Glad (So Far) We
Didn't Sell In May
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 stands at 15,179, down 192 points, or 1.2%,
from when I wrote to you last month, but still up 15.8% from the 2012 year-end closing price of
13,104. The market has taken a breather since hitting the high last
month, and there's nothing wrong with that. A little pull back and consolidation
is natural and healthy. As long as the index remains above
the rising blue trendline there is nothing to worry
about. A 5% correction would bring the index to about 14,750 so
as far as I'm concerned that's the first important support level.
Depending on the timing, investors who followed the old market bromide to "sell in
May and go away" have been disappointed (so far). Although there were
severe market corrections in the summers of 2010, 2011 and 2012, that
doesn't mean there must be a repeat performance this summer. The Fed, in
conjunction with central bankers around the world, continues to pursue its policy of
monetary easing, forcing up equity prices and punishing bond investors. Indeed,
until the Fed removes the stimulus it's unlikely the market
will endure any significant downturn, and that question is causing the massive
volatility that has engulfed the market over the last few weeks.
So what are the charts telling us today about the state of the markets? As of yesterday's
close we've experienced a 2.3% decline from the May high
yet the DJIA remains above the rising trendline and both moving averages. The question
is whether this is simply a breather before the inevitable resumption of the
gains or the beginning of a larger correction. For months I have been
predicting that there would have to be a break of some kind
in this extended rally. Maybe the usual summer doldrums will provide that pause.
Bigger picture, I believe the market will be higher by the end
of the year than it is today.
The Dow Jones Transportation
Average has experienced a greater decline, measuring 4.1%, between
yesterday's close and its May high. This is no big surprise and the
transportation average usually experiences greater volatility than
the industrial average. Still, the index has violated the trendline,
it remains above both
moving averages (although not by much). I've identified in green what I believe to be
the first important support level around 6,100. Unless the index falls below that
level, after which 5,800 would provide the next support
level, the market should be ok.
It appears that the correction in the Dow
Jones Utility Average may be over. In fact, I think investors have
been presented with another chance to buy into higher yielding
utility stocks after a significant pull back of about 11.5%. I think
this was simply a rotation out of a defensive sector into more
aggressive parts of the market during an historic
rally. Now that the market is taking a breather, and
rates appear to be stabilizing, the utilities could return to favor. Nothing fundamental
has changed about the sector. Support around 475 has held and both
RSI and MACD have turned up. If Treasury yields remain below 2.3%
utilities are a buy.
This could be one of the most
important charts, and story lines, in the market today.
Ben Bernanke and the Fed is employing every tool in its
arsenal to keep interest rates artificially low in order
to stimulate the economy. Notice I said "artificially
low". Left to their own devices, interest rates would certainly be
much higher. And market forces are working to push rates
closer to their natural level. So who will win, Bernanke or the
market? I think the answer is that Ben wins in
the short term but the market wins in the long run. The
current rate is right around support/resistance at 2.1% and
just below the top of the rising trading range
(red and blue lines). The trillion dollar question is when the Fed
will begin to reduce, or eliminate, their program of $85 billion
a month in bond purchases. All the world waits for that
announcement, and so do we.
Last Month's Results
Even with a bit of correction
in the end of the month, May still managed to produce solid gains
across all the domestic stock market averages. That also meant we've enjoyed five
straight months of gains to begin this year. The only fly in the
ointment was the downturn in the EAFE. In addition, the bond market continued
to slide and is now in the red year-to-date. Interestingly, small growth stocks have taken
the leadership position, surpassing the gains in the Dow as riskier assets are enjoying their
time in the sun. Should the market stumble, this leadership position will be
very short lived.
Dow Jones Industrial
Europe, Australia, Far
* Return numbers include the reinvestment of dividends
- According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended June 8
was 334,000, a decrease of 12,000 from the prior week's revised figure.
The four-week average of 345,250 is about 6,000 higher than the tally from
a month ago. According to the seasonal average, about 3.0 million
people continue to collect unemployment insurance, which is roughly the same
as the prior month. Overall, this picture remains modestly positive.
- Non-farm payroll employment report in May
basically met expectations. The establishment survey reported that a
solid 175,000 jobs were added in the month, while the figure for March was revised slightly higher and
April was revised a little lower for a net loss of 10,000 jobs. The
household survey said that the unemployment rate remained essentially unchanged at 7.6%.
The 11.8 million workers counted as unemployed was up a bit as more workers
appeared to be looking for work, and the
labor force participation rate ticked up to 63.4%. The more comprehensive U-6
"underemployment" rate inched lower to 13.8%.
- 4.4 million people continued to be unemployed longer than
27 weeks. The seasonally adjusted number of people who could only find
part-time work held at 7.9 million and the number of marginally attached workers fell
to 2.2 million. The number of people holding multiple jobs is 7.1 million. The average hourly
wages for blue collar workers inched higher to $20.08 while the average work week
increased to 33.8 hours. Overall, the picture remains one of slow, incremental improvements.
- The Congressional Budget Office (CBO) estimated that on a net present
value basis, the Treasury reported a federal budget deficit of $139 billion in May, and $627 billion for
the first eight months of fiscal 2013. This is $220 billion
less than the record figure reported for the same period of
fiscal 2012. This is due to a 15% increase in revenues and a slowdown in the
growth of government spending.
- The Census Bureau reported that the U.S.
trade deficit of goods and services was $40.3 billion in April, a
slight increase over the prior month, thanks to an increase in
imports. This is a nonevent.
- The National Association of
Homebuilders/Wells Fargo Confidence Index had the biggest monthly
increase in June since September 2002, rising from 44 to 52. This
is the first time the index has been above 50, or in the "healthy"
area, since April 2006. This is very bullish news.
- The Census Bureau reported that privately owned housing
starts reversed part of
the decline in April, gaining 6.8% in May, leaving them 28.6%
higher than a year ago, to a seasonally adjusted annual rate of
914,000 units. New building permits
dipped 3.1% from the prior month yet remained 20.8% higher than the year before.
- The Census Bureau reported that on a seasonally adjusted annualized basis,
454,000 new homes were sold in April, a 2.3%
increase after an upwardly revised March, and still 29% higher
than a year ago. The estimate of number of homes for sale was
156,000, which represents a tiny 4.1 months of inventory at the
current rate of sales. The median sales price jumped to $271,600,
which is well above the rising 12-month moving average price
of $250,633. Could this mark the price increases I've been predicting as a
result of the tight inventory and the beginning of the big selling season? We'll see.
- The National Association of Realtors reported that on a
seasonally adjusted annualized basis, sales of existing
homes increased 0.6% in April, to 4.97
million units, and remained 9.7% higher than a year
ago. The estimate of homes for sale jumped to 2.1 million
as rising prices spurred more homeowners to put their homes up for sale. The
median sales price jumped to $192,800, which is well above the rising 12-month
average of $181,425. Honestly, the news couldn't be much better.
- According to the Institute for Supply Management (ISM), economic activity
in the manufacturing sector contracted in May for the first
time since November 2012 as the index declined to
49. This is the lowest reading since June
2009. On the other hand, the ISM index of non-manufacturing activity was 53.7,
which marked growth in the service sector for 41
consecutive months. This type of poor data allows the
Fed to continue their program of monetary stimulus.
- The Conference Board reported
that it's index of Leading Economic Indicators increased by
0.6% in April following a 0.2% decline in March. Says Ataman
Ozyildirim, economist at The Conference Board: "After a slight
decline in March, the U.S. LEI rebounded in April, led by housing
permits and the interest rate spread. Labor market conditions also
contributed, although consumers? outlook on the economy remains weak.
In general, the LEI points to a continuing economic expansion with some upside potential."
Says Ken Goldstein, economist at The Conference Board: "The index is 3.5 percent higher (annualized)
than six months ago, suggesting expansion. However, the biggest risk right now is the adverse impact
of cuts in federal spending. The biggest positive factor is the potential for improvement in the
recovering housing and labor markets. The biggest unknown is the resiliency in confidence, both consumer and business."
- According to the Bureau of Economic
Analysis, the "second" estimate of GDP growth for Q1 2013 was 2.4%, a
slight decrease from the advance estimate of 2.5% but still a marked improvement over the anemic growth of 0.4%
in Q4 2012. For comparison, growth was 3.1% in Q3, 1.3%
in Q2 and 2.0% in Q1. Again, this tepid growth
won't stir the Fed to reduce their policy of monetary expansion.
- The Federal Reserve reported in that in April the amount of total outstanding consumer credit was $2.97 trillion, up from the prior month and growing
at a 4.75% annualized rate. Consumer credit grew for the ninth consecutive
month. When is it going to make a significant impact on retail sales?
- The Conference Board's Consumer
Confidence Index surged to 76.2 in May from 69.0 in April. Says Lynn Franco, Director
of The Conference Board Consumer Research Center "Consumer Confidence improved in April, as consumers' expectations about the short-term economic outlook and
their income prospects improved. However, while expectations appear to have bounced back, it is too soon to tell if confidence is actually on the mend."
- According to the FDIC, 4 banks failed in
May, bringing the total for the year to 14, versus 24 through the
same month last year. I would be surprised if more than 20-25
banks go under this year.
The dollar index failed for a second time to pierce resistance just above
84 and has fallen back into the primary trading zone (marked by the red dotted lines).
Notwithstanding the recent weakness, the dollar remains a "safe" and desired currency as central bankers around the world fight to the death
to devalue their currencies. Going forward, I'd expect to see a resumption of dollar
The trading in gold for the
past year has been a painful bloodbath. But what is
garnering little notice is that it's possible that the bottom has been made. As
you can see below, a floor around $1,340 may have been set. Twice the floor
held. Recently the price seems to be consolidating between $1,350 and $1,450. Should
gold escape the summer, which is an historically poor time, then
it's possible that the price could again rise and try
to break through resistance around $1,480. So for now, we wait and
This will be the final month, for now at least,
that I'll show the chart of the price of silver. Quite simply,
it is so correlated to the price of gold, as you
can see by comparing these two charts,
that it doesn't make sense to continue showing it. Like gold, silver has
managed to remain above a floor price around $20. This is a very
important level. Future gains will be made only be piercing resistance
The price of copper remains
depressed and I continue to wonder how the economy, and by proxy, the stock market,
can be doing so well while this core industrial component is doing so
badly. I think it all comes back to China, which
continues to flounder (see below). As I said last month,
I wonder if the price of copper is any longer a barometer
for the state of the domestic economy. Maybe it's now a better gauge of China's
economy. If that's true, I may eliminate this chart.
The price of
West Texas crude is holding up better than many other commodities. It is currently
trading above both moving averages and heading towards interim resistance
at $100 (dotted green line). You can see numerous attempts
over the past year that have all failed to breach
that barrier. With RSI and MACD both gaining strength maybe it'll
break through this time.
The bull market in
the financial sectors continues as the index remains above
the rising trendline and both moving averages.
The recent pause in the upward trajectory is reflected in the
slowing RSI and the negative MACD. This could provide a buying opportunity for investors
looking for an entry point into this rising sector.
The housing sector looks a little choppier. The
current price of the index sits right on the 50-day moving
average after tumbling about 13% in the past month. That being said, the overall
trend remains bullish so this too could be
a possible entry point for investors. If the past is any prelude, and given my expectation
of a strong summer selling season, I would expect this sector to move higher over the next
After moving ever higher over the past year,
the index for the developed international markets took a breather
over the past month, dropping about 6% or so. The current price
is slightly below the 50-day moving average but remains above the 200-day average
and the rising trendline. RSI has
fallen from overbought to mildly oversold. MACD is about to turn positive so we
could be ready for the next rally and move to new highs.
index simply cannot get out of its own way. After bouncing
off support around 2,135 the index jumped in May before plunging right back back down again in June to again test
that support. What is really going on in China? Does anybody know? Are matters
worse there than their tight lipped government will admit? Or is there another
problem we don't even know about? The weakness in China continues to diminish the price of copper and
other base metals. If China were to rally, global equity markets would
certainly zoom to new highs.
After again failing to pierce resistance at 80 the NYSE Bullish
sentiment index has retreated a bit to a less exuberant level,
which is good. The index has spend almost seven months in
the trading range between 60 and 80, which is bullish. That's the
longest period of consistently bullish sentiment in two years. Notice that after the decline
RSI has just turned back up, suggesting the rally likely has
more room to go.
Next we see that only about 50% of
stocks traded on the New York Stock Exchange are currently trading above their 50-day moving average, down
from about 80 last month. This is a good
thing has the recent decline has taken some froth out of the market
while not causing any real damage. I think the next primary move will
take this index higher.
Finally, the VIX, or the "fear index", shows that
volatility has returned to the market this
year. We've had three spikes so far
this year, showing that traders are getting more
nervous. And yet these spikes have only brought the index out of complacency and into a
more normal trading zone, so I take it as a good thing. There should be a
little bit of healthy fear when looking at the stock market.
Thinking and Doing
Everyone is on Fed watch right now. Instead of
what would Jesus do, it's now "what will Ben do" and when will he do
it? Or will he do anything at all? Maybe he'll simply retire and
leave the mess to his replacement. Market watchers are parsing
everything the Fed says, or doesn't say, looking for clues as to
when and how the central bank will begin to taper off their QE.
Obviously, this has massive implications for the stock and bond
markets. Allow me to inject a voice of reason and sanity. The cold
hard reality is that should the Fed begin to slowly reduce the
amount of bond purchases they make each month, now totaling $85
billion per month, it really shouldn't have that big an impact on
our economy. If interest rates move from 2% today to 3% by this time next
year, to 4% a year later, would that really cause
a problem? Can anyone argue that 4% interest rates would
crater our economy? That would still be an historically low interest rate. I think
the sooner we begin to normalize interest rates, the better it will
be for everyone. But until the Fed telegraphs its intentions, we'll simply
wait and watch.
saying for months that I planned to take a little money
off the table as the market rallied. In fact, over
the past few months, I raised my cash position from 1.5% to
3.5%. I've done this by eliminating small or under performing positions. In
some cases I simply gave up on losers and took my
lumps. In others I tightened my "mental stop loss" prices and pulled
the trigger. In still others I reduced exposures to sectors where
the growth prospects have dimmed, like the commodity sector. Until China joins the
festivities, base metals will continue to lag.
factor holding back my results is clearly my position in precious
metals. After having profited for many years by allocating nearly 10% of my
holdings to gold and silver, those same securities have been the albatross around my
neck for the past year and a half. I honestly never
envisioned the depth or length of the downturn that we've been subjected
to. So now I'm sitting with my positions, waiting for what
I believe will be the inevitable upswing, possibly beginning in the fall as
the thesis for owning gold remains intact.
News and Notes
Last week I hosted an event in
support of the Westchester Community College Scholarship Foundation.
About 45 people enjoyed delicious food and wine
then listened to Brandon Steiner of Steiner Sports, one of the
premier collectibles companies in the country. All of the
proceeds go directly towards scholarships for needy students of
WCC. It was a wonderful evening that benefited a very worthy cause.
Next month I plan to throw the
2nd Annual WAM Summer Slam in my backyard. There will again be great
music, plenty of wonderful food and drinks, and lots of clients,
prospects, colleagues and friends to help celebrate summer. I hope
to see some of you here.
As always, I thank you, my readers, and remind
you that this newsletter is
for you. I have been writing News and Views for over nine years
now. If you'd like to read any prior edition, simply go to my website
and click on the link to my newsletter archives. I hope you have learned
something about our economy and our stock market, and that you
will continue to follow along with me in the future. If you
have any thoughts or suggestions on how to make it better, please let
me know. And if you'd like to speak with me about your
investment needs, or if you know 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.
"News and Views", Copyright, Werlinich
Asset Management, LLC and www.waminvest.com. All Rights