The Bull Keeps Running
Thinking and Doing
For the second month in a row, the market, as
represented by the Dow Jones Industrial Average, attained a
new record high as I write the newsletter. And once again,
most sectors of the market are rallying. As I've said over and over
this year, and for the past few years, investors should
remain cautious, but fully invested. Rather than attempting to
time the market, which invariably leads to buying high and selling low, the best
way to build wealth is to own a diversified portfolio of high
performing stocks. This is what I've tried to do for my clients over
the past twenty years.
As we look at the chart of the #DJIA for the past
eight months, we continue to see a very bullish primary trend. The
rally that began
over nine years ago, in March 2009,
continues unabated today. The current price is well above both the
50-day and 200-day
moving averages, and interim support around 20,400. Early
indications point to Q2 earnings being better than expected, which
suggests that the rally should continue.
After months of disappointment, the Dow Jones
Transportation Average finally joined the new record club. And did so
at the same time as the Industrial Average, resulting in a
bullish Dow Theory confirmation. Two months ago I suggested
that the low price of the index presented a buying
opportunity. Almost immediately thereafter it recovered and has moved
higher ever since.
Although the usually staid Dow Jones
Average has produced remarkably outsized gains so far this year, the
index has retreated subsequent to the Fed rate hike in June. Still, the
yield on the 10-year treasury has barely budged (see below), which
suggests that the sector could regain some of those
to the Department of Labor, the
figure for seasonally-adjusted initial jobless claims for the week
ended July 8 was 247,000, which is roughly in line with the
same range of
figures we've seen all year. The four-week
average of 245,750 is also consistent with the numbers for most of the
non-farm payroll employment report in June exceeded
expectations, as 222,000 jobs were gained in the month,
and an additional 47,000 net jobs were added in the
prior two months. The household survey reported that the unemployment
rate nudged up to 4.4%, while the labor
participation rate inched up to 62.8 as more people entered the labor
force. Average hourly wages for blue
collar workers rose to a new high of $22.03 while the average work
week rose to 33.7 hours.
7.0 million workers were counted as
unemployed, while 1.7 million people remained
unemployed longer than 27 weeks. The seasonally
adjusted number of people who could only find part-time work rose to
5.3 million while the number of marginally attached workers
crept up to 1.6 million. The number of people holding multiple
jobs dropped to 7.43 million. All of this resulted
in the U-6 "underemployment" rate rising to 8.6. Overall, this was a
very solid, if unspectacular,
report, showing that the labor market continues to make slow and steady
Congressional Budget Office (CBO) estimated that on a net present value
basis, the nation's budget deficit was $87 billion in June,
about $93 billion less than the $6 billion surpluss from a year ago.
This resulted in a deficit of
$520 billion for the first nine months of
fiscal 2017, $120 billion more than the shortfall recorded during the
same period last year. The full-year deficit is now estimated to be
around $693 billion.
Census Bureau reported that privately owned housing starts
decreased 5.5% in May to 1,092,000, which is the lowest level of the
year, and was down 2.4% from a
year ago. This decline doesn't bode well for the future of new home
sales this year.
Census Bureau reported that on a seasonally adjusted annualized
basis, 610,000 new homes were sold in May,
up 2.9% from April, and 8.9% from a year ago. The estimate
the number of homes for sale was 268,000, representing 5.3
months of inventory at the current rate of sales. The median sales
price soared to 345,800, the highest figure in more than a decade, and
$30,000 more than the 12-month moving
average price of $315,600. My guess is that the high average price
reflects low interest rates and not enough new homes for sale.
National Association of Realtors reported that 5.62 million existing
homes were sold in May, up 1.1% from the
prior month, and up 2.7% from a year
ago. The estimate of the number of homes for sale was 1.96 million,
representing only 4.2 months of inventory at the current
rate of sales. The median price was $252,800, which is well above
the rising 12-month moving average price of $238,150. The market for
existing homes seems to be doing better than the one for new homes.
Conference Board reported that its index of Leading Economic
Indicators (LEI) increased 0.3% in May, following a gain of 0.2%
(revised) in April and 0.4% in March. "The
U.S. LEI continued on its upward trend in May, suggesting the economy
is likely to remain on, or perhaps even moderately above, its long-term
trend of about 2 percent growth for the remainder of the year," said
Ataman Ozyildirim, Director of Business Cycles and Growth Research at
The Conference Board. "The improvement was widespread among the
majority of the leading indicators except for housing permits, which
declined again. And, the average workweek in manufacturing has recently
shown no sign of improvement."
to the "third" estimate by the Bureau of Economic Analysis,
GDP increased at a modest annualized rate of 1.4% in Q1 2017, up from
the meager 0.7% advance and 1.2% second estimates. 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 on par with the 1.4%
growth rate in Q2. The best I can say is it that compares favorably with
the mediocre 0.8% growth rate from Q1 2016.
to the BLS, the seasonally adjusted Consumer Price Index for all Urban
Consumers (CPI-U) was flat in June, after falling 0.1% in May.
Over the last twelve months, the index rose 1.6%,
continuing the downward trend since February, when it was 2.7%.
Too many more months like this and the Fed will have to postpone their
next rate hike until sometime next year.
Conference Board's Consumer Confidence Index increased to 118.9 in June
from 117.6 (revised) in May. "Consumer
confidence increased moderately in June following a small decline in
May," said Lynn Franco, Director of Economic Indicators at The
Conference Board. "Consumers’ assessment of current conditions improved
to a nearly 16-year high. Expectations for the short-term have eased
somewhat, but are still upbeat. Overall, consumers anticipate the
economy will continue expanding in the months ahead, but they do not
foresee the pace of growth accelerating."
The value of the dollar
index has been in a steady decline for the past six months,
falling to the same level as a year ago. I would have expected the
dollar to be stronger in light of the rate increases. Instead, the
index seems to be pricing in the instabilities of the Trump
administration. For now, enjoy the benefits to corporate profits
enjoyed by the lower dollar.
The yield of the 10-year
Treasury bond has traded
between 2.1% and 2.6% for the past eight months. Every time I say that
rates can't possibly go any lower, they manage to do just that. But I
will again go out on a ledge and say that the Treasury yield will not
fall below support at 2.0% and will likely remain in the trading range
outlined below for the rest of the year.
For all of 2017, the
price of a barrel of West Texas Crude has made lower highs and lower
lows as it seeks to find a bottom. Interim support at $45 was violated
last month, and again briefly last week. It wouldn't surprise me to see
the price fall to the critical support level around $39. And that is
why I've drastically reduced my exposure to the energy sector, holding
only two core, long-term positions in a few accounts.
The price of gold is
also stuck in a trading range, between $1,125 and $1,300, as you
can see below. Barring escalated tensions in the Middle East, North
Korea, Russia or elsewhere, it's hard to make a case for a resurgence
in the price of the yellow metal any time soon.
The Nasdaq Composite,
led by the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google),
has continued to power to record highs, even accounting for two
separate declines in the past two months. There seems to be no
meaningful break in the momentum of this index so there's no reason to
get off this train.
Trading in the financial sector has been
range-bound for the past seven months, as you can see below, after failing twice to breach resistance around 25.20. Five times
the index has fallen to, but not through, support around $22.80. As I said last month, my investment thesis is
that we'll see the index move above resistance around $25.25 before
falling below support.
Sticky low interest rates continue to
benefit the tight housing market. And now that the weather has finally
warmed up, heading into the strong home selling
season, there's no reason this sector can't move even higher. Lather, rinse, repeat.
The NYSE Bullish
sentiment index remains remarkably sanguine considering how well the
stock market is doing. One might expect greater levels of bullishness
considering that the market continues to surge to new record levels.
This lack of bullish sentiment is, as a contrary indicator, quite
What I'm Thinking and Doing
Last month, I said that
while Presidents, Congressmen and Senators come and go, the economic
cycle will outlast them all. Right now, we are in the
midst of an historic period of relatively stable but modest economic
growth, spurred by historically low interest rates, extremely low
inflation and steady, predictable corporate
profits. In addition to all of that, we have a very accommodative
Federal Reserve. Given all of that, my basic
investment thesis is as it has been since 2009: be fully invested
the stocks of quality
companies, most of whom pay a steady dividend, while mixing
in shares of some small, fast-growing tech stocks.
long-time readers know that I ascribe to a sector rotation theory of
investing. By that I mean that I tend to invest in the leading stocks
of sectors that I believe have the best chance to outperform the
overall market, and avoid the sectors that I believe will underperform.
Over the last twenty years this strategy has led me in and out of the
tech, gold, mining and biotech sectors. It has also spurred me to take
an outsized position in energy before spending the last eighteen months
to substantially reduce it. I've also reduced other long-held positions
in telecom and real estate as times and conditions have changed. More
recently, I've substantially increased my holdings in the technology
sector, while adding to my already large position in defense. While my
decisions over the years have not always been easy, indeed, they were
sometimes very difficult, I always do what I think is in the best
interests of my clients.
I have been very busy
over the past two months, during which I have made a number of very
strategic trades. I've substantially reduced my telecom stocks by
liquidating one position and reducing two others. I also reduced my
stake in the final two energy stocks I own. I used some of the proceeds
of these sales to purchase a large position in one large tech stock as
well as a smaller stake in a fast-growing micro-cap tech stock. I also
bought an initial position in two large defense contractors. In
addition, I've rotated out of an ETF of consumer discretionary stocks
and into one focused on cyber security and another on mobile payments.
Each of these trades were made with the intention of rotating out
of poorly performing sectors and into fast growing ones.
Looked at in its entirety, I'm very pleased with the composition of my
News and Notes
little new to
report this month with respect to my family. Nola is looking forward to
coming home in less than three weeks after working insane hours
for a theater company in Western
Massachusetts. Lily has enjoyed a great internship in DC this
summer but is also looking forward to coming home in two weeks. Ezra is
in between his two amazing trips and enjoying some lazy time with
friends. As for me, I'm almost six weeks removed from my shoulder
surgery and trying to recover from a bout of Parsons Turner Syndrome.
There's always something, right? Fortunately, Kathiryn is well and
working hard for ADP. We have managed to have some fun, and we're
looking forward to enjoying ourselves over the last six weeks of
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.
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www.waminvest.com. All Rights Reserved.