June 16, 2014

As I write this, the Dow Jones Industrial Average stands at 16,775, up 264 points, or 1.6%, from when I wrote to you last month. This leaves the venerable index about 168 points shy of the all time high achieved on June 9th. The Dow Jones Transportation index and the S&P 500 also recorded new highs on the 9th. Since then the market has slipped a bit thanks, in large part, to the unrest in Iraq. Barring a major conflagration between the ruling party and the Sunni insurgents, I expect the market will shrug off this threat, as it has done with all other bumps in the road during this extended bull run. Last month I commented on the market's ability to operate with blinders to any bad news as it continues to "climb a wall of worry". I don't think anything has really changed. As long as sentiment remains gloomy or worried while the market continues its steady ascent, those who remain invested will earn the largest profits. 

Last month I also wrote that "it could be time to nibble at some stocks in [the biotech and high growth technology] sectors. And it also may be time to look at some downtrodden housing stocks. And the value sector, as represented by dividend-paying, blue chip stocks continues to be a smart place to put your money for excellent long-term returns." Again, if you took that advice you likely made some money as biotech and technology snapped back quickly, housing made some gains and value stocks continued to chug along and make solid, if unspectacular, gains. I say this over and over, the way to build wealth is to buy good stocks at good prices and hold them indefinitely. It is very hard to trade, or time, the market; that's left for the experts. And even the best have trouble beating a buy and hold strategy over time. 

Looking at the chart of the #DJIA, we clearly see the unbroken upward sloping trading channel. Twice support was tested (last October and the end of January), but both times the index snapped back quickly. Interestingly, trading has smoothed out over the past four months, remaining near the middle of the range (the teal dotted line). In order to create any concern at all, the price would have to fall below the 50-day moving average. After that, it would have to fall below support around 16,000 (orange line). Until then, it would appear that things are just fine and the chart remains bullish.

The chart of the #DJTA looks equally good. The trading channel has been in place for over a year, even though I'm showing only the last ten months. The current price, even with the recent dip, remains above the 50-day moving average and above the rising support level (blue line). RSI has fallen to stasis and MACD is actually negative. So the stage is being set for the next rally.

The #DJUA is in the midst of its second month of weakness after four months of big gains. The price is currently sitting on the 50-day moving average, but still well above the 200-day average and the rising support line. Historically low interest rates benefit this sector, but highly negative sentiment against coal provides headwinds. Regardless, I have held my core utility positions through all of the ups and downs over the past few years, and I see no reason to change this stance right now. This sector shouldn't be traded; we own it for stability and income. With yields 50%-100% higher than treasuries, just buy when the sector is beaten down then hold on until something fundamental changes. 

After again flirting with major support at 2.45%, the yield on the 10-year Treasury has recovered somewhat as it's advance back to over 2.60%. Clearly investors remain nervous about the pace of our domestic economic recovery, and about the conflict in Iraq, among other international problems. That being said, I'm not moving my clients into this trade. I think this is a "sucker's bet". By the end of the year, investors buying at these levels will likely be feeling the pain of higher rates.

Last Month's Results

May was a good month for equity and fixed income investors. While value continues to trump growth for the full year, growth returned to prominence last month. The most interesting story though continues to be the strength in bonds. The Barclays Aggregate has gained 3.9% for the year, as yields have fallen, and the Barclays High Yield index has returned 4.6%, besting almost all of the major stock indices. While I do not believe this relationship will last all year, it's hard to argue with the numbers so far.

* 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 June 7 was 317,000, an increase of about 20,000 from the prior week's revised figure. The four-week average of 315,250 is about 8,000 lower than the tally from a month ago. About 2.61 million people continue to collect unemployment insurance, which is 60,000 people less than last month. This is the lowest level for insured unemployment since November 24, 2007.
• The non-farm payroll employment report in May met modest expectations as the establishment survey reported that 217,000 jobs were added in the month, while revisions subtracted 8,000 in the prior month. The household survey reported that the unemployment rate remained at 6.3%, the lowest level since November 2008. The more comprehensive U-6 "underemployment" rate also fell, dropping to 12.2%. 9.8 million workers were still counted as unemployed, and the labor force participation rate held at 62.8%.
• 3.4 million people were counted as being unemployed longer than 27 weeks, a drop of 100,000. The seasonally adjusted number of people who could only find part-time work fell to 7.3 million and the number of marginally attached workers dipped to 2.1 million. The number of people holding multiple jobs increased to 7.3 million. The average hourly wages for blue collar workers rose to $20.54 while the average work week stayed at 33.7 hours. Overall, for the fourth straight month, US workers are making steady, if unspectacular, gains.
• The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $131 billion in May, which means that for the first eight months of fiscal 2014 the cumulative deficit is $439 billion, about $188 billion less than the same period in the prior year, thanks to a 7% increase in revenues and a 2% decrease in government expenditures.
• The Census Bureau reported that the U.S. trade deficit of goods and services increased in April for the fifth consecutive month to $47.2 billion. Domestic consumers are spending money on foreign goods at a faster pace than our goods are being purchased abroad.
• The National Association of Homebuilders/Wells Fargo Confidence Index dropped 1 point to 45 in May from a downwardly revised 46 in April. “After four months in which the HMI has shown little signs of fluctuation, it is clear that builder sentiment is becoming more in line with the market reality of a continuing but modest recovery,” said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Del. "However, builders expressed some optimism that sales will pick up in the coming months.”
• The Census Bureau reported that privately owned housing starts rose 13.2% in April to a seasonally adjusted annual rate of 1,072,000 units, which is 26.4% higher than a year ago. New building permits rose 8.0% from the prior month and were 3.8% higher than the year before. Maybe this is the beginning of the summer buying season everyone has been waiting for. 
• The Census Bureau reported that on a seasonally adjusted annualized basis, 433,000 new homes were sold in April, up 6.4% from an upwardly revised figure for March, but still 4.2% below a year ago. The estimate of the number of homes for sale is 192,000, which represents a 5.3 months of inventory at the current rate of sales. The median sales price dipped to 275,800, which is above the 12-month moving average price of $268,292. Perhaps this is the beginning of the spring/summer recovery in home sales that I've been anticipating.
• The National Association of Realtors reported that on a seasonally adjusted annualized basis, 4.65 million existing homes were sold in April, up 1.3% from March but down 6.8% from a year ago. The estimate of homes for sale grew to 2.29 million, which represents 5.9 months of inventory at the current rate of sales. The average selling price rose for the fourth straight month to $201,700, just above the rising 12-month average of $200,250. As with new homes, this could be beginning of a resurgence in existing home sales.
• According to the Institute for Supply Management (ISM), economic activity in the manufacturing sector rose in May from 54.9 to 55.4, marking overall growth for twelve straight months. The ISM index of non-manufacturing activity rose to 56.3, which marked growth in the service sector for 52 consecutive months. There is nothing wrong with these figures.
• The Conference Board reported that it's index of Leading Economic Indicators (LEI) increased 0.4% in April, following a gain of 1.0% in March. "The LEI rose for the third consecutive month, driven largely by improving housing and financial market conditions,” said Ataman Ozyildirim, Economist at The Conference Board. “This latest report suggests the economy will continue to expand, and may even pick up steam through the second half of the year."
• According to the Bureau of Economic Analysis, the "second" estimate of GDP growth for Q1 2014 was 1.o%, much better than the advance estimate of 0.1%. Still, this is well below the 2.6% rate of growth earned in Q4 and a far cry from the 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. I expected a higher revision and got it. The final estimate may tick the number up just a bit higher.
• The Federal Reserve reported that in April the amount of total outstanding consumer credit grew at an annualized rate of 10.25%, up to $3.75 trillion. Both revolving and non-revolving credit grew at almost double digit rates. Clearly, the consumer is starting to feel a bit better.
• The Conference Board's Consumer Confidence Index, which decreased in April, improved moderately in May from 81.7 to 83.0. Says Lynn Franco, Director of The Conference Board Consumer Research Center, "Consumer confidence improved slightly in May, as consumers assessed current conditions, in particular the labor market, more favorably. Expectations regarding the short-term outlook for the economy, jobs, and personal finances were also more upbeat. In fact, the percentage of consumers expecting their incomes to grow over the next six months is the highest since December 2007 (20.2 percent). Thus, despite last month’s decline, consumers’ confidence appears to be growing."

Trends To Watch

For over ten months the dollar index has moved in a very tight trading range between 79 and 81.50. The index has repeatedly bounced off those support/resistance levels without breaking through. There doesn't seem to be any imperative to move the dollar in significantly in one direction or the other. So for now, until the trend changes, assume more of the same.

And what of gold? It appears that the bottom has held again. Early this month the price of gold fell to about $1,240, only $40 from major support. The price is now moving higher, thanks in part to the fighting in Iraq and the worries of escalation. I don't believe this is part of a longer term trend towards higher prices. Rather, I expect it's simply a trading opportunity. Last month I suggested that "If you're so inclined you could buy below the dotted purple line as long as it doesn't fall below support (blue line). Then sell above the dotted green line, assuming it can't break through resistance (red line)." As for me, I'm staying on the sidelines.

Again, thanks to the fighting in Iraq, the price of West Texas crude has surged above recent interim resistance at $105 (orange line) and is headed towards major resistance at $110. I suspect this rise is only temporary, and that the price will eventually settle back to around $100.

This month I'm adding a new chart, representing the NASDAQ Composite, in which we see the recent volatility in the tech sector. In my blog, on April 8, I wrote that "there is a sale going on right now in technology stocks: are you buying? If you manage your expectations, and invest a reasonable amount of money (probably starting at 5-10%) then this could be a good time to dip your toes in the high growth market." I took my own advice and bought a few tech stocks. Time will tell if they were smart purchases.

The financial sector, as represented by the price of the Financials SPDR ETF, continues to trade ever higher. The current price is above both moving averages and the rising support line. RSI and MACD have both rolled over, so another buying opportunity may be coming up.

The index for the housing sector has moved into the upper end of its trading range and is holding above both moving averages. Last month, amid concerns that interim support wouldn't hold and that the price could drop to major support, I wrote that "I think it will move higher and again test resistance at 210 [because] a rally is coming, maybe by May." Well, the price hit $107 before dropping last week. The rally doesn't appear to be over yet.

As you can see below, the index for the developed international markets, as represented by the MSCI EAFE SPDR ETF, remains in a solid uptrend. I'm a bit concerned that RSI is mildly oversold and MACD seems to be rolling over. Therefore I'd expect a bit of a correction in the near term. Longer term though, the bullish trend should continue.

For months I have been writing that the Chinese stock market, as represented by the Shanghai Index, is headed towards a major move. As the wedge gets tighter and tighter, the pressure grows greater and greater. Most technical analysts 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 because the pressure still has room to build. I think that in three or four months the pattern will burst and the index will move decisively one way or another, and take the global stock markets with it.

The NYSE Bullish sentiment index has recovered quickly after a two month swoon. Last month I asked if you took advantage of the drop to buy something (see below). Well, did you? Now, RSI shows sentiment as being quite overbought. It won't take much sideways, or downside action to bring the sentiment back down a bit, setting the stage for the next big rally. .

Right now 75% of stocks traded on the New York Stock Exchange are currently trading above their 50-day moving average, which is about 15% higher than this time last month. Like the sentiment chart, this puts this index dangerously close to the top of the range and in need of a correction of some kind.

Given all the uncertainty in the market, the VIX is remarkably sanguine; too calm if you ask me. But this suggests to me that the market doesn't see anything really bad happening in the near term and I'm ok with that.

There isn't much I can say now that I haven't said for months on end. I believe we remain in a bull market, although the easy gains have already been made. I'm on record saying I believe that the #DJIA will return around 10% this year although the gains will be hard earned. It also appears that after a few years in which the market grew increasingly correlated, where all asset classes traded roughly the same way, that this year the market is again playing favorites. As a sector-based stock picker, I view this as good news. I like a market where some sectors go up while others go down. To me, that's normal and healthy. 

I haven't purchased anything new since I wrote to you last month. In fact, I sold one stock that I've held for a few years that just didn't pan out like I had hoped. So I took my small profit and raised a little cash. I may sell one or two other small positions in the next few weeks to have some more money available for the next dip. It's been very hard to find good buying opportunities during this seemingly ceaseless bull market. Therefore corrections are a welcome interruption; you just have to be patient and ready to pounce when the time is right.

News and Notes

A few weeks ago I hosted two Lunch & Learn's for about 80 employees of Motorola Solutions. The purpose of these one hour seminars was to help educate them on their options with regards to their 401k plans as they transition from Motorola to their new company, Zebra Technologies. This is a very important moment for them, and one faced by many people across the country as they leave one job for another, or retire. What they do with their 401k will affect their finances for the rest of their lives. So if you, or someone you know, is facing the same choice, feel free to give me a call so that we can discuss your options.

There are only two more months until the summer National Championships in August and I'm still putting in the work. I have to admit, I'm a little tired and ready for a break. But there's no rest for the weary. I've got a warm up meet in two weeks to help gauge where I am in my training, and to give me some much needed practice swimming in a 50 meter pool. Wish me luck. 

In less than two weeks Lily and Ezra will finally finish the school year and start their summer travels. Nola has already been home for a month and is still getting used to be away from school. As for me, I'm just glad it has finally warmed up; summer can't come soon enough. 

That's it for this month; there's nothing else to report. 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
President

                               

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