Werlinich Asset Management, LLC

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April 13, 2015

Slow and Steady Will Win This Race

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 before the market opens for business, the Dow Jones Industrial Average stands at 18,057, up a solid 270 points, or 1.5%, from when I last wrote to you. All of the broad market averages are creeping slowly higher, although it has hardly been a straight line. This seems to support my belief, held for more than twenty years, that a buy and hold approach is the best way to invest money for long-term wealth accumulation. Personally, I continue to hold my positions while preparing to deploy some of my cash.

The #DJIA is currently making a second attempt to surpass the high established a little over a month ago. The current price is above both moving averages and well above interim support around 17,250 (green line). Although the market action over the past four months has been very choppy, the big picture is that the index remains solidly bullish and nothing suggests to me an imminent danger. 

The Transportation Index, the other key component of Dow Theory, continues to muddle through a period of consolidation that has lasted for over five months (between interim support around 8,700 and resistance above 9,200). The transportation index has clearly under performed the industrial index. The last time the #DJTA made a new high was back in December. This is mildly, but not seriously, worrisome. The current price holds just above the 200-day average and in line with interim support. I believe this is a good buying opportunity as I think the index will move higher over the next few months. 

After two months of significant weakness the Dow Jones Utility Average is showing some signs of strength. The primary reason the #DJUA sold off in the first place is the fear of Fed induced rising rates. Were rates to go up, utility yields would appear relatively less attractive, thereby sending prices lower. 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. In fact, I don't think they will be higher at all. Therefore, I think the current price around 590 offers an appealing spot to buy. 

The yield on the 10-year Treasury continues to vacillate. The bottom made in the summer of 2012 has held, and so had the high established at the end of 2013. The question now is which direction will rates move, and will the low of 1.4% hold. I think rates will stabilize around 2.0% at least through the summer months. 

Last Month's Results

The first quarter of 2015 was a mixed bag, filled with lots of volatility. Growth stocks significantly outpaced value and overseas stocks bettered most domestic indices. Bonds continue to generate positive returns for the year. Two of the three months finished lower, but the one positive month made up for the losses in the other two. I think we can expect more of the same through the remainder of the year; choppy results leading to modest gains.

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 4 was 281,000, an increase of 14,000 from the prior week's revised figure, and a small reduction from this time last month. The four-week average of 282,250 is 20,000 less than the tally from a month ago. About 2.30 million people continue to collect unemployment insurance, which is about 120,000 less than last month and is the lowest figure in the past twelve months.
  • The non-farm payroll employment report in March was far short of expectations as the establishment survey reported that only 126,000 jobs were added in the month, while revisions subtracted another 69,000 from the January and February tallies. The household survey reported that the unemployment rate remained at 5.5% but the labor force participation rate ticked lower for the second straight month, falling to 62.7. The comprehensive U-6 "underemployment" rate fell to 10.9%. A dwindling 8.6 million workers were still counted as unemployed (one hundred thousand less than last month).
  • 2.6 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 rose to 6.7 million while the number of marginally attached workers fell to 2.1 million. The number of people holding multiple jobs increased slightly to 7.26 million. Average hourly wages for blue collar workers edged up to $20.86 and the average work week slipped to 33.7. So was this a one month aberration or is it the end of the five-year growth in job creation? The Fed would certainly like to know the answer to that question.
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $44 billion in March, leaving the six-month deficit at $430 billion, about $17 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 March to 53. This marks the third monthly decline in a row. "The drop in builder confidence is largely attributable to supply chain issues, such as lot and labor shortages as well as tight underwriting standards," said NAHB Chief Economist David Crowe. "These obstacles notwithstanding, we are expecting solid gains in the housing market this year, buoyed by sustained job growth, low mortgage interest rates and pent-up demand."
  • The Census Bureau reported that privately owned housing starts fell 17.0% in February, to a seasonally adjusted annual rate of 897,000 units, which was also 3.3% lower than a year ago, and well below recent levels. New building permits actually rose 3.0% from the prior month and remained 7.7% higher than the year before. These are mixed signals, but I'm not concerned about the big drop in housing starts given how harsh the winter has been.
  • The Census Bureau reported that on a seasonally adjusted annualized basis 539,000 new homes were sold in February, up for the third straight month and 7.8% from January, and 24.8% from a year ago. The estimate of the number of homes for sale is a slim 210,000, which represents only 4.7 months of inventory at the current rate of sales. The median sales price slipped to $275,500, a big decrease from the prior month (revised), leaving it over $25,000 below the November '14 high and $10,000 below the 12-month moving average price of $285,458. 
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, 4.88 million existing homes were sold in February, an increase of 60,000, or 1.2%, from January, and up 4.7% from a year ago. The estimate of homes for sale is 1.89 million, which represents a slim 4.6 months of inventory at the current rate of sales. After falling five of the last six months, the average selling price rose to $202,600, which is still below the rising 12-month average of $208,70
  • According to the Institute for Supply Management (ISM), economic activity in the manufacturing sector dropped for the fifth consecutive month in March to 51.5, which nonetheless marked overall growth for 22 straight months. The ISM index of non-manufacturing activity dipped down to 56.5, which signaled growth in the service sector for 62 consecutive months. These numbers demonstrate only modest economic growth and may keep the Fed from raising rates in June. 
  • The Conference Board reported that its index of Leading Economic Indicators (LEI) increased 0.2% in February, following a similar 0.2% gain in January. "Widespread gains among the leading indicators continue to point to short-term growth," said Ataman Ozyildirim, Economist at The Conference Board. "However, easing in the LEI's six-month change suggests that we may be entering a period of more moderate expansion. With the February increase, the LEI remains in growth territory, but weakness in the industrial sector and business investment is holding economic growth back, despite improvements in labor markets and consumer confidence."
  • According to the Bureau of Economic Analysis, GDP increased at an annual rate of 2.2% in Q4 2014 according to the "third" estimate, a substantial drop from the 5.0% and 4.6% growth rates in Q3 and Q2 respectively, and only slightly better than the anemic decline of 2.1% in Q1. Again, these numbers may give the Fed reason not to raise rates too quickly.
  • The Federal Reserve reported that in February the amount of total outstanding consumer credit grew at an annualized rate of 5.50%, up to $3.343 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 remains better to borrow cheaply and spend or invest rather than save.
  • According to the BLS, the seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) increased 0.2% in February after falling in December and January. If you take out food and energy, CPI rose the same 0.2%. At least temporarily, energy prices have stabilized. Over the last 12 months, the index is essentially unchanged. This is another example that the economy is far from overheating, which again should help temper the need for the Fed to increase rates.
  • The Conference Board's Consumer Confidence Index, which had fallen in February improved from 98.8 to 101.3. Says Lynn Franco, Director of The Conference Board Consumer Research Center, "Consumer confidence improved in March after retreating in February. This month's increase was driven by an improved short-term outlook for both employment and income prospects; consumers were less upbeat about business conditions. Consumers' assessment of current conditions declined for the second consecutive month, suggesting that growth may have softened in Q1, and doesn't appear to be gaining any significant momentum heading into the spring months."

Trends To Watch

The dollar continues to be the best performing asset class this year. In fact, our currency has never achieved such a large gain in such a short period of time. Some observers are comparing the almost parabolic ascent of the greenback to the move by internet stocks in the late 1990s and their fear is that there will be an equally painful collapse in the price. I don't think the comparison is apt, and I don't believe we're faced with sudden calamity. I do think that before the year is over the value of the dollar is likely to weaken a bit, which would be a good thing for U.S. multi-national corporations. 

The price of West Texas Crude remains mired in a severe downtrend as crude supplies far out-strip demand. On a technical level, it is crucial that the price stays above major support at $40. Given the relentless appreciation of the dollar, and the imbalance between supply and demand in this country, I don't expect prices to rise until later this year when supply is likely to be reduced, thanks to a rapidly dwindling rig count At that time, I would expect price to rebound. Sometime before that will be the time to buy. If the price can move above $50, and stay there, that could be the signal.

Once again the price of gold has bounced off support at $1,140 and has moved higher. Last month I said that "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." So far, that has certainly been a winning trade if you made it.

The strong dollar is certainly no friend to the price of copper, which has shown a little strength recently, helping the price move back to a key support/resistance level just above $2.75. Last month  I wrote that "I can't help but think that copper has simply fallen too far. Things in the global economy are MUCH better now than they were during that crisis. Things continue to be built, 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." We'll see if I called the bottom or if this is simply a momentary blip.

The Nasdaq Composite is holding about 54 points below the record closing price of 5,048.62 from March 10, 2000. 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 continue to increase the tech exposure in my portfolios. RSI indicates that the index is a bit overbought right now but that doesn't mean it can't move slowly higher.

Looking below at the chart of the financial sector, you can see the three earlier "buy" calls I made over the past eight months. Given that the price of the index is once again hugging the rising support line (in blue), and remains above both moving averages, I think it is set up for another move higher so I think we're in position to buy again right here. 

Looking at the chart of the housing index we see the huge ascending triangle formation that has formed over the past six years. This pattern suggests that the price is likely to break above resistance around 240 and achieve a level not attained since the beginning of 2007. In February 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 and that was clearly a terrible call as shortly after I wrote it, the index began to power higher. What I did not account for was monetary easing by central banks around the globe, just as our Federal Reserve was looking to tighten. Those policies have been rocket fuel to equities around the world. It may be time to rethink my hesitance to investing overseas.

After a brief period of consolidation at resistance around 3,200, the price of the Shanghai Index has continued its meteoric rise. While there is a long way to ago to surpass the lofty levels achieved in 2007, the current strength bodes well for continued success. I would expect the index to rest for a bit, but longer term, there's no reason to think it won't go even higher. 

I think I misread the NYSE Bullish sentiment index over the past few months. I've been saying the index suggested neither a bullish nor bearish posture. In retrospect, I think I should have interpreted things as setting up for better times with sentiment in the low 50s. By sitting on the sidelines and waiting, I think I may have missed a decent buying opportunity. We'll see. 

It is a little worrisome that the price of the VIX is heading towards the "super complacent" range. If support can hold above 12 I won't be too concerned. Overall, this picture is fine, representing a relatively sanguine view of the market. 

What I'm Thinking and Doing

As I said last month, I think we've entered a period in which the market will be increasingly volatile, both on a daily basis, as well as weekly and monthly. The first quarter has been very choppy and I expect the volatility to increase in coming months as we get closer to the summer selling season and as we await more guidance from the Fed as to their upcoming interest rate policy moves. I will reiterate that I don't think the Fed will increase rates at the June meeting, as was expected. In fact, I don't think they'll raise this year. Economic indicators are a little weak right now, inflation is virtually non-existent, housing continues to struggle and nobody wants to choke off growth outside of the U.S. Therefore, I expect rates to remain where they are and I believe equities will continue to be the only real option for investors. 

Looked at broadly, the overall picture for investors looks optimistic. 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. As a result, I plan to deploy some of my cash soon. 

Since last month I've begun to nibble a bit at some beaten down stocks in transportation, technology and energy. I expect to pull the trigger on a couple of new ideas that I've had my eye on. In fact, I may have waited a little too long to start buying, but better late than never if the ideas are good. 

News and Notes

Last month I asked my readers to dip into their wallets a little to help a local charity named Cluster that had lost their government funding. To remind you, Cluster, which is celebrating its 40th anniversary this year, lost $45,000 of its $60,000 annual budget for their Study Buddy Program. My wife and I believe the crucial service that they provide is far too important to be canceled due to political capriciousness. So we offered to help. Along with their Board of Directors and Advisory Council, we offered to match every new dollar donated, up to $15,000. That means that Cluster will receive a total of $3 for every $1 in new donations. As of last week, we'd managed to raise just over $13,000 so we are very close to our goal. 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.

After over seven months of virtually non-stop training, it's time for the big meets. I competed in Harvard a few weeks ago at the New England Masters Championships where I produced a pretty good showing, swimming faster than my seed times in all six events, finishing first through eight in all six events. Next weekend I head to San Antonio where I'll compete in six events across three days at the Masters National Championships. Then . . . . some much needed rest!

Baseball season has begun and my Mets are off to an uneven start. 21 year-old Jordan Spieth looks he's going to be one of the youngest winners of the Masters. Hockey is ready for the playoffs and basketball isn't far behind. All of this means that warmer weather is on the way after a very long and miserable winter. I am so ready to put away the fleece and take out the shorts and tank tops! And if you're on twitter, please follow me in order to get daily tweets about the market.

Best regards,

Greg Werlinich

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