October Bounce Rewards Patient Investors
Current Market Analysis
Last Month's Results
Trends To Watch
What I'm Thinking
News and Notes
Current Market Analysis
As of the close of business Friday,
the Dow Jones Industrial Average stood at 17,216, which is 617
points, or 3.7%, higher than when I wrote to you last month. The
stock market, as defined
by the #DJIA, is now down 3.4% for the year (after finishing last year
17,823). The index has now regained more than half of the losses
incurred in the summer correction. The current strength in the market
suggests that the August 25 closing price of 15,666 may have
the bottom this year. I've been saying for months that I think
market will finish the year in the black,
so we'll just need to improve by about 3.5% from here to make that
happen. Since the Fed has made it pretty clear that it will not be
adjusting their short-term lending rates in 2015, I think that rally
will come to fruition.
I'd like to take a
moment to remind my readers of something I said last month about
corrections because it's very instructive. "Corrections
are a normal and healthy part of the stock market. They may not be much
fun to go through, but go through them we must. The stock market, like
economy and most every other force in nature, goes up and down; through
good times and bad. We've enjoyed
six years of a bull market since the last bear market ended in early
2009. That's a long time to go without suffering through a decline of
10% of more; so we were overdue. If
we've seen the worst of it we got off easy." Hopefully you took my
advice and just sat tight with your investments. If you did, you've
enjoyed some nice gains during this rally. And if you had the courage,
like I did, to make some strategic investments, then you should feel
pretty good right now.
chart of the #DJIA
is looking much better than a few weeks ago, not to mention two months
ago. After setting the low at the end of August, the index tested that
mark in late September, and support held before bouncing
The rise took it through a first resistance level (pink line) just
below 16,500 before besting the next level around 17,100 (blue line).
Should the rally continue the all time high would be in sight.
The Transportation Index remains weak, but
is showing some signs of life. After hitting bottom in August it has
managed to rise past two lines of resistance, even as various
components of the sector (like airlines, truckers and railroads) have
taken turns getting crushed. I would like to see the #DJTA remain above
support around 8,000 and then move through resistance around 8,700. I'd
also like to see the moving average lines start to move up.
While the Dow Jones
Average has performed very poorly this year, it did not break through
support during the correction, and has subsequently rallied very nicely
this month. Notice the moving averages are moving higher and starting
to converge. If this pattern continues, we could see a bullish
#goldencross in the coming months. After falling about 18%
over the first nine months, the #DJUA has rallied about 11% over the
past six weeks. Last month I wrote that as "investors have fled the
sector in advance of a rate hike that never materialized. As such, this
sector represents an intriguing buying opportunity for
investors. . . If a rate hike is already "baked in",
then we might actually see a rally before the end of the year." So far,
that prediction has proven prescient as that rate hike is basically off
the table at this point.
Amazingly, after rising through most of the first
half of the year, the yield on the 10-year treasury bond has fallen
again for most of the second half, and is back to around 2.00%. During
the recent panic investors fled stocks and
flocked to bonds, twice knocking the yield down to
1.9%. I would expect yields to remain plus or minus 2% for the
remainder of the year.
After a brutal August, September was merely bad,
with modest losses across most of the major
averages. Small-cap growth got killed in the month and got crushed in
the quarter, and small-cap value didn't do much better. Large-cap
growth stocks (Facebook,
Netflix and Google being some of the best examples) have been the best
performers this year. But the only sector to be in the black is the
one that I predicted would certainly lose money, and that's
government bonds, which have eked out a 1.1% gain so far this
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 10 was 255,000, down slightly from the prior
week, and about 20,000 lower than the prior month's figure. The
four-week average of 265,000 was roughly 10,000 less
than the tally from a month ago. This is also the
lowest monthly average since December 15, 1973. About 2.16 million
people continue to collect unemployment insurance, about 100,000 less
than last month. This is also the lowest level for insured unemployment
since November 4, 2000.
The non-farm payroll employment report in September was hugely
disappointing as the establishment survey
reported that only 142,000 jobs were added in the
month, while revisions subtracted another 59,000 jobs from the
July and August totals. The household survey
reported that the unemployment rate remained at 5.1% while the
labor force participation rate dropped to a new low of 62.4.
Average hourly wages for blue collar workers remained at $21.08 while
the average work week dipped to 33.6 hours.
Only 7.9 million workers were still being counted as
unemployed. 2.1 million people remained unemployed longer
than 27 weeks, down from last month. The seasonally
adjusted number of people who could only find part-time work dropped to
6.0 million while the number of marginally attached workers inched
higher to 1.9 million. The number of people holding multiple jobs
rose to 7.4 million. All of this helped the comprehensive U-6
"underemployment" fall to a very low 10.0%. This is not the picture of
a robust economy; it's barely muddling along. This data will likely
mean the Fed will hold off on raising rates until late in Q1 of 2016,
at the earliest.
Congressional Budget Office (CBO) estimated that on a net present value
basis, the Treasury reported a budget surplus of $95
billion in September, leaving the full-year deficit at $435 billion,
about $48 billion less than the shortfall recorded in the same period
last year, and the smallest deficit recorded since 2007. Relative to
the size of the economy, that deficit - at an estimated 2.4% of GDP -
was slightly below the average experienced over the past 50 years.
The National Association of Homebuilders/Wells Fargo Confidence
Index rose one point to 62 in September. "NAHB is projecting about 1.1
million total housing starts this year," said NAHB Chief Economist
David Crowe. "Today's report is consistent with our forecast, and
barring any unexpected jolts, we expect housing to keep moving forward
at a steady, modest rate through the end of the year."
The Census Bureau reported that privately owned housing starts
were 3% lower in August after falling 4.1% in July, dropping
an adjusted annual rate of 1,126,000 units, which was still 16.6%
than a year ago. New building permits rose 3.5%
from the prior month and remained 12.5% higher than the
year before. Even though the figures are a bit weaker now, the overall
trend is positive.
The Census Bureau reported that on a seasonally
adjusted annualized basis 552,000 new homes
were sold in August, up 5.7% from July (revised higher)
and 21.6% from a year ago. It also managed to surpass the previous
high set in February. The estimate of the number of homes for sale
was 216,000, representing a very slim 4.7 months of inventory at the
current rate of sales. The median sales price was $292,700, leaving it
just above the 12-month moving average price of $290,300.
The National Association of Realtors reported that on a seasonally
adjusted annualized basis, 5.31 million existing homes
were sold in August, a decrease of 270,000, or 4.8%, from July,
yet were still 6.2% higher than a year ago. The estimate of homes for
sale is 2.29 million, which represents 5.2 months of inventory
at the current rate of sales. The average selling price
was $228,700, off the highest levels since July 2007 but well
above the rising 12-month average of $228,700. Overall, the housing
market appears to be fairly robust.
According to the Institute for Supply Management (ISM), economic
activity in the manufacturing sector dipped (for the third straight
month) to 50.2 in September, barely registering growth for the
26th straight month. The ISM index of non-manufacturing activity dipped
(for the second month in a row) to 56.9, which still signaled
growth in the service sector for 68 consecutive months. It's clear the
reason wages aren't moving is all of the job gains are in the
lower-paying service side of the economy. Could this portend "the end
of jobs" in America, as higher wage jobs are outsourced to either
robots or cheaper countries?
Conference Board reported that its index of Leading Economic
Indicators (LEI) increased 0.1% in August,
no change in July and a gain of 0.6% in June. "The U.S. LEI suggests
economic growth will remain moderate into the New Year, with little
reason to expect growth to pick up substantially," said Ataman
Ozyildirim, Director of Business Cycles and Growth Research at The
According to the "third" estimate by the Bureau of Economic Analysis,
GDP increased at an annual rate of 3.9% in Q2 2015, up from the second
estimate of 3.7%. This was far better than the
decrease of 0.2% in Q1, and the 2.2% increase in Q4 2014.
Still, it remains well below the 5.0% and 4.6% growth rates in Q3 and
Q2 2014, respectively. While I'm not sure this is the strong growth
that people are hoping for, it's a start, although it's one that's
unlikely to continue at this level.
According to the BLS, the seasonally adjusted Consumer Price Index
for all Urban Consumers (CPI-U) decreased 0.2% in September,
and was essentially unchanged over the past 12 months. If you
strip out food and energy, CPI rose 0.2% as energy prices fell in
food gained sharply. It is clear to me, and it would seem to the Fed as
well, that economic growth is stagnant right now.
The Conference Board's Consumer Confidence Index
ticked up in September to 103, which is very near the highest
level of the year, set in January. This continues the big rebound after
the plunge in July. "Consumer
confidence increased moderately in September, following Augustís sharp
rebound," said Lynn Franco, Director of Economic Indicators at The
Conference Board. "Consumersí more positive assessment of current
conditions fueled this monthís increase. Consumersí expectations for
the short-term outlook, however, remained relatively flat, although
there was a modest improvement in income expectations. Thus, while
consumers view current economic conditions more favorably, they do not
foresee growth accelerating in the months ahead.
peaking in March and April, the
price of the dollar
index has fallen to support around 93 five different times, most
recently last week, before moving higher each time. Clearly the dollar
has weakened as sentiment supporting a Fed rate hike waned. I wouldn't
be surprised to see this support level violated before the end of the
year. Also notice that the moving averages are about to form the
bearish #deathcross, suggesting more price weakness ahead.
don't need to belabor the fact that this
has been a tough year to be long oil or energy related stocks.
that could negatively impact the price of oil has done just that. The
good news is that since the correction low of around $37.75 the price
of oil has recovered somewhat and is currently
trading in the mid-$40s. The weaker dollar is certainly helping things.
But it will be
hard to make a bull case for the near-term price of oil until the
shows signs of sustained growth, and until either supply falls to meet
demand or demand rises to meet supply. Until that happens, I expect the
price of oil to remain between $40 and $60.
correction in the stock market, and the realization that the Fed will
likely continue the easy money for at least a few more months, has
helped bolster the price
of gold. Indeed, the price of gold has risen about $120, or 11% in less
than three months. This rally pushed the price past one resistance
level around $1,150 and towards the next one at $1,225. I admit I'm
surprised by how rapid, and how robust, this rally has been. Still, I
really can't make the case for a lasting bull rally in the shiny
fading dollar has provided no solace to the sickening downward spiral
that is the price of copper. The fact that the price of copper, which
is used in so
many industrial applications, has fallen to a low not seen since the
financial crisis ended. That is not indicative of economic health now,
or in the near future.
price of the Nasdaq Composite twice bounced off support around 4,600
(notwithstanding the few days the index spent below that level during
the panic) before moving higher and attempting to pierce resistance at
4,900. Last month the index formed a #deathcross, which is highly
bearish. So it will be important for the future of this rally that the
price moves higher, which I think it will.
market correction pounded the financial
sector and it's just starting to recover. Last month I suggested that
thanks to the violent sell off, it "seems like a great time to pick up
some leading bank or insurance
stocks so I'd be a buyer." I'm sticking with that prediction, even
though the low interest rate policy by the Fed negatively impacts the
earning potential of big banks. Long-term, I still like this
chart of the housing index has quickly turned from bullish to bearish.
After peaking in mid-August, the price has fallen by almost 9% to it's
current level, after plunging 15% peak to trough. I've indicated two
interim resistance/support levels in purple. The bottom one has been
breached three times this year and is in danger of being pierced again
right now. The short-term trend, as indicated by the green
line, is downward and the moving averages are getting close to
converging. Nothing about this picture is bullish to me.
index for developed international markets doesn't look good at all,
although it is showing some signs of life. One month ago the price of
the index bounced off support around 56.5 before moving higher. The
question is whether it's a "dead cat bounce" or the beginning of a
substantive rally. Clearly the fact that the Fed has backed off its
intent to raise rates this year has helped bolster the fortunes of the
emerging markets. Therefore I would expect this index to rally towards
the end of the year.
struggling to come up with something new to say about the Shanghai
Index. It's simply a mess and a market to be avoided, regardless of
whether or not the index rallies in the short term.
crumbling to a new low in August, and testing that low in late
sentiment index is rallying furiously right now. Last month I wrote
that "I'm not sure when sentiment will turn, and clearly I've been
wrong with my recent "buy" signals, but things are setting up for a
major rally sometime soon. And when it happens, it should be
powerful." I think we're in the midst of that rally right now.
price of the volatility index, the VIX, has dropped right back
into the normal trading range after the hysteria of the correction sent
the index soaring to staggering levels in just a few days. This is
perfect example of how quickly fear can spike, and how equally fast it
can dissipate. I continue to urge all investors to resist the urge to
panic when fear reigns; it's better to simply sit back allow the panic
to fade, as it always does.
What I'm Thinking and
month I wrote about the reasons for the correction and how I felt it's
a normal and healthy part of the natural cycles of the stock market. I
also said that I believed that the fundamental
underpinnings of our economy and stock
market were healthy and that there was no massive bubble waiting
to burst. I went on to say that when corrections are over, the stage
would set for the
next big rally. So far, that's exactly what has come to pass. More
importantly, I don't think the rally is over. I expect further gains
over the next two months will put the market in the black by year-end.
I may, I'd like to take one brief moment to pat myself on the back,
just a little. I have said, since back in January, that I didn't think
the Fed would raise rates this year. I often felt like I was one of the
very few people who felt that way. But it appears that my stance will
be proven correct as it now appears that Fed won't change their
interest rate policy until sometime in the first quarter of next year,
at the earliest. But let me reiterate something else I said last month:
whether or not the Fed raises their lending rate by 25 basis points is
really irrelevant. Whether
their lending rate is 0.25%, 0.50% or 0.75% really doesn't matter that
much to the average American or the U.S. economy. In fact, higher rates
would probably help large segments of the population that relay on the
interest from their savings accounts. Most interest rates in the
country are set by the market, not by the Fed. And those rates will
likely stay reasonably low for months or years to come. The sooner we
recognize that this particular policy decision by the Fed
that important the better off we'll all be.
being very busy in the market during August and September, I have done
virtually nothing so far in the fourth quarter. Honestly, unless
something very unusual were to happen between now and the end of the
year, I don't expect to do much other than some minor tax-related
trades. I've made all the changes to my portfolios that I wanted to
make. Now I intend to sit tight and monitor the results of those moves.
I'm ready to take all of my current holdings into 2016.
last vestiges of summer were blown away last night as a cold snap
reduced the temperatures in my neighborhood to below 30 degrees. It was
29 when I went to practice this morning. To be honest, I'm not ready
for cold weather yet. I only turned on the heat this morning when our
bedroom was 59 when my alarm went off. The good news is that we have
another week or two of beautiful foliage to look at here in the
Northeast before we slide towards Halloween then November.
week Lily and I completed our last college tours. Most of her
applications are already in and she plans to have to final ones in
before the end of the month. After everything is submitted, then it's a
waiting game. But please don't ask her where she wants to go. She gets
very touchy about the subject.
a crazy busy two months, things begin to ease up a bit this month. By
the end of this month, Kat
and I will have been to one beer festival, a Broadway show, two
concerts (Joe Walsh and REO Speedwagon) and three charity galas. Plus,
I took a flying lesson out of the White Plains airport. I flew a four
seat plane down the Hudson River, around the Statue of Liberty, up the
East River to Central Park, where we crossed back to the West Side and
returned home. It was about 45 minutes of incredible views and
tremendous excitement. I hope to do that again some day. And finally:
LET's GO METS!! They are two games from the World Series. By the time I
write to you next month they may have celebrated in the Canyon of
Heroes on Wall Street.
it for now. I look forward to writing to you
again in October.
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