Don't Be Afraid Of This Market
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 16,943, up 168 points, or 1.0%, from when I wrote to you last
month. This leaves the #DJIA only 125 points shy of the all
time high achieved on July 3rd. The Dow Jones Transportation
index and the S&P 500 also recorded new highs on the
3rd. Since then the market has slipped a bit, but nothing to be
concerned about. I said last month that "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." So far, that has proven to be the case. And as I've
said before also, the market continues to
"climb a wall of worry". As
long as investor and guru sentiment remains nervous and gloomy, I
believe the market can continue to ascent further. I'll bet on the
market action rather than the nattering nabobs of negativity.
While I do believe that, on balance, the market
will continue to move higher, that doesn't mean there won't be days or
weeks when it loses ground. In fact, I expect a reversal to happen at
some point this summer when bad news of some kind combines with low
summer trading volume to provide a quick downward snap. And when that
happens I'll be ready to buy because I'm convinced the market will
finish the year higher.
The chart of the #DJIA is just a thing of
beauty for the bulls. We clearly see
the unbroken upward slope as it hugs the dotted green line in the
middle of the trading channel. Volatility has really smoothed
out over the past
four and a half months, which suggests that there will be a bigger
move, up or down, coming up sometime soon. 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 continues to look great. The trading
channel has been
in place for
well over a year, even though I'm showing only the last ten months. The
current price remains well above the 50-day
moving average and above the mid-point of the trading
range. RSI is at a reasonable level and MACD has
fallen into negative territory, so there is room to grow here.
After hitting a new high earlier this month the
corrected harshly over the first couple days of July but again seems to
be recovering. The current price is above both moving averages
and comfortably above an interim support level at around 530 (pink
line). Historically low interest rates continue to benefit this
sector. 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. 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.
The yield on the 10-year Treasury is
falling again to support at 2.45%. That support has held each of the
prior four times and I would expect it to do so again. I find it
strange that investors would flee equities for the "safety" of bonds
because of a fear that higher interest rates in early 2015 will punish
stocks. Yet they seem to forget that higher interest rates will punish
bonds even worse. That's why I'm out of bonds.
June was a another solid month for equity and fixed
investors. And for the second month in a row, growth remained the
driving force, as witnessed by the outsized gains in the NASDAQ and
Russell 2000 Growth indices. It's interesting to note the divergence
now between large and small cap stocks as investors seem to prefer the
safety of the bigger companies right now. Fixed income
has generated solid returns for the first half of the year,
confounding many many observers (including me)..
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 July 5 was 304,000, a decrease of 10,000 from the prior
week's revised figure, and 13,000 lower than this time last month. The
four-week average of 311,250 is about 4,000
lower than the tally from a month ago. About 2.57 million people
continue to collect unemployment insurance, which is 70,000
people less than last month. The good news is that these numbers keep
non-farm payroll employment report in June exceeded
expectations as the establishment survey reported that
288,000 jobs were added in the month, while revisions added 29,000
in the prior two months. The household survey reported
that the unemployment rate fell to 6.1%, the
lowest level since September 2008. The more comprehensive U-6
"underemployment" rate also fell, dropping
to 12.1%. 9.5 million workers were still counted as unemployed (three
hundred thousand less than last month), and the
labor force participation rate held at 62.8% for the third straight
3.1 million people were counted as being unemployed longer
than 27 weeks, a drop of 300,000. The seasonally adjusted number of
people who could only find part-time work rose to 7.5 million and the
marginally attached workers dipped to 2.0 million. The
number of people holding multiple jobs decreased to 7.0
million. The average hourly wages for blue collar workers
rose to $20.58 while the average work week held stubbornly at 33.7
hours. For the fifth straight month, more than 200,000 people
found a new job and the unemployment rate is falling. But wage growth
is slow, hours worked is stagnant and the labor force
participation rate refuses to budge, so the employment picture is
better, but still needs improvement.
Congressional Budget Office (CBO) estimated
that on a net present value basis, the Treasury reported a federal
budget surplus of $70 billion in June, which means
that for the first nine months of fiscal 2014 the cumulative
deficit is $366 billion, about $144 billion less than the same period
in the prior
year, thanks to an 8% increase in revenues (mostly taxes). Spending is
up 1% thanks to increases in social security and health care
Census Bureau reported that for the first time in six months the U.S.
deficit of goods and services decreased in May to $44.4 billion as the
growth in exports finally outpaced imports.
The National Association of Homebuilders/Wells Fargo Confidence Index
rose 4 points to 49 in June. “After several months of little
fluctuation, a four-point up tick in builder sentiment is a welcome
and shows some renewed confidence in the industry,” said NAHB Chairman
Kevin Kelly, a home builder and developer from Wilmington, Del.
“However, builders are facing strong headwinds, including the limited
availability of labor.” “Consumers are still hesitant, and are waiting
for clear signals of full-fledged economic recovery before making a
home purchase,” said NAHB Chief Economist David Crowe. “Builders are
reacting accordingly, and are moving cautiously in adding inventory.
The Census Bureau reported that privately owned housing
starts fell 6.5% in May, after rising 12.7% in
April, to a seasonally adjusted
annual rate of 1,001,000 units, which is 9.4% higher than a
year ago. New building permits fell 6.4% from the
month and were 1.9% lower than the year before. This does not portend
well for the housing recovery.
The Census Bureau reported that on a seasonally
adjusted annualized basis, 504,000 new homes
were sold in May, up a whopping 18.6% from a slightly
lower revised figure for April,
and 16.9% higher than a year ago. The estimate
of the number of homes for sale is 189,000, which represents a
very slim 4.5 months of inventory at the current rate of sales.
The median sales price increased to 282,000, which is above
the 12-month moving average price of $269,942. The increase in units is
a positive, but the price increase bodes poorly for future unit growth
as first time buyers may be priced out of the the market.
The National Association of Realtors reported that on a seasonally
adjusted annualized basis, 4.89 million existing
homes were sold in May, up 4.9% from March but down 5.0%
from a year ago. The estimate of homes for sale grew to 2.28 million,
which represents 5.6 months of inventory at
the current rate of sales. The average selling price
rose for the fifth straight month to $213,400, well above the
rising 12-month average of $201,092. Here we had solid unit growth as
well as decent price gains., yet the strength is somewhat illusory as
we remain below the levels from a year ago.
According to the Institute for Supply Management (ISM), economic
activity in the manufacturing sector was essential unchanged in June
at 55.3, marking overall growth for thirteen straight months. The ISM
index of non-manufacturing activity slipped slightly to 56.0, which
marked growth in the service sector for 53 consecutive months. These
results are solid, if unspectacular.
Conference Board reported that its index of Leading Economic
Indicators (LEI) increased 0.5% in May, following a gain of 0.3% in
April. "May’s increase in the LEI, the fourth consecutive one, was
broad based,” said Ataman Ozyildirim, Economist at The Conference
Board. “Housing permits held the index back slightly but the LEI still
points to an expanding economy and its pace may even pick up in the
second half of the year.”
According to the Bureau of Economic Analysis, GDP shrank by 2.9% in Q1
2014, a sickening drop vs. the loss of 1.0% that was reported in the
second estimate. This is a plunge from 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'm not going to give much weight to
this number, which was clearly impacted by the horrible weather and by
companies drawing down their inventory. The important figure will be in
The Federal Reserve reported that in May
the amount of total outstanding consumer credit grew at
an annualized rate of 7.5%, up to $3.194 trillion. The growth
in revolving credit slowed to 2.5% while non-revolving credit
at an almost double digit rate.
the consumer continues to borrow in order to spend, whether by choice
The Conference Board's Consumer Confidence Index, which
had increased in May, improved again in June, rising
82.2 to 85.2.
Says Lynn Franco, Director of The Conference Board Consumer Research
"Consumer confidence continues to advance and the index is now at its
highest level since January 2008 (87.3). June’s increase was driven
primarily by improving current conditions, particularly consumers’
assessment of business conditions. Expectations regarding the
short-term outlook for the economy and jobs were moderately more
favorable, while income expectations were a bit mixed. Still, the
momentum going forward remains quite positive."
For almost a year the dollar index has
in a very tight 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 significantly in one direction or the other. So for
now, until the
trend changes, assume more of the same. And this generally lower dollar
continues to support higher commodity prices and to benefit US
Gold continues to have a very good 2014 as the
prices moves higher. Indeed, it is now bumping again an interim
resistance level around $1,350. As I've said before, I don't
believe this is part of a longer term trend towards
higher prices. Rather, I expect it's simply a trading opportunity.
Based on that idea, I would be a seller right now.
After eliminating this chart about a year ago, I
thought I'd bring back the chart showing the action of the price of
copper. Copper prices are often thought to be a key indicator of
economic health because so many manufactured goods use copper. If one
believes that premise, then the resurgent price of copper over the past
few months (with a gain of 14%) is a clear harbinger of better things
to come for our economy.
The price of West Texas Crude didn't quite make it
to resistance at $110 before rolling over and falling for over 10
consecutive days to reach interim support (green dotted line) just
above $100 per barrel. The current price is just above the 200-day
moving average and right on interim resistance and the short-term trend
line (solid green line). So this is a key inflection point. If the
price falls below $100, it could fall to major support at $92.
Notwithstanding the sell-offs in January and March,
the NASDAQ Composite has been a monster over the past year,
gaining about 22% since last September. I think this sector has more
room to grow so I'm looking to add to my holdings.
The financial sector continues to be a winner. If
you don't own a position in this sector, you're missing out. Look for a
decline to around 22 as a good place to start buying.
The index for the
housing sector has stabilized in the upper end of its trading
range where it remains above both moving averages, although a
recent slide has brought it right to the 50-day average. The index was
unable to breach resistance early this month but I'm not giving up. I
think the housing numbers will continue to improve, and therefore the
index will likely move higher.
As you can see below, the index for the developed
remains in an unbroken
uptrend, although it appears the index is a bit overbought and could be
primed for a small retreat before heading higher. Longer term though,
the bullish trend should continue.
My recording is stuck on repeat here as I'll
continue to speculate that the Shanghai Index is headed towards a major
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. All it would take is one
month of better than expected GDP growth or PMI data and this market
could explode higher as all the bad news seems to be baked in.
After a two month lull in April and May, investors
have grown far more bullish, as you can see in the chart of
the NYSE Bullish sentiment index. At a current level of around
72.6 the index is dangerously close to over exuberant levels around 76.
RSI is very overbought, suggesting that a correction could be coming
up. It won't take much sideways, or downside,
action to bring sentiment down a bit, setting the
the next rally.
Right now 66% of stocks traded on the New York
Stock Exchange are
currently trading above their 50-day moving average, which is actually
below the figure from last month, which is surprising considering the
market is trading at higher levels. Given that, I'd expect to see this
figure rise again back towards resistance around 84.
I'm wondering if the VIX is an important indicator of market
sentiment any longer. Historically, these levels of
extraordinary investor complacency would suggest major trouble, yet the
market no longer seems to care. For now, I'll continue showing it, but
it's hard to get excited about these super low levels any
What I'm Thinking and
If you listened to the
doom and gloom prognosticators you are out of the market and very
unhappy to be missing the party. The market has simply ignored, or
discounted, all of the social, political and economic troubles around
the globe and continued to power ever higher, fueled by the easy money
policies of the various central banking institutions. If you listened
to me and just sat tight, then you're enjoying solid, if unspectacular
gains. There was no "sell and May and go away" this year. That old
axiom didn't work last year either. Sometimes you simply have to stop
reading the papers, turn off CNBC and tune out the noise to hear what
the market is telling you. The action of the market is the only
"expert" whose voice truly matters. And the market is telling us that,
for whatever reason, we must remain invested right now. It really is as
simple as that because, in this case, the charts and numbers truly
doesn't mean that the party will go on forever, which it clearly won't.
As my Grandfather used to say, "times and conditions change" and you
must be willing to change along with them. But for now, I'm not
concerned. I continue to believe that the #DJIA will return
10% this year, which means modest gains in the second half of the year.
And if we read the tea leaves correctly, and invest in the
out-performing sectors, and ignore the laggards, we can earn even
For the second straight
month, I have done very little with my portfolios. For the most part,
I'm following my own advice and simply sitting still and enjoying the
gains. There are few stocks I'd like to buy at current prices so I'm
being patient, allowing dividends to pile up, and waiting for better
buying opportunities. I still have my eye on a few ideas, and I'll be
ready to pounce if and when the price is right.
is only one more month until the Masters summer National
Swim Championships, being held at the University of Maryland in
mid-August, and I'm piling up the yardage. I've got another
three weeks of intense training before I begin to taper for the meet.
I'm hoping that with a little luck I'll produce a few fast swims and
earn some Top Ten rankings. Wish me luck.
Ezra is currently having
a blast at camp and Lily is busy rock climbing in Zion National Park
and hiking in the Grand Canyon. Nola is home spending time with friends
and doing some volunteer work before she and Lily head to Spain for a
week later this month. Kathiryn and I have been keeping busy, as we
usually do, and are having a great time so far this summer, with even
more plans upcoming.
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.