I Bought Last Month, Did You?
Current Market Analysis
Last Month's Results
Trends To Watch
What I'm Thinking
News and Notes
Current Market Analysis
As I write this midway
through the trading day, the Dow
Jones Industrial Average
stands at 17,627, up 1,306 points, or 8.0%, from when I wrote
in the middle of the panic last
month. This huge reversal leaves the #DJIA, and most of the
major averages, at or near their historic high levels. Not bad for a
few weeks of work!
Last month I wrote that
"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." Fortunately for me and my clients, because I was a buyer
during the panic, I was correct in my belief that the downturn was
nothing more than an overdue natural correction. Looking back, it was
an easy decision to be a buyer, but in the moment, it took some
So how do things look
now, after the snap back in prices? I'd say they look pretty damn good!
We can see that the price of the #DJIA has return to the
of the trading channel, is at all-time record levels and is well above
both moving averages. Last month the price fell below one support
(green line) but bounced right off the other one (orange line).
Fortunately, we didn't have to see what would happen if that support
was broken. Even though RSI is a little stretched right now, there are
no big danger signs.
The chart of the
#DJTA is also right back on track. This index only fell to it's first
big support before bouncing higher. The price is now back to the upper
end of the trading range and well above both moving averages. Like the
industrials, RSI is a bit stretched, but everything looks pretty
The #DJUA remains
stubbornly in bullish mode. The current price
is above both moving averages and trading in the upper end of
trading range. During the panic it barely budged, never falling below
the rising trend line. Low interest rates continue to prop up
this sector, and as there doesn't appear to be anything on the
horizon that suggests a change in rate policy, utilities
continue to benefit.
Looking at the 10-year
Treasury over 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 low of about 2.20%. I'm
little surprised that yields haven't increased more during the recent
surge in equities, but I suppose I should give up waiting for higher
yields. The Fed has won this battle.
After falling sharply in late September and early
October, stocks roared back in the second half of the month. Small
caps, which have lagged all year, roared back to life. Still, for the
year, large-cap stocks, powered by growth and technology, have led the
way. The Dow Jones Industrial Average, a proxy for value, continues to
fall behind the more growth oriented S&P 500. And bonds just
continue to chug along; no big gains, but no big losses either. I would
never have believed you could make 5% in government bonds 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 November 8 was 290,000, a decrease of 12,000 from the prior
week's revised figure, and similar to the figure from this
time last month. The four-week average of 285,000 is about 2,500
lower than the tally from a month ago. About 2.39 million people
continue to collect unemployment insurance, which is about 80,000 more
than last month. Overall, progress is being made.
non-farm payroll employment report in October was slightly below
expectations as the establishment survey
reported that 214,000 jobs were added in the
month, while revisions added an additional 31,000
to the prior two months. The household survey reported
that the unemployment rate dipped to 5.8%. The more comprehensive
U-6 "underemployment" rate also fell to 11.5%. 9.0
million workers were still counted as unemployed (three
hundred thousand less than last month). The
labor force participation rate rose
slightly to 62.8%. That key metric refuses
to rise to a meaningful level.
million people were counted as being unemployed longer
than 27 weeks, slightly better than last month. The seasonally adjusted
people who could only find part-time work dropped to 7.0 million and
marginally attached workers dipped to 2.2 million. The
number of people holding multiple jobs rose to 7.77
million. The average hourly wages for blue collar workers
held inched higher to $20.70 while the average work week
ticked up to 33.8. Overall, while
the headline numbers paint a very positive picture, the lack of labor
participation growth combined with stagnant wages means that
the Fed is unlikely to change their interest policy any
Congressional Budget Office (CBO) estimated
that on a net present value basis, the Treasury reported a federal
budget deficit of $132 billion in October, about $41 billion
more than the shortfall recorded in the same month last year; but the
entire amount can be attributed to a timing shift in the calendar. I
would expect the annual deficit to fall again in fiscal 2015.
Census Bureau reported that the U.S.
deficit of goods and services increased in September to $43
as exports fell and imports grew.
four consecutive monthly gains drove sentiment to the highest level in
years, the National Association of Homebuilders/Wells Fargo Confidence
Index fell five points in October to 54. Any reading over 50
indicates more builders view sales conditions as good than poor. “We
are seeing a return to the mid-50s index level trend established
earlier in the summer, which is in line with the gradual pace of the
housing recovery,” said NAHB Chairman Kevin Kelly, a home builder and
developer from Wilmington, Del.
The Census Bureau reported that privately
starts rose 6.3% in September, to a seasonally
annual rate of 1,017,000 units, which was 17.8% better than a
year ago. New building permits rose 1.5% from
month and remained 2.5% higher than the year before. There
continues to be too much month-to-month volatility here to
draw any meaningful
conclusions, but the general trend of new construction remains
The Census Bureau reported that on a seasonally
adjusted annualized basis, 467,000 new homes
were sold in September, about the same as August and a solid
17.0% higher than a year ago. The estimate
of the number of homes for sale is 207,000, which represents 5.3 months
of inventory at the current rate of sales.
The median sales price swooned to $259,000, well below
the 12-month moving average price of $276,292.
The National Association of Realtors reported that on a seasonally
adjusted annualized basis, 5.17 million existing
homes were sold in September, up 2.4% from August but down
from a year ago. The estimate of homes for sale held at
which represents 5.3 months of inventory at
the current rate of sales. The
average selling price
fell for the second straight month, falling to $209,700, which
remained just above the
rising 12-month average of $204,067.
According to the Institute for Supply Management (ISM), economic
activity in the manufacturing sector dimmed moved higher in
October to 59.0, which marked overall growth for
months. The ISM
index of non-manufacturing activity dipped to 57.1, which
marked growth in the service sector for 57 consecutive months. These
solid numbers demonstrate continued
growth in the economy.
Conference Board reported that its index of Leading Economic
Indicators (LEI) increased 0.8% in September, following no gain
(revised) in August. "The LEI picked up in September, after no change
in August, and the strengths among its components have been very
widespread over the past six months,” said Ataman Ozyildirim, Economist
at The Conference Board. “The outlook for improving employment and
further income growth are expected to support the moderate expansion in
the U.S economy for the remainder of the year.”
According to the Bureau of Economic Analysis, GDP increased at an
annual rate of 3.5% in Q3
2014 according to the "advance" estimate, down from 4.6% in
Q2. That remains far better than the
anemic decline of 2.1% in Q1 and 2.6% in Q4
2013. By comparison, GDP growth was 4.1% in Q3 2013.
There is nothing wrong with this number.
The Federal Reserve reported that in September
the amount of total outstanding consumer credit grew at
an annualized rate of 6.5%, up to $3.267 trillion. The
steady rise in the amount of outstanding consumer credit has resulted
in the highest levels since I started tracking this in 2004;
nobody is saving any money because interest rates on savings is
The Conference Board's Consumer Confidence Index, which
declined in September, rose in October from 89.0 to 94.5. Says Lynn
Franco, Director of The Conference Board
Consumer Research Center, "“Consumer confidence, which had declined in
September, rebounded in October. A more favorable assessment of the
current job market and business conditions contributed to the
improvement in consumers’ view of the present situation. Looking ahead,
consumers have regained confidence in the short-term outlook for the
economy and labor market, and are more optimistic about their future
earnings potential. With the holiday season around the corner, this
boost in confidence should be a welcome sign for retailers."
In order to put the
action of the dollar
index in some perspective, I'm showing you a five year chart.
can see that the current price has equaled the high last achieved in
early 2010. This dollar strength,
while great for travelers and shoppers, is bad for our
our exports and terrible for commodities, which are
dollars. As long as
the dollar continues to increase in value, the price of oil and metals
will likely suffer.
Like oil, it takes a
five year chart to put the decline in the price of gold into
perspective. Twice this year the price of gold had rebounded
higher after falling to
major support at around $1,200. The third time was the charm as support
failed and the price fell to levels not seen since early 2010.
next line of defense comes in at around $1,100. After that, look out
The strong dollar is
certainly no friend to the price of
copper. It is well below interim support at $3.20, is below
moving averages and is falling dangerously close to major support at
$2.92. As the global economy appears, at least for now, to be ok, this
really is all about the dollar. So I would expect a rally sometime soon
because the dollar will have to rest eventually.
The following chart
continues to go from bad to worse. The
price of West Texas
crude has plunged about 30% in less than five months months
since peaking just under $108 in early July. In doing so,
it crashed through support around $92. The big
will support hold at around $77.50? The current price is $75.20 so
things look grim. I still think this will be looked at as a great
The one major average
that has not yet achieved a record closing high is the Nasdaq
Composite. But as you can see below, it is awfully close. As of this
writing, the index is only 358 points, or about 7.5%, below the record
closing price of 5,048.62 from March 10, 2000. It has been a VERY LONG
road to get to this point. Let's see if the index can push higher and
Last month I told you it
was again time to buy the financial sector. If you did you've made a
quick 12.5%. The ETF shown below has quickly recovered and is again
trading near the top of the trading channel. I'm very bullish on this
The index for the
housing sector has been very volatile this year. Twice is has fallen
below interim support around 192, but both times it quickly
recovered. I'd watch for the next inevitable downturn before
After a brutal 15% decline between June and
October, the index for the
has recovered a bit recently. Support at 60 held, which is very
important. I'd like to see the "death
cross" reversed before I get too excited. I'm still very wary of the
international sector right now.
The Shanghai Index continues to
surge higher. The price has jumped 25% in just five or six
months, and amazingly, nobody is talking about it. I wish I could say I
bought a Chinese ETF and booked some big gains, but no, I didn't
believe in the rally. Clearly Alibaba has a lot to do with this, so
maybe the gains will hold.
Once again, the NYSE Bullish sentiment
index has proved to be a great contrary indicator. Buying the decline,
depending on your timing, would have been the smart thing to do. And
based on the fact that the index hasn't yet returned to the trading
range, I'd say there's more gains to come.
Last month I said "as with the bullish sentiment
on the incredibly low percentage
of stocks 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." Did you buy? I did.
Fear is so last month. After spiking 250% higher,
and providing a great buying opportunity, the VIX has fallen
right back to where it started two months ago as stock market
volatility evaporated. Last month I wrote that "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." Bingo.
What I'm Thinking and
On October 15, which coincidentally, was the day
before the bottom was made, I wrote a blog entitled "Don't Succumb To
Blind Fear". In case you didn't read it, I'd like to share it with you
because it will give you a lot of insight into the way I think about
the market and how investors should treat the ups and downs.
"The past week has
been a very turbulent, and nerve-wracking, time for investors. Stock
markets around the world have been rocked by massive losses. In just
the seven trading sessions, the Dow Jones Industrial Average (#DJIA)
has fallen about 850 points, or 5%. By comparison, the S&P 500
has fallen 5.2%, the UK FTSE a slightly better 4.8% while the
German DAX has dropped a whopping 6.9%. These are significant losses in
only seven trading days.
Today was a microcosm of the past few weeks as the major averages were
whipsawed all day long. At one point, the #DJIA was down 2.8%, before
finishing down 1%. Similarly, the Dow Jones Transportation
Average (#DJTA) was also down 2.8% before actually ending the day 18
points higher. The S&P 500 dropped 3% before winding up down
only 0.9%. Investors who panicked today and sold at the bottom will
likely regret that when the market inevitably recovers and they find
themselves sitting in cash on the sidelines, missing the large gains.
So what are the reasons for the big declines and the crazy volatility?
They include (just to name a few): a growing economic malaise in
Europe, concerns about a continued economic slowdown in China, fears on
an expanding Ebola outbreak, continued trouble in the Middle East
thanks to ISIS and other terrorists, plunging oil prices thanks to the
dollar surging in value against most other currencies and horrible
policy decisions within OPEC. You could probably add concerns over
social unrest in Hong Kong. Don't forget natural disasters like
cyclones, hurricanes and typhoons that are growing in frequency and
magnitude. And that doesn't even count worries about economic slowdown
in this country, anticipation about future rate increases by the
Federal Reserve and uncertainty about the upcoming mid-term elections.
Phew, did I miss anything?
Given all the ills that I enumerated above, we should all dump
build a bomb shelter and stick all of our money under our mattress,
right? WRONG!! Succumbing to fear, acquiescing to panic and
abandoning your financial plan is exactly the opposite of what you
should be doing.
First of all, in my opinion, you shouldn't be investing any money that
to be spent in the next two years. So if we take that as a given, and
if we assume (yes, I know what happens when we assume, but that's the
only way I can continue this narrative) that the money you have
invested is for some future purpose (of at least five years), than
weekly volatility is really irrelevant. In fact, it is normal and
Let's put things in perspective. On October 9, 2007, almost exactly
years ago, the #DJIA was 14,164.53. From there it proceeded to go down
for the next year and a half, finally hitting bottom on March 9, 2009
at 6,547.05, for a loss of 53.8%. From that low, the market hurtled
forward for the next five and a half years, erasing all of those losses
before peaking on September 19 at 17,279.74, a gain of 163.9%! Today
the #DJIA closed at 16,141.74, which means we've fallen 6.6% from the
high. Is that really so bad? In the grand scheme of things is that
likely to derail your future plans?
The truth about the stock market is that it goes up and it goes down.
after a prolonged period of going up, with only a few very short down
periods, we were due for a correction of sorts. Now, I don't know
either the depth or duration of this correction, but I'm confident it
won't be nearly as bad as 2008/2009. Global economic conditions are
MUCH better today, even with all of our problems, than they were back
then. So relax, have a nice glass of wine (or whatever your drinking
pleasure is), take stock of your portfolio and look at your
"wish list" of stocks that you'd like to buy. Perhaps now is the tie to
use some discretionary cash to pick up one or two of them on the cheap.
Then sit back, wait for the rebound and congratulate yourself for
remaining calm and sticking with your plan.
Full disclosure: I
purchased one new position last week, and another one this
afternoon, totaling about $600,000. So I'm putting my money where my
mouth is. I'm very confident those will be very opportunistic and
profitable purchases, creating solid profits for me and my clients for
years to come."
Over the past two weeks, as the
market soared higher, I began the process of tax loss
selling and small-position pruning. I do this every year around this
time. Whenever you have to sell and take a loss, or just admit that you
were wrong about something, it's tough to pull the trigger and get out.
But that's part of being an investor. And as difficult as it can be, I
actually find the process cleansing as I get rid of the underperforming
holdings to make way for better ideas. By the end of the month I hope
to completed all of these trades. Then I'll sit back and watch the
market in December, ready to buy something if the price is right, or
content to just sit and wait for 2015.
The REALLY BIG NEWS is that tomorrow I'm getting married to
the woman of my dreams, the about to be former Kathiryn Sikkema. I
spent the first half my life looking for this spectacular woman; I
can't wait to share the second half with her. The intimate event will
be held in our home, witnessed by a few family members and close
friends. We couldn't be happier. And now that I've finished this
newsletter, the celebration can begin!
it for this month. 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.
Simply give me a call or drop me an email.
and Views", Copyright, Werlinich Asset Management, LLC and
www.waminvest.com. All Rights Reserved.