000 since June. The current average price is $189,000, which is about $9,500 below the 12-month average of $198,417. The estimate of homes for sale increased to 2.0 million, which represents 5.2 months of inventory at the current rate of sales. As I mentioned above, I don't expect any real progress until the weather improves in April.
  • According to the Institute for Supply Management (ISM), economic activity in the manufacturing sector rose in March from 53.2 to 53.7, marking overall growth for ten straight months. At the same time the ISM index of non-manufacturing activity rose to 53.1, which marked growth in the service sector for 50 consecutive months. Overall, these results are pretty solid. 
  • The Conference Board reported that it's index of Leading Economic Indicators (LEI) increased 0.8% in March, following an increase of 0.5% in February. "The LEI rose sharply again, the third consecutive monthly increase,” said Ataman Ozyildirim, Economist at The Conference Board. “After a winter pause, the leading indicators are gaining momentum and economic growth is gaining traction. While the improvements were broad-based, labor market indicators and the interest rate spread largely drove the March increase..."
  • According to the Bureau of Economic Analysis, the "third" estimate of GDP growth for Q4 2013 was a modest 2.6%, down from the "advance" estimate of 3.2%, but better than the "second" estimate of 2.4%. The problem is that all of these numbers are well below the surprisingly robust 4.1% logged in Q3. By comparison, GDP growth was 2.6% in Q2, a meager 1.1% in Q1 and an anemic 0.4% in Q4 2012. The bad news is that economic growth is somewhat anemic; the good news is that it will force the Federal Reserve to keep its monetary policy very accommodative. 
  • The Federal Reserve reported that in February the amount of total outstanding consumer credit grew at an annualized rate of 6.5%, up to $3.13 trillion. Interestingly, revolving credit actually fell by 3.5%. I'm not sure what to make of that. 
  • The Conference Board's Consumer Confidence Index, which had faltered a bit in February, surged in March from 78.3 to 82.3. Says Lynn Franco, Director of The Conference Board Consumer Research Center, "Consumer confidence improved in March, as expectations for the short-term outlook bounced back from February’s decline. While consumers were moderately more upbeat about future job prospects and the overall economy, they were less optimistic about income growth."

Trends To Watch

For almost eight months the dollar index has moved in a very tight trading range between 79 and 81.50. Three times over the past year the index has fallen to that key support level at 79 (red line) and each time it has bounced higher, most recently last month. I admit I'm surprised the dollar isn't stronger, relative to other currencies, and thanks to the Fed's decision to taper their bond buying program. We'll see what happens as the year progresses.  

After a huge run to open the year, the rally in gold seems to have petered out. While the price managed to break through two resistance levels (purple and green dotted lines) before peaking in March, the recent decline has the price again testing interim support around $1,275 (purple dotted line). Should that support fail, we could see the price fall all the way back to test major support at $1,200. 

The price of West Texas crude has surged about 15% since bouncing off major support around $92 in early January. As RSI is approaching overbought levels, I wouldn't be surprised to see the index back off a bit and test the interim resistance/support just above 100 (the green dotted line). Notwithstanding the large price swings of the past six months, the larger trading range remains intact. 

As you can see below, the rising trend for the financial sector, as represented by the price of the SPDR ETF, remains intact. There was an excellent buying opportunity that I pointed out back in January, as you can see in the red circle. Last month I wrote that "If there is another general market downturn, watch for the next buying opportunity below 22." Well, I hope you bought, because that chance just presented itself. 

After briefly breaking through resistance in late February to achieve a new record high, the index for the housing sector spent the majority of the subsequent two months dropping like a stone. In fact, the price recently fell through interim support at 195. The question is will it bounce higher from here or head lower. My gut says that we may head a bit lower in the short term, but that a rally is coming, maybe by May. 

The index for the developed international markets remains in a general uptrend, as you can see below. You will notice three times where the price fell to, or below, support in the past year. Each time opportunistic investors were rewarded with solid gains during the ensuing rally. I expect this pattern to continue. 

As a spectator, the Chinese stock market, as represented by the Shanghai Index, is growing more exciting and more interesting by the month. A clear wedge pattern is being formed by the blue and red lines. As the red line falls closer each month to the blue line, pressure builds. Most technical traders would view this as a bullish pattern because history suggests a greater likelihood of an upside breakout. I'm not suggesting anyone buy this pattern just yet; but it is fascinating to watch, and holds tremendous implications for the global market. 

After the NYSE Bullish sentiment index cratered in January I wrote in February that this was a good sign for upcoming gains, and I was proven correct. We have almost the same setup now. And again, I believe we have a rally in our immediate future.  

Right now 60% of stocks traded on the New York Stock Exchange are currently trading above their 50-day moving average, which is slightly fewer than this time last month. That figure places the index right in the middle of the positive area (blue on top and dotted green on the bottom). This is neither bullish nor bearish. RSI is likewise very sanguine and MACD has recently turned positive. This complacency allows for the future gains I expect.

The brief but violent spike of volatility in January has already faded from memory as the VIX has settled back into familiar complacency. Nothing here concerns me at all.  

What I'm Thinking and Doing

In my January newsletter I predicted, correctly it turned out, that the market would survive the correction and head higher. Indeed, the ensuing rally took many of the broad market averages to record high levels. Then last month, after the latest market dip I wrote that, notwithstanding the unrest in Russia and Crimea, I still believe the market will move generally higher as too many factors are in favor of the Bulls." That too proved prescient as the market again rallied to test record levels. 

It's no surprise that I've been bullish on the stock market for years now, and remain so today. As a result, my clients and I remain fully invested while looking for opportunities to pick up selected stocks should they temporarily slip out of favor, as some tech stocks have done recently. Indeed, I've picked up a few shares of some tech bellwethers, but nothing that alters my fundamental conservatism.

After reducing cash by over $1,000,000 in January and February, I sat back and let some cash build up in March, hoping to be able to put it to good use in the coming months. I failed to pull the trigger on one stock I wanted to buy; now it's up about 6%. While I obviously wish I'd followed my disciple and bought it when it hit my buy number, rather than getting greedy and hoping for an even better price, I'll have to wait for another chance to pick it up sometime in the next few months. 

News and Notes

After 17 years in business, I finally got the call from the SEC announcing that I'm being audited. After three phone interviews and a grueling few days of responding to multiple written requests for information I'm now waiting to hear what they have to say. I'm confident that I'll pass the audit with minimal dings. Cross your fingers for me please.

My big meet in Boston a few weeks ago was largely a success. Other than one race, which was a disaster, the other seven races were at, or better, than my expectations. I earned two 3rd places, four 5th places and one 7th. While I don't think I swam fast enough to earn any Top 10 rankings, that was a long shot given that I'm at the top end of my age bracket. I'm back in heavy training now for the summer season. I'm hoping to race at the summer National Championships in August, during which I will be the young guy in the 50-54 age group, so national rankings could be possible. 

Nola will have completed her Freshman year of college before I write to you again next month. How quickly her school year flew by! Lily is now driving and is looking forward to picking up her car later this week. Ezra is working on his tennis and competing in some local USTA matches. Hopefully he'll make the JV team next year as a high school freshman. 

Hopefully I can say that Winter, and all that snow, is finally behind us. The flowers are blooming, the trees are budding and the grass has turned back from brown to green. Happy belated Passover and Easter to all of you. Memorial Day, and summer, is just around the corner. I'll drink to that. 

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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