Werlinich Asset Management, LLC

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May 13, 2015

Not Time To Sell or Go Away

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 18,068, essentially the same level as this time last month. In fact, the broad market has been trading sideways for the past couple of months; indeed for much of this year. The #DJIA is only up 1.4% so far in 2015. In general, the growth sectors of the market are outperforming value but for the broadly diversified investor, it's been a tough year to make money to this point. I expect this market "churning" to continue for the next few months as we await word from the Federal Reserve on their interest rate policy and as we enter the typically slow summer months. This could set us up for a nice fall rally. And even though we have entered the "sell in May and go away" time frame, I encourage my readers to sit tight and hold your positions. This was the same advice I gave last year and that worked out pretty well for us. 

The chart of the #DJIA is a little busy, but it shows two themes: that the index remains solidly in an upward trading channel (between the red and blue lines) while concurrently trading within a somewhat narrow range (the horizontal green lines). And within the green trading range, it's holding above the interim support line (dotted lavender). As the current price is above both moving averages and both RSI and MACD are quiescent, 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 now lasted for more than six months. The fact that the transportation index has clearly under performed the industrial index is a bit worrisome, but not a deal-breaker for the investors. The current price is just below both moving averages and is hugging the interim support line. I've begun adding to positions in this sector because I believe this is a good buying opportunity as I think the index will move higher over the next few months.

The glimmer of strength demonstrated last month by the Dow Jones Utility Average may have been short lived. After briefly moving up to 600, the index turned lower and is again testing support around 570. I believe the reason for the recent weakness has been the unexpected jump in interest rates (see the chart of the 10-year Treasury). As I don't believe the Fed will be increasing rates any time soon, I expect this rate increase to ameliorate over the coming months. I still believe it's still worth owning utilities as the average yield of the sector continues to be superior to the return of the 10-year treasury and I'm convinced rates will remain stable for at least the next few months.

After plunging from 2.17% to 1.65% in the first month of this year, the yield on the 10-year Treasury is basically back where it started the year thanks to a recent sell off. The current yield is bumping against resistance around 2.4%, which I think should hold for a while. Last month I suggested that "rates will stabilize around 2.0%, at least through the summer months." I still believe that to be true.  

Last Month's Results

The results in April continued the sideways churning begun during the first quarter; a little up, a little down. The Q1 earning were decent, although the were certainly impacted by the strong dollar. Large cap stocks performed far better than small cap and overseas stocks continued to far outpace the domestic indices. Bonds continue to generate positive returns for the year, albeit barely. 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 May 2 was 265,000, similar to the prior week and a decrease of 16,000 from the prior month's revised figure. The four-week average of 279,500 about 3,000 less than the tally from a month ago. About 2.23 million people continue to collect unemployment insurance, which is about 72,000 less than last month and continues recent the downward trend.
  • The non-farm payroll employment report in April met Wall Street expectations as the establishment survey reported that 223,000 jobs were added in the month, while revisions subtracted another 41,000 from the February and March tallies. The household survey reported that the unemployment rate dipped to 5.4% and the labor force participation rate ticked slightly higher, returning to  62.8. The comprehensive U-6 "underemployment" rate fell to 10.8%. A dwindling 8.5 million workers were still counted as unemployed, a bit lower than last month.
  • 2.5 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 while the number of marginally attached workers remained at 2.1 million. The number of people holding multiple jobs decreased slightly to 7.16million. Average hourly wages for blue collar workers edged up to $20.90 and the average work week held at 33.7. This month was a big improvement after the usually slow February. But it wasn't so good that it's likely to spur the Fed to raise rates any time soon. 
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget surplus of $155 billion in April, leaving the seven-month deficit at $285 billion, about $22 billion less than the shortfall recorded in the same period last year. It's anticipated that the full year deficit will be similar to the deficit of $483 billion from fiscal 2014.
  • The National Association of Homebuilders/Wells Fargo Confidence Index increased four points to 56 in April, reversing a three month slide. "This uptick shows builders are feeling optimistic that the housing market will continue to strengthen throughout 2015," said NAHB Chief Economist David Crowe.
  • The Census Bureau reported that privately owned housing starts rose 2.0% in March, to a seasonally adjusted annual rate of 926,000 units, which was 2.5% lower than a year ago, but still below recent levels. New building permits fell 5.7% from the prior month but were 2.9% lower than the year before. These are mixed signals at best, and another sign that the economy is sputtering a bit.
  • The Census Bureau reported that on a seasonally adjusted annualized basis 481,000 new homes were sold in March, down 11.14% from February, breaking a streak of three straight monthly increases, but still up 19.4% from a year ago. The estimate of the number of homes for sale is  213,000, the highest figure in the past year and it represents 5.3 months of inventory at the current rate of sales. The median sales price dropped for the third straight month to $277,400, leaving it well below the 12-month moving average price of $286,333. 
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, 5.19 million existing homes were sold in March, an increase of 300,000, or 6.1%, from February, and up 10.4% from a year ago. The estimate of homes for sale is 2.0 million, which represents a slim 4.6 months of inventory at the current rate of sales. After falling five of the prior six months, the average selling price rose for the second straight month to $212,100, which is just above the rising 12-month average of $209,925. Overall, the housing market is muddling along, but it could be getting ready for a summer surge.
  • According to the Institute for Supply Management (ISM), economic activity in the manufacturing sector remained steady at 51.5 in April, after falling for the prior five months in March, which nonetheless marked overall growth for 21 straight months. The ISM index of non-manufacturing activity increased to 57.8, which signaled growth in the service sector for 63 consecutive months. These numbers demonstrate only modest economic growth and should keep the Fed from raising rates until the end of the year at the earliest.
  • The Conference Board reported that its index of Leading Economic Indicators (LEI) increased 0.2% in March, following a 0.1% gain in February. "Although the leading economic index still points to a moderate expansion in economic activity, its slowing growth rate over recent months suggests weaker growth may be ahead," said Ataman Ozyildirim, Economist at The Conference Board. Again, another indication that the economy is simply limping along.
  • According to the Bureau of Economic Analysis, GDP increased at an annual rate of 0.2% in Q1 2015 according to the "advance" estimate. This is far below the 2.2% increase in Q4 2014 and a substantial drop from the 5.0% and 4.6% growth rates in Q3 and Q2 respectively. It's not too far from the anemic decline of 2.1% in Q1 2014. Again, these numbers will give the Fed reason to hold off on raising rates any time soon.
  • The Federal Reserve reported that in March the amount of total outstanding consumer credit grew at an annualized rate of 7.50%, 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. I wonder where all of this borrowing is going?
  • According to the BLS, the seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) increased 0.2% in March, the same increase as February. If you strip out food and energy, CPI rose the same 0.2%. At least temporarily, energy prices have stabilized. Over the last 12 months, the index declined 0.1%. 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 increased in March fell from 101.4 to 95.2. "Consumer confidence, which had rebounded in March, gave back all of the gain and more in April," said Lynn Franco, Director of Economic Indicators at The Conference Board. "This month’s retreat was prompted by a softening in current conditions, likely sparked by the recent lackluster performance of the labor market, and apprehension about the short-term outlook. . . Coupled with waning expectations, there is little to suggest that economic momentum will pick up in the months ahead.”

Trends To Watch

Don't look now but perhaps the huge rally in the dollar may be over. At the very least it's likely time for a pause. As you can see below, the value of the greenback has dropped a bit over the last few weeks, providing some relief to various commodities (as we'll see below). Last month I predicted 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." What I didn't realize is how quickly it would happen or how salubrious that move would be for the price of crude oil and other key commodities. Should the index weaken a bit further we'll see the beneficial effect on Q2 earnings later this summer which could fuel the next rally. 

Last month I said that "if the price [of West Texas Crude] can move above $50 and stay there, that could be the signal [to buy]." One month later, the price of black gold is over $61 and trending higher. Does this mean the bottom has been made and the price is heading back to lofty levels? I think the answers are yes and no. I believe the bottom has been made, but I don't expect the price to move above resistance at $80 any time soon as there is still too much supply sloshing around. I would look for the price to stabilize in the $60 to $70 range for a while. 

The price of gold remains trapped in a range between $1,140 and $1,215, where it has remained for most of the past six months. I'll reiterate what I've been saying for months: I don't like gold as an investment right now, but it could be an interesting vehicle for nimble traders looking to profit from short-term moves. 

As the dollar has weakened a bit recently the price of copper has rallied. Looking at the chart, you can see that after bottoming early this year, "Doctor Copper" has stages a very nice recovery, moving towards interim resistance around $3.25. The current price has now equaled the 50-day moving average, which remains below the 200-day average, but the trend is moving in the right direction. I may have called the bottom in March when 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." Did you buy anything in the sector?

After 15 VERY LONG YEARS, the Nasdaq Composite closed at 5,056.06 on April 23 and thereby finally eclipsing the previous record closing price of 5,048.62 from March 10, 2000. The next day it finished the day at 5,092.08, after which it turned south and fell back below 5,000. So my prediction that "the tech-heavy index [will] finally push through that (record) level sometime in the first half of this year" came to pass, and my portfolios have benefited. Looking ahead, after a period of consolidation, I expect further gains before the end of the year. 

Looking below at the chart of the financial sector, you can see the four "buy" calls I made over the past nine months. Given that the price of the index continues to hug the rising support line (in blue), and remains above both moving averages, I think my last buy call remains in force. There is a lot of room to grow from this level. 

I expect this could be one of the last months that I'll be showing the chart of the housing index from this extended time perspective as the huge ascending triangle formation that has formed over the past six years is about to be broken, one way or another. My guess is that the index will shortly 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; that gives me another week or so.

The biggest surprise of the year (to me, anyway) continues to be the performance of the developed international markets, as represented by the IEE. I simply did not account for the 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 as the dollar strengthened against almost every other currency, helping their exports and making their markets more appealing to buy with strong dollars. It may, though, be time for a breather as the dollar weakens a bit.

Last month, when commenting on the parabolic rise in the price of the Shanghai Index over the past year and a half, I said that "while there is a long way to go 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 can't really see any reason to change my perspective, but this really scares the heck out of me, which is why I haven't put any of my own money on this trade. 

Last month I conceded that I may have misread the chart of the NYSE Bullish sentiment by not calling a buy in January and February, with the index resting in the low 50's. In retrospect, I should have interpreted things as setting up for better times. The good news is that if you're patient, another buying opportunity, like today, will always present itself.

Right now the VIX appears to be holding right in the middle of the "new normal complacent" range, which is just fine. Anything in the 14 - 18 range seems to be a sweet spot for the VIX. Overall, this picture is fine, representing a relatively sanguine view of the market.

What I'm Thinking and Doing

The broad market averages have been "churning" for the past few months and I expect this to continue for a few more months. This period of consolidation is normal and healthy and could set the stage for the next move upward. The possible fly in the ointment is the Fed, which must still provide guidance 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 earlier this year. In fact, I don't think they'll raise this year. Too many economic indicators are weak right now, inflation is virtually non-existent, the housing market continues to struggle and nobody wants to choke off growth outside of the U.S. Therefore, I expect rates to remain low and I believe equities will continue to be the best option for investors.

Notwithstanding everything I said above, in which I suggested that the broad market averages have limited short-term upside, there's always opportunities to profit more than the index. Areas such as transportation and energy are likely to outperform the broader market. Technology and biotech should also do well over the balance of the year. There are also parts of the finance sector that should do very well for years to come. I've been putting money to work in all of the sectors I've just mentioned. 

After sitting on the sidelines for most of the year, I finally began to deploy some of my cash over the past few weeks. I started two new positions in the financial sector; one large and one small. I also started to build a position in a leading company in the cyber security arena. In addition, I've begun to nibble at an ETF that owns a nice mix of solar stocks. In addition to these four new positions, I've added to railroad and defense stocks that have dropped a bit recently. Overall, it's been a busy couple of weeks spending money to purchase quality securities that should generate solid profits for many years to come. 

News and Notes

Over the last two months I've asked my family, friends and readers to join with me to help a deserving local charity named Cluster replace the government funding that they had lost. I had pledged, along with their Board of Directors and Advisory Council, to match every new dollar donated, up to $15,000. The great news is that as of last week, Cluster had received almost $16,000, of which $11,625 came from my contacts. As a result, Cluster has replaced the entire $45,000 that had been lost, plus a little extra. I want to thank each and every one of you who stepped up to help out. We could not have done it without your support. 

After more than a year of virtually non-stop training, my results at the Masters National Championships were a little disappointing. I have to admit, I was very happy to finish the meet and begin a vacation from swimming. I'm now about half way through my hiatus and enjoying every minute. It's such a treat to be able to stay up until 11:00, or later, and actually sleep until 7am. 

Spring is finally heating up here on the East Coast and school is winding down. Nola comes home from college in a week while Lily and Ezra are looking forward to finishing up next month. Kathiryn and I are getting away for a few days next weekend to celebrate the first six months of married life. Other than that, things are pretty quiet right now and I'm enjoying the downtime. So that's it for now. 

Best regards,

Greg Werlinich

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