I'm Not Selling and Neither
Current Market Analysis
Last Month's Results
Trends To Watch
What I'm Thinking
News and Notes
Current Market Analysis
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
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
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.
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
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
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.
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.
Name of Index
Dow Jones Industrial Average
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
US government bonds
Barclays High Yield
High-yield corporate bonds
* 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 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.
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
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.
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
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
month and were 3.8% higher than the year before. Maybe this is the
beginning of the summer buying season everyone has been waiting
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
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.
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.
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."
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
Again, thanks to the fighting in Iraq, the price of
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
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
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.
What I'm Thinking and
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.
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.
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
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.
me a call or drop me an email.
and Views", Copyright, Werlinich Asset Management, LLC and
www.waminvest.com. All Rights Reserved.