It's Time For Caution, Not Selling
Thinking and Doing
After peaking around March 1, the broad market has
spent the last ten weeks consolidating in a fairly tight trading range.
Growth stocks, as represented by the Nasdaq 100 are doing a little
better than their industrial brethren, but still, most investors have
little to be upset about so far this year. Of course, the
market trajectory could change quickly due to any number of reasons.
But for now, one should be cautious, but remain invested. There is
still optimism that the administration will deliver meaningful tax
reform and a stimulus plan. Personally, I think that optimism is
unfounded. That being said, there is a chance, if Trump is willing to
reach out to the other side of the aisle, that a modest agreement on
taxes could be reached before the fall. If that happens, it could spur
For years I have been urging my readers to ignore
all of the "noise" and simply watch the market. Doing that means that
you've followed the old Wall
"Don't Fight The Tape". Basically, that means stick with what's been working and keep riding the primary
trend of the market. If you've done that, you should be sitting on very
nice gains since the market hit bottom in March of 2009.
Looking at the chart of
the #DJIA for the past fourteen months, we see that the primary trend
has clearly been up. There have been a few dips along the way, which
were buying opportunities, not times to bail. The current price remains
above both the 50-day and 200-day moving averages, and is well above
resistance around 20,000. So if Trump can avoid blowing up the economy,
or the world, there's no reason to think that the market can't continue
to move higher.
The more economically sensitive Dow Jones
Transportation Average is in a bit of a funk right now. Now that it's
becoming clear that Trump's $1 trillion infrastructure plan is not
likely to happen, the sector is waiting for a different reason to move
higher. So for now, I would expect the index to consolidate for a few
more months. If it moves much lower it could be a nice buying
The Dow Jones Utility
Average has produced outsized gains so far this year as rates remain
lower than expected. Indeed, the index absorbed the first Fed rate
increase quite well. The question is what happens in June if they
increase their lending rate another 25 basis points? For now, I'm
holding my positions.
Key Economic Statistics
to the Department of Labor, the
figure for seasonally-adjusted initial jobless claims for the week
ended May 6 was 236,000, a number basically in line with the prior
week's and the prior month's figures. The four-week
average of 243,500 was slightly lower than the figure from last
non-farm payroll employment report in April was above expectations, and
a big recovery from the meager numbers in March,
as only 211,000 jobs were gained in the month,
and 6,000 net jobs were subtracted from the
prior two months. The household survey reported that the unemployment
rate dropped to a tiny 4.4%, the lowest level in nearly a decade, while
the labor force
participation rate dipped to 62.9. Average hourly wages for blue
collar workers rose to a new high of $21.96 while the average work
week inched up to 33.6 hours, the highest level since last
million workers were counted as
unemployed, while just 1.6 million people remained
unemployed longer than 27 weeks. The seasonally
adjusted number of people who could only find part-time work fell to
5.3 million while the number of marginally attached workers
dipped to 1.5 million. The number of people holding multiple
jobs dropped to 7.61 million. All of this resulted
in the U-6 "underemployment" rate plunging to 8.6, which is
the lowest level since late 2007.
Congressional Budget Office (CBO) estimated that on a net present value
basis, the nation's budget surplus was $179 billion in April,
and $72 billion more than a year ago. This resulted in a deficit of
$348 billion for the first seven months of
fiscal 2017, $5 billion less than the shortfall recorded during the
same period last year, but if not for timing shifts, the shortfall
would have been much larger.
Census Bureau reported that privately owned housing starts
decreased 6.8% in March to 1,215,000, which was up 9.2% from a year
ago. The weather in March was pretty poor, so I'm not concerned by this
Census Bureau reported that on a seasonally adjusted annualized
basis 621,000 new homes were sold in March, up
5.8% from February, and 15.6% from a year ago. The estimate of the
number of homes for sale was 268,000, representing only 5.2
months of inventory at the current rate of sales. The median sales
price was $315,100, reversing a few months of declines, and above the
average price of $310,767.
National Association of Realtors reported that 5.71 million existing
homes were sold in March, up 4.4% from the
prior month, and 5.9% from a year
ago. The estimate of the number of homes for sale was 1.83 million,
representing only 3.8 months of inventory at the current
rate of sales. The median price was $236,400, which is roughly equal to
the rising 12-month moving average price of $235,800.
to the Institute for Supply Management (ISM), economic
activity in the manufacturing sector expanded in April for
the eighth month in a row, dipping from 57.2 to 54.8. The ISM index of
non- manufacturing activity increased from 55.2 to 57.5, which still
signaled growth in the service sector for 87 consecutive months. Almost
boringly, the economy continues to expand at a modest pace.
Conference Board reported that its index of Leading Economic
Indicators (LEI) was increased 0.4% in March, following a gain of 0.5%
(revised) in February and 0.6% in January. "The
March increase and upward trend in the U.S. LEI point to continued
economic growth in 2017, with perhaps an acceleration later in the year
if consumer spending and investment pick up," said Ataman Ozyildirim,
Director of Business Cycles and Growth Research at The Conference
Board. "The gains among the leading indicators were very widespread,
with new orders in manufacturing and the interest rate spread more than
offsetting declines in the labor market components in March."
to the "advance" estimate by the Bureau of Economic Analysis,
GDP increased at a meager annualized rate of 0.7% in Q1 2017. This
compares very poorly with the 2.1% rate of growth from Q4 2016 and the
3.5% rate of growth from Q3, but is only slightly worse than the 1.4%
growth rate in Q2. The best we can say is it compares favorably with
the mediocre 0.8% growth rate in
Q1 2016. This report is unlikely to deter the Fed from
implementing their next 0.25% rate hike in June.
to the BLS, the seasonally adjusted Consumer Price Index for all Urban
Consumers (CPI-U) increased 0.2% in April, after falling 0.3% in March.
Over the last twelve months, the index rose 2.2%,
continuing the modest trend that began a year ago. This level is
just above the 2.0% target set by the Fed, giving them cover for their
next rate increase in June.
Conference Board's Consumer Confidence Index decreased to 120.3 in
April from 124.9 (revised) in March. "Consumer
confidence increased sharply in March to its highest level since
December 2000 (Index, 128.6)," said Lynn Franco, Director of Economic
Indicators at The Conference Board. "Consumer
confidence declined in April after increasing sharply over the past two
months, but still remains at strong levels," said Lynn Franco, Director
of Economic Indicators at The Conference Board. "Consumers assessed
current business conditions and, to a lesser extent, the labor market
less favorably than in March. Looking ahead, consumers were somewhat
less optimistic about the short-term outlook for business conditions,
employment and income prospects. Despite April’s decline, consumers
remain confident that the economy will continue to expand in the months
I think this chart informs part of why the broad
market has done so well this year. A weaker dollar has helped
the larger multinational companies and has benefited commodity prices,
like oil. I would expect the dollar to improve through the year if the
Fed makes good on its promise to hike rates two more times this year,
and that could pressure corporate profits in the second half of the
year. This will be a key chart to watch this year.
The yield of the 10-year Treasury bond has traded
between 2.2% and 2.6% for the past six months. It's hard to envision a
scenario where rates drop appreciably from here, but they could remain
range-bound for a few more months. I still think the yield could
approach 3% before the end of the year.
After a painful drop in April, where support held
around $43/barrel, the price of West Texas Crude has rebounded a bit in
May, and is again seeking $50. It's interesting to note that the price
of crude has remained between $43 and $54 for much of the past year.
Until the price moves out of the range, one way or another, there is no
reason to change my current investment thesis, which is to hold a few
core, long-time positions, but otherwise underweight this
After failing to pierce resistance at $1,300,
the price of gold has fallen sharply since mid-April, giving
credence to my prediction
that there is "a greater chance of it moving below $1,200 than above
$1,300". I have to admit, trying to forecast the short-term direction
of the price of gold is very difficult. Therefore, I prefer to remain
on the sidelines here.
The Nasdaq Composite
continues to be the primary engine of growth for the stock market, and
seems to be an unstoppable force. The
tech-heavy index remains in a major uptrend
and made record levels four days last week. Driving
the growth are big names like Apple, Amazon, Microsoft, Alphabet,
Facebook and Nvidia, all of which (other than Microsoft) are
financial sector continues to show signs of trouble. After
enjoying a massive post-election rally, a harsher reality appears to
have set in and the index is trending lower.
In the short-term, there could be further pain. Looking a bit
longer-term, I still think that this is simply a bump in the
I would use further weakness as a buying opportunity. Rates will rise
and finance companies will benefit, spurring increased
The sticky low interest rates have continued to
benefit the tight housing market. Housing starts, as well as new and
existing home sales, are all going strong, with larger year-over-year
increases. And we're just now heading into the strong home selling
season. There's no reason this sector can't move higher.
representing the developed
markets has had a great run over the past six months, performing much
better than I had expected. Interestingly, you can see the large
intra-day spike from the results of the French election. I made a
decision a many years ago to focus, almost entirely, on the domestic
stock market as it was easier to research and to understand. As a
result, I plan to discontinue showing this chart after this
NYSE Bullish sentiment index has struggled over the past ten
weeks, even though the market has had a general upward bias. I find
this action bullish and it potentially sets the stage for the next big
After spending a couple of weeks in the "balanced"
area, the VIX
has again returned to absurd levels of complacence. I'm starting to
wonder whether or not this index retains any validity as a forward
looking indicator. For most of the past six months the index has
remained at historically low levels, yet the market has continued to
move higher, with few breaks in the upward trajectory. Reason, and the
laws of probability, demand that something has to give, that the market
will eventually experience a prolonged decline. But until that time, I
wonder whether the VIX still has any predictive powers.
What I'm Thinking and Doing
I've decided to refrain from political commentary
this month and try to focus on the stock market, although it is very
hard to separate politics from the market, as they are very
intertwined. That being said, if I'm able to block out the noise coming
from the Trump administration and try to home in on what's really going
on with the economy and corporate profits, it seems like it's business
as usual right now; more of the same Muddle Through that was the norm
of the Obama years. Interest rates remain low, economic growth remains
slow and steady and inflation is still quiescent. Given all of that, my
investment thesis remains in force. I want to be long quality
companies, most of whom pay a steady dividend. I also want to mix in
some small, fast-growing tech stocks that give me the chance to make
multiple of my money if I pick correctly. I also want to hold some
defensive stocks, like utilities, large food and beverage companies,
and defense stocks. I will continue to be fully invested in stocks
until the market tells me to be otherwise.
When the market is at, or near, all-time high
levels, it's difficult to find stocks to buy at good prices. And when
that happens, investors need to be careful not to chase rising prices.
As a result, I've been mostly on the sidelines for the past few months.
I did manage to pick up shares of a major defense contractor on an
earnings dip, as well as a couple of micro-cap tech stocks that also
dropped for one reason or another. Finally, I took a small position in
two new ETFs as a way to take a position in two growth sectors.
Overall, with only one or two minor positions, I'm very happy with the
overall construction of my portfolio of securities. I think my clients
are well-positioned to profit in the months and years ahead.
News and Notes
Amazingly, in just two short weeks, Nola
will be graduating from Wesleyan University with
a Bachelor of Arts in Theater! We also just found out that she received
the Rachel Henderson Theater Prize, given each year to the student who,
in the estimation of the theater faculty, has contributed the most to
theater at Wesleyan over the course of his or her undergraduate career.
We're all very proud of her. It seems like only yesterday that we
dropped her off and helped decorate her freshman dorm room. Now, less
than two shorts weeks after commencement, she'll be heading to Western
Massachusetts for two months, before returning home in August. Then, in
September, she'll be moving to Washington DC for a one year Fellowship
program. After that, who knows? But whatever she does, and wherever she
goes, she's going to be a big success.
I brought Lily
home a couple of days ago after she finished
her Freshman year at GW, where she is taking courses towards a major in
political communications and a minor in history. She aced all of her
classes, made some great friendships and enjoyed her first year living
away from home. In addition to everything else, she completed an
internship with Congresswoman Nita Lowey and has already
secured a job in DC this summer.
Ezra has about six weeks left before finishing his
junior year of high school. I think he would agree with me that this
was his best year of school yet. And to
celebrate, Ezra decided to forgo employment this
lieu of traveling the world. He'll spend a month doing incredible
things in Iceland and around the French alps. Who's got it better than
him? I want his
Lastly, Kathiryn and I took in a feral mother cat
and two VERY little baby kittens, who are now about three weeks old. We
intend to wean them from mom in about a week, get her fixed, then put
her back out in the wild. We'll then have the kittens for a while as we
prepare them to be adopted. If anyone is interested, please let me
In addition, we've got a very busy three or four
months coming up during which we'll be going to lots of concerts,
baseball games and Broadway shows. Kathiryn will also be performing one
or two gigs a month through the end of the summer, giving our friends
lots of chances to see her perform. I hope lots of you will come out
and support her and her bandmates. If you want, just let me know and
I'll add you to the
distribution list for all announcements of upcoming gigs.
That's it for this month. I look forward to
communicating with you again next month. If you have
any questions, please don't hesitate to contact me.
and Views", Copyright, Werlinich Asset Management, LLC and
www.waminvest.com. All Rights Reserved.