Correction or Buying Opportunity?
Current Market Analysis
Last Month's Results
Trends To Watch
What I'm Thinking
News and Notes
Current Market Analysis
As I write this after the close, the Dow
Jones Industrial Average
stands at 16,321, down 629 points, or 4.0%, from when I wrote
month. This big reversal leaves the #DJIA down almost 1,000
points, 5.5%, from the all
time high achieved on July 16th. And that's the good news. The
#S&P500 is down 6.4% and the #NASDAQ is off 8.4%. Even worse,
the Dow Jones Transportation Average (#DJTA) is now officially in
correction territory, as it's fallen 11% as is the Russell 200 index of
small-cap growth stocks (#RUT) which has swooned 13.2% since its high
I'll share my thoughts on what's going on in
detail later in this newsletter. For now, suffice it to say that after
a long absence, fear has returned to the market. Investors are afraid
that the party is over; that the world is heading back into recession
and that stocks are doomed to fall. I suppose one could make that
argument. On the other hand, I believe that this is simply a long
overdue correction in a bull market that began five and a half years
ago. That's a long time for the bull to keep running. He's taking a
breather. Conditions in this country are far different than they were
back in 2008, the last time we endured a sustained bear market. I was
clearly wrong, at least in the short term, when I wrote last
month that "looking ahead, I
think we'll probably move a bit higher heading into the mid-term
elections in November, after which the next big move will happen." But
we still have three weeks until the election so we have some time for
my prediction to come to pass.
In the meantime, let's look at the charts, which no
longer paint pretty pictures. As we look at the #DJIA we
can see the damage done in the last month, a trend that recurs
in almost every image to follow.
The price of the index has now fallen below the rising support line (in
blue) and below both moving averages. I've drawn two support levels in
orange, the first of which is at around 16,333. After that comes
16,015. Let's hope we don't have to discuss where support comes in if
that level is breached.
The chart of the
#DJTA is even worse as the current price has plunged well below the
rising trendline and also below both moving averages. RSI has fallen to
oversold levels and MACD looks terrible. The transportation average is
selling off more than the industrials because it is seen as an
indicator of an upcoming economic malaise. I simply don't agree. Time
The #DJUA represents one of the few
sectors still in a bullish mode. The current price
is above both moving averages and solidly within the
established trading range. Falling interest rates continue to prop up
this sector and there doesn't appear to be anything on the immediate
horizon that suggests a change in rate policy, so utilities should
continue to benefit.
This month I'm giving you a longer perspective on
the 10-year treasury to help put the current yield in perspective.
Looking at the last four years, you can see that yields fell from a
high of about 3.75% to as low as about 1.4% in the summer of 2012,
before rising again to 3% at the end of 2013. Over the subsequent ten
months, yields have fallen again to a current low of 2.28%. It's
possible that if the market continues to struggle, a "flight to safety"
could send yields back to around 2%. I've certainly been dead wrong on
this trade all year.
After solid gains in August,
stocks dropped a bit in September. Small-cap stocks suffered
large enough losses to leave them down for the year. Large-cap growth,
especially large tech stocks, continue to lead the way as evidenced by
the large divergence between the S&P 500 (more growth)
and the Dow
Jones Industrial Average (more value). Bonds, especially high yield,
had a poor month too, but still have accrued solid gains for the
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 October 4 was 287,000, a decrease of 1,000 from the prior
week's revised figure, and well below the figure from this
time last month. The four-week average of 287,500 is about 5,000
lower than the tally from a month ago. About 2.31 million people
continue to collect unemployment insurance, which is 200,000
people less than last month. This is the lowest level since May 2006.
Progress continues to be made.
non-farm payroll employment report in September
exceeded expectations as the establishment survey
reported that a surprisingly robust 248,000 jobs were added in the
month, while revisions added an additional 69,000
in the prior two months. The household survey reported
that the unemployment rate dipped to 5.9%. The more comprehensive
U-6 "underemployment" rate also fell, coming in at 11.8%. 9.3
million workers were still counted as unemployed (three
hundred thousand less than last month). The
labor force participation rate fell
slightly to 62.7%, down from 63.2% just six months
3.0 million people were counted as being unemployed longer
than 27 weeks, the same as last night. The seasonally adjusted number
people who could only find part-time work dropped to 7.1 million and
marginally attached workers rose to 2.3 million. The
number of people holding multiple jobs rose to 6.95
million. The average hourly wages for blue collar workers
held steady at $20.67 while the average work week held
stubbornly at 33.7
hours for seven out of the last eight months. Overall, while
the headline numbers paint a very positive picture, the lack of labor
participation growth combined with no wage growth tells me that nothing
here will force the Fed to change their interest policy any
Congressional Budget Office (CBO) estimated
that on a net present value basis, the Treasury reported a federal
budget surplus of $106 billion in September, which means
that for fiscal 2014 the cumulative
deficit is $486 billion, about $20 billion smaller than expected, $195
billion less than fiscal 2013 and the smallest deficit recorded since
2008. Relative to the size of the economy, the deficit, at an estimated
2.8% of GDP, was slightly below the average experienced over the past
40 years. Revenues were up about 9% and spending was
Census Bureau reported that the U.S.
deficit of goods and services decreased slightly in August to $40.1
growth in exports continued to out pace imports.
The National Association of Homebuilders/Wells Fargo Confidence Index
rose for the fourth straight month in September, reaching 59, the
level since November of 2005. Any reading over 50 indicates
view sales conditions
as good than poor. "Since early summer, builders in many markets across
the nation have been reporting that buyer interest and traffic have
picked up, which is a positive sign that the housing market is moving
in the right direction," said NAHB Chairman
Kevin Kelly, a home builder and developer from Wilmington,
The Census Bureau reported that after surging 22.9% in July, privately
starts fell 14.4% in August, to a seasonally
annual rate of 956,000 units, but still 8.0% better than a
year ago. New building permits dropped 5.6% from
month but remained 5.3% higher than the year before. There is
too much month-to-month volatility here to draw any meaningful
The Census Bureau reported that on a seasonally
adjusted annualized basis, a robust 504,000 new homes
were sold in August, up 18.0% from the July total,
and a whopping 33.0% higher than a year ago. The estimate
of the number of homes for sale is 203,000, which represents a slim
4.8 months of inventory at the current rate of sales.
The median sales price was $275,600, down a bit from an upwardly
revised figure in July, which is almost identical to
the 12-month moving average price of $275,592. The average
sales price has now fallen four months in a row.
The National Association of Realtors reported that on a seasonally
adjusted annualized basis, 5.05 million existing
homes were sold in August, down 1.8% from July and down 5.3%
from a year ago. The estimate of homes for sale down up to
which represents 5.5 months of inventory at
the current rate of sales. After rising for seven straight months, the
average selling price
dipped slightly to $219,800, which remained well above the
rising 12-month average of $203,250.
According to the Institute for Supply Management (ISM), economic
activity in the manufacturing sector dimmed just a bit in
September to 56.6, which still marked overall growth for
months. The ISM
index of non- manufacturing activity dipped to 58.6, which
marked growth in the service sector for 56 consecutive months. While
these numbers weren't great, they still demonstrate continued
growth in the economy.
Conference Board reported that its index of Leading Economic
Indicators (LEI) increased 0.2% in August, following a gain of 1.1%
(revised) in July. "The LEI continued to rise in August, although at a
slower rate than in July." said Ataman Ozyildirim,
Economist at The Conference Board. "The LEI's six-month growth trend
has been held back slightly by lackluster contributions from housing
permits and new orders for non defense capital orders. Despite concerns
about investment picking up, the economy should continue expanding at a
moderate pace for the remainder of the year."
According to the Bureau of Economic Analysis, GDP increased at an
annual rate of 4.6% in Q2
2014 according to the "third" estimate, up from the second estimate
of 4.2%. That is far better than the
anemic decline of 2.1% in Q1. By comparison, GDP growth was 2.6% in Q4
2013, 4.1% in Q3 and 2.6% in Q2. This solid number
simply brought the two month average back in line with recent results
and future expectations. Looking ahead, GDP growth will likely return
to the 2.5% range.
The Federal Reserve reported that in August
the amount of total outstanding consumer credit grew at
an annualized rate of "only" 5%, up to $3.247 trillion. The
steady rise in the amount of outstanding consumer credit slowed a bit
but remains at the highest level since I started tracking this in 2004.
The Conference Board's Consumer Confidence Index, which
had increased in August, declined in September, falling from 93.4
(revised) to 86.0. Says Lynn Franco, Director of The Conference Board
Consumer Research Center, "Consumer confidence retreated in September
after four consecutive months of improvement. A less positive
assessment of the current job market, most likely due to the recent
softening in growth, was the sole reason for the decline in consumers'
assessment of present-day conditions...All told, consumers expect
economic growth to ease in the months ahead."
In order to put the dramatic increase in the dollar
index in some perspective, I've had to show a five year horizon in
chart this month. You can see that the current price of the index is
close to a high last achieved in early 2010. This dollar strength,
while more about Euro weakness is great for travelers and importing
goods, but bad for our the exports of our multi-national corporations
and terrible for commodities, which are priced in dollars. As long as
the dollar continues to increase in value, the price of oil and metals
will likely suffer.
Twice this year the price of gold has fallen to
major support and around $1,200 and twice it has rebounded. As the
stock market is falling right now, investors are once again looking at
gold as a potential safe haven, and therefore buying the shiny metal.
Both RSI and MACD have turned up, so this trade could continue higher
for the time being.
Thanks in part to the strong dollar, the price of
copper is falling. It has dropped below the interim support at $3.20
and is below both moving averages. It will be very important for
support to hold at about $2.92. The price could also be weak if
investors believe that the global economy, read China, will continue to
The following chart has gone from bad to worse. The
price of West Texas
crude has plunged about 21% in the past four months
since peaking just under $108 in June. In doing so,
it crashed through interim resistance around $100 and major
support around $92. Now it's headed for the next big support
level at around $78. If it falls that far things would be very bad.
This is either a great buying opportunity or an indication of very bad
things to come. The optimist in me believes the former.
After being a beacon of strength for most of the
year, the NASDAQ Composite has rolled over dramatically in the
last month. In doing so it has fallen through support at about 4,360
and below both moving averages. RSI and MACD are both approaching
oversold levels. Important support comes in around 4,000 so keep you
eyes on that level.
It will be interesting to see if the financial
sector can avoid the carnage enveloping much of the rest of the stock
market. Right now, it remains safe as the current price remains within
the trading range and above the 200-day moving average. The banks have
strong balance sheets, solid earnings, and they're increasing their
dividends to shareholders. I think this is a good buying opportunity.
The index for the
housing sector is again taking a beating as the price has fallen below
interim support around 192 and is well below both moving averages.
Also, a "death cross" appeared last month, whereby the 200-day average
has moved above the 50-day average. That is very bearish. If this index
falls much further, and approaches major support at 166, it might be
time to get out of this sector for a while.
The index for the
looks ugly. The situation in Europe looks terrible, without
any near-term reason for optimism. The index has plunged 14% in four
months, in doing so has fallen through interim support at 65 and well
below both moving averages, which last month also formed the "death
cross". The current price is just above major support at 60. I would be
out of the sector right now.
Amazingly, in the face of declines in most of the
rest of the world's markets, the Shanghai Index continues to
surge higher. The current price is just below the high last achieved in
early 2013. Normally this optimism would bleed over to other markets.
If these gains continue, I would expect other market to follow suit.
Well, my prediction two months ago that it was
"time to buy" (see below) was clearly premature and ill-timed.
The NYSE Bullish sentiment index
has plummeted to a severely oversold position. And while markets can
remain oversold longer than one might hope, it does set things up for a
rally. It is not time to be a seller; I'd be a buyer.
As with the bullish sentiment indicator
on the incredibly low percentage
on the New York
Stock Exchange that are
currently trading above their 50-day moving average, I would say we are
setting up for a very strong buying opportunity.
Fear is back. Stock market volatility, as evidenced
by the VIX,
has returned with a vengeance. After almost a year of complacency, the
VIX has jumped more than 100% over the past three months, much of that
just in the past two weeks. Given how quickly the VIX has increased, I
would not be surprised to see an equally fast decline sometime in the
next few weeks as the market recovers a bit.
What I'm Thinking and
This afternoon a client sent me an email asking me
if this is the correction that I have been saying would have to come
sooner or later, or if he should be worried. I answered him by saying:
"I do think this is a legitimate correction, and it's probably long
overdue. That being said, it's never pleasant while it's going on. I
don't think we're headed for a full-blown bear market. Corporate
balance sheets are solid, as are earnings. Our national debt has
dropped considerably. The Federal Reserve remains vigilant and will
doing everything in its power to keep the economy moving forward. I
think this is primarily a European problem, and while I don't mean to
diminish that problem, it should not crater our stock market. This is
way we are invested conservatively. We will suffer losses, but that
losses should be less than the broader market indexes. And we'll
continue to collect our dividends."
I think that sums up my feeling about the market
pretty succinctly. Nobody likes it when the market declines, except
maybe Warren Buffett. And that tells you something. Perhaps we should
all think, and invest, a little more like the Oracle of Omaha. Be a
buyer when others are selling and there is blood in the water. Wouldn't
you like to buy a great stock after it's fallen 10-15% for no reason
having to do with it's core business? I certainly would.
Following that advice, last week I picked up a
great American industrial company after it had fallen 15% in just a few
weeks. While it may fall a bit lower if the overall market continues to
drop, I'm confident that we'll earn solid profits over the next five
years and beyond. And if the market remains weak, I'll look to add
other stocks on my "wish list". There are plenty of stocks I'd love to
buy if the price is right.
The big news is that my fiance' and I have moved up
our wedding date. We are now getting married in one month, on Friday,
November 14. We are so excited! We're also quite busy trying to nail
down all of the details.
On Thursday night I'm attending two important
fund-raising events for two local charities that I support: the Food
Bank for Westchester (I'm on the Board of Directors) and Cluster, an
organization based in Yonkers. Both are great organizations that do
very important work in our community to help support those less
fortunate. While I would have preferred that these two events not be on
the same night, I will be at both of them, lending my support. I hope
to see some of you there.
it for this month. The weather report says we should enjoy a few
(final?) days of Indian Summer the rest of the week as temperatures
rise back above 70 degrees. So we should all get outside and enjoy it.
As always, I
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.