It's Been A Very Solid Year, As
Current Market Analysis
Last Month's Results
Trends To Watch
What I'm Thinking
News and Notes
Current Market Analysis
As I write this before the market opens for
business, the Dow
Jones Industrial Average
stands at 17,596, down a slim 31 points from when I wrote
to you Unfortunately, the market seems headed for a fall today if the
futures are any indication. Still, there is really nothing to complain
about this year, unless you had all of your money invested in the
energy sector. Barring a catastrophe, most investors will earn solid
gains for the full year, which ends in less than three weeks.
In my Fearless Forecast edition, published in
January, I predicted that the #DJIA would finish the year up 12% and
the #S&P500 would close up 14%. While those predictions may end
up being a shade optimistic, they will be pretty close to reality. I
expect we will have a little year-end rally which should bring the
major averages a bit higher, so we'll see how things end up.
So how do things look
now? Overall, not too bad! We can see that the price of
the #DJIA continues to trade around the midpoint
of the trading channel (green dotted line) and remains well
both moving averages. The current price is down about 2% from the
record high set just last week on December 5. I wouldn't get worried as
long as the price remains above the blue support line.
The next chart shows that the
#DJTA remains on track. Even though the price has dipped 3%
below the record high set about three weeks ago, the index remains
above both moving averages and higher than the first level of support
(lavender line). If it falls below the line, but remains above the
green line, then the sector would be a buy.
The #DJUA quietly
remains in bullish mode. You hear almost nobody
talking about this sector in the media or on CNBC. It is really a
stealth rally. The current price
is above both moving averages and trading in the upper end of
trading range. 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. This year, amazingly,
yields have fallen in almost a straight line, confounding my
predictions, as well as those of most of the "experts". This is
delivered solid gains to bond investors. Can this continue again in
2015? For that to happen yields would have to fall below 2%, which I
just don't think will happen.
Stocks continued to make gains in November, putting
the losses from late September/early
October farther behind. Growth sectors led the way, and
large-cap significantly outpaced small-cap. In fact, small-cap value
actually lost ground in the month. The Dow Jones Industrial Average, a
proxy for large-cap value, continues to
lag the more large-cap growth oriented S&P 500.
Bonds continue to chug along; no big gains, but no big losses
either, although high yield slipped in the month. The worst
performer is the EAFE, which is down for the year.
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 29 was 297,000, a decrease of 17,000 from the prior
week's revised figure, and similar to the figure from this
time last month. The four-week average of 299,000 is about 15,000
higher than the tally from a month ago. About 2.36 million people
continue to collect unemployment insurance, which is about 30,000 less
than last month. Overall, progress continues to be made.
non-farm payroll employment report in November blew away
expectations as the establishment survey
reported that 321,000 jobs were added in the
month, while revisions added an additional 44,000
to the prior two months. The household survey reported
that the unemployment rate remained at 5.8%. The more comprehensive
U-6 "underemployment" rate fell to 11.4%. 9.1
million workers were still counted as unemployed (one
hundred thousand more than last month). The
labor force participation rate stayed at 62.8%. That key
metric simply 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 6.9 million and
marginally attached workers dipped to 2.1 million. The
number of people holding multiple jobs fell to 7.55
million. The average hourly wages for blue collar workers increased
to $20.74 while the average work week
held at 33.8. Except for the stagnant labor
participation, this was a very positive report.
Congressional Budget Office (CBO) estimated
that on a net present value basis, the Treasury reported a federal
budget deficit of $59 billion in November, leaving the two-month
deficit at $181 billion, about $45 billion
less than the shortfall recorded in the same period last year; but much
difference can be attributed to a timing shift in the
Census Bureau reported that the U.S.
deficit of goods and services decreased slightly in October to $43.4
as exports marginally outpaced imports.
a one month decline in October, the National Association of
Homebuilders/Wells Fargo Confidence
Index regained four of the lost five points in November to 58.
“Growing confidence among consumers is what's fueling this optimism
among builders,” said NAHB Chairman Kevin Kelly, a home builder and
developer from Wilmington, Del.
The Census Bureau reported that privately
starts fell 2.8% in October, to a seasonally
annual rate of 1,009,000 units, which was 7.8% better than a
year ago. New building permits rose 4.8% from
month and remained 1.2% higher than the year before. Overall,
housing starts have been solid throughout the year, suggesting that the
housing market is stable and improving.
The Census Bureau reported that on a seasonally
adjusted annualized basis, 458,000 new homes
were sold in October, about the same as September and a meager
1.8% higher than a year ago. The estimate
of the number of homes for sale is 212,000, which represents 5.6 months
of inventory at the current rate of sales.
The median sales price surged to $305,000, the highest monthly
figure I've ever recorded in the past 10 years, and well above
the 12-month moving average price of $279,583.
The National Association of Realtors reported that on a seasonally
adjusted annualized basis, 5.26 million existing
homes were sold in October, up 1.5% from September and up
from a year ago. The estimate of homes for sale held at
which represents only 5.1 months of inventory at
the current rate of sales. The
average selling price
dropped for the fourth straight month, falling to $208,300, which
remained just above the
rising 12-month average of $204,917.
According to the Institute for Supply Management (ISM), economic
activity in the manufacturing sector dipped at bit in
November to 58.7, but still marked overall growth for
months. The ISM
index of non-manufacturing activity rose to 59.3, which signaled
growth in the service sector for 58 consecutive months. These
solid numbers demonstrate continued
growth in the economy.
Conference Board reported that its index of Leading Economic
Indicators (LEI) increased 0.9% in October, following a gain
of 0.7% (revised) in September. "The LEI rose sharply in October, with
all components gaining over the previous six months,” said Ataman
Ozyildirim, Economist at The Conference Board. “Despite a negative
contribution from stock prices in October, and minimal contributions
from new orders for consumer goods and average workweek in
manufacturing, the LEI suggests the U.S. expansion continues to be
According to the Bureau of Economic Analysis, GDP increased at an
annual rate of 3.9% in Q3
2014 according to the "second" estimate, slightly better than the
advance estimate, but still 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.
This is above average growth and unlikely to be continued in
The Federal Reserve reported that in October
the amount of total outstanding consumer credit grew at
an annualized rate of 5.0%, up to $3.279 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
basically zero. But at least the consumer spending is a huge boon to
The Conference Board's Consumer Confidence Index, which rose in
October, declined in November from 94.1 to 88.7. Says Lynn
Franco, Director of The Conference Board Consumer Research Center,
"Consumer confidence retreated in November, primarily due to reduced
optimism in the short-term outlook. Consumers were somewhat less
positive about current business conditions and the present state of the
job market; moreover, their optimism in the short-term outlook in both
areas has waned. However, income expectations were virtually unchanged
and gas prices remain low, which should help boost holiday sales."
I think this is one of the two most important
charts I'm showing this month. Notice that the value of the dollar
index is at its highest level in many years, and this has a huge
(negative) impact on commodity prices (oil, precious and base metals)
as well as the balance sheets of companies that do a lot of business in
foreign markets. If the dollar continues to strengthen, it will have
negative impacts on large segments of the market.
Here is the other incredibly important chart. The
price of West Texas Crude is in free fall and it's dragging the entire
energy sector down with it. It's also adding quite a bit of fear and
uncertainty to the stock market. The price fell through the first
support (green line) and $80, and has today dropped through the second
support (blue line) at $60. The final, rock-hard support is the
financial crisis price level of $40. I don't think we'll get there. I
think production levels will be cut, indebted companies will go out of
business and M&A will provide support. I think we're going to
have a major buying opportunity sometime very soon, and I will be
participating; just not quite yet.
Looking at a five year chart of the price of gold
we see that after trading between $1,200 and $1,400 for the better part
of two years, the current battle for the yellow metal is between
support at $1,100 and resistance around $1,200. Should the price
definitively move higher, $1,400 could be back in play. If not, we'll
likely see a drop back to $1,100.
The strong dollar is
certainly no friend to the price of
copper. It has fallen well below interim support at $3.20, is
moving averages, and is perilously 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. Last month I said I would
expect a rally sometime soon
because the dollar will have to rest eventually. Well, that rest hasn't
Composite is continuing its inexorable climb to reach the
price of 5,048.62 from March 10, 2000. As of this
writing, the index is only 340 points, or about 7%, below the
record . It has been a VERY LONG
road to get to this point. I expect the tech-heavy index to finally
reach that level sometime in the first half of next
I've made two "buy" calls on the financial sector
this year, both of which were fortunately well timed. Now we should sit
tight and wait for the next pullback as the index is bumping against
resistance at the high end of the trading range. I
remain bullish on the long term prospects for this
For the second time this year the index for the
housing sector hit resistance around 215. And for the second
time that momentum quickly ebbed as the price turned and headed lower.
The good news is that the moving averages just formed a "Golden Cross"
whereby the 50-day moving average moves higher than the 200-day
average. This is generally viewed as a very bullish price formation. So
perhaps this dip will be temporary, setting the stage for a definitive
move higher than 215.
After a brutal 15% decline between June and
October, the index for the
is now swinging between resistance at 65 and support at 60. This is not
a pretty chart, and given to currency troubles plaguing much of the
rest of the world, I don't things are going to get much better any time
soon. I'd stay away from this sector.
The Shanghai Index has gone parabolic.
The price has jumped almost 50% in just over 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. And looking at the chart now, seeing both RSI and
MACD both extremely overbought, I would sit and wait for the inevitable
The NYSE Bullish sentiment
index continues to be a very good contrary indicator. Buying
depending on your timing, has been a winning strategy all year. The one
difference now is the current rally failed to reach the trading range
before it turned over during market decline this week. My intuition
says that we have further down to go before the next rally.
After a furious, and profitable rally, momentum has
ebbed a bit. The percentage
of stocks on the New York Stock Exchange that are currently trading
above their 50-day moving average has turned lower and is moving down
towards interim support at 45. I wouldn't be surprised to see this
level breached as the index trades lower with falling crude prices. But
I believe we'll have one more rally before the year is over.
Last but not least, we can see that a bit of fear
and uncertainty has again return to the market. The VIX has moved up to
20, near the top of the "old normal" trading area. Should it break
resistance at 22 we will have set the stage for our next buying
What I'm Thinking and
I think the turmoil in the energy sector is
spilling over into the rest of the equity market. And if that's the
case, I expect that the current market weakness will be relatively
brief. The underpinnings of this market remain strong, the Federal
Reserve remains accommodative and consumer sentiment remains upbeat.
This all tells me that the current downturn will be short lived and
that the rally is not over.
Over the past two months I've culled some of my
weaker positions in the energy and commodity sectors, while still
retaining my core holdings. At the same time, I've purchased stocks
that have limited international exposure and will benefit from a strong
As I've already completed my year-end tax related
selling, I'm just going to sit back and wait for the next buying
opportunity, which will likely be from the oil patch. Some of those
stocks are already in the bargain bin, just waiting for investors, like
me, with foresight, patience and courage, to step in and start
After a beautiful wedding and wonderful honeymoon,
it's back to work, swimming, family and my time with the Food Bank for
Westchester. The holidays are fast approaching. Nola returns
from school tomorrow, which means we'll be all together for a while.
It'll be good to have her home again. Before we know it, it will be
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.
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